The Quaker Oats Company

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In the MatTrer or THE QUAKER OATS COMPANY ORDER, OPINION, ETC., IN REGARD TO THE ALLEGED VIOLATION OF THE FEDERAL TRADE COMMISSION ACT AND SEC. 2 (a) OF THE CLAYTON ACT Docket 8112. Complaint, Sept. 14, 1960—Decision, Nov. 18, 1964 Order setting aside initial decision and dismissing for lack of showing of injury to competition and for failure of proof, respectively, charges of price discrimination and selling below cost on the part of a major producer of oat flour, among other food products.

AMENDED AND SUPPLEMENTAL Complaint The Federal Trade Commission, having reason to believe that the respondent named in the caption hereof, and more particularly designated and described hereinafter, has violated and is now violating the provisions of Section 2(a) of the.Clayton Act (U.S.C., Title 15, Section 13), as amended, and Section 5 of the Federal Trade Commission Act, and it appearing to the Commission that a proceeding by it in respect thereof would be in the public interest, hereby issues its amended and supplemental complaint, stating its charges with respect thereto as follows:

COUNT I Alleging violation of Section 2(a) of the Clayton Act, as amended: ParaGraPu 1. Respondent, The Quaker Oats Company, sometimes hereinafter referred to as respondent Quaker, is a corporation orga- Complaint 66 F.T.C.

nized, existing and doing business under and by virtue of the laws of the State of New Jersey, with its office and principal place of business located in the Merchandise Mart Plaza, Chicago 54, Tlinois. Par. 2. Respondent Quaker for many years has been and is now engaged in the business of the production and processing, sale and distribution of various food products, including cereals, pancake, bread and cake mixes, macaroni products, corn meal, and flour, including oat . flour. Said respondent is also engaged in the production, sale and distribution of chemical products, pet foods, and livestock and poultry feeds.

Respondent Quaker has plants located in some 28 cities in 20 States throughout the United States.

Oat flour is produced by said respondent at its plant in Cedar Rapids, Towa. Said respondent sells oat flour in bulk quantities to large industrial users for processing into various food products, including cereals and baby foods.

Quaker’s sales of rolled oats have, in the past several years, amounted to approximately 75% or more of the total industry sales of such product.

Said respondent’s sales of all products have exceeded $300,000,000 annually since 1957, and its sales of oat flour exceeded $1,000,000 during 1959.

Par. 8. Respondent Quaker, in the course and conduct of its said business has been, and is now, engaged in commerce, as “commerce” is defined in the Clayton Act, in that it has sold and distributed, and is now selling and distributing, its products to purchasers thereof located in States other than the State of origin of shipments and has, either directly or indirectly, caused such products, when sold, to be shipped and transported from the State of origin to purchasers located in other States. There is now, and has been, a constant course and flow of trade and commerce in such products between said respondent in the State of origin and purchasers thereof located in other States. ;

Par. 4..In the course and conduct of its said business in commerce, respondent Quaker has sold, and now sells, its products to purchasers thereof, some of whom have been and are in competition with each other, and with customers of competitors of respondent, in the resale and distribution of such products.

Respondent Quaker has been and is now in competition with other corporations, partnerships and individuals in the course and conduct of its said business in commerce.

Par. 5. Respondent Quaker has been, since about 1955, and is now, THE QUAKER OATS CO. 1133 1131 Complaint discriminating in price between different purchasers of its oat flour by selling such product to some purchasers at prices substantially higher than the prices at which respondent sells such product of like grade and quality to other purchasers, some of whom are in competition with each other in the processing and sale of products containing oat flour, or products composed in substantial part of oat flour. Said respondent does not maintain a forma] list of prices applicable to the sale and offering for sale of oat flour. Instead respondent. submits prices to purchasers in response to requests for bids by such purchasers, or respondent solicits business on an offer and acceptance basis.

As illustrative of respondent’s discriminatory prices, sales of such product have been made by respondent to some purchasers at prices ranging from 1% to 5% or more higher than those prices allowed to other purchasers, some of whom are in competition with the nonfavored purchasers in the processing and resale of such product, or of products containing substantial amounts of said product. Such discriminatory prices have amounted to as much as 24 cents per hundred weight above the prices charged by said respondent to other purchasers of oat flour of the same grade and quality. Differentials in the price of oat flour in amounts ranging from 5 cents to 10 cents per hundred weight are substantial enough to cause a purchaser to buy from the supplier quoting such lower price or differential.

Par. 6. The effect of the discriminations in price, as alleged in Paragraph Five herein, may be substantially to lessen competition or tend to create a monopoly in the lines of commerce in which the respondent and the purchasers receiving the preferential prices are engaged, or to prevent, injure or destroy competition between respondaent and its competitors and between and among purchasers of such product from respondent. In addition, such practices have a dangerous tendency to hinder competition or to create or further a monopoly in respondent in the manufacture, sale and distribution of rolled oat products.

‘Par. 7. The discriminations in price, as hereinbefore alleged, are in violation of the provisions of Section 2(a) of the Clayton Act, as amended.

COUNT II Alleging violation of Section 5 of the Federal Trade Commission Act:

Paracrary 1. Paragraphs One through Four of Count I hereof are incorporated by reference and made a part of the allegations of Complaint 66 F.T.C.

Count IT herein, except that in Paragraph Three of Count I reference to the Clayton Act is eliminated and reference to the Federal Trade Commission Act is substituted therefor.

Par. 2. In the course and conduct of its business in commerce, respondent has, from time to time since 1956, sold or offered for sale its oat flour to certain customers at prices below cost or otherwise unreasonably low, with the intent, purpose and effect of injuring, restraining, suppressing and lessening competition in the sale of oat flour and rolled oat products. | For example, in March 1956 respondent sold 20,000 hundred weight of oat flour to one customer at a price of approximately 30 cents per hundred. weight below cost.

As another example, respondent, in August 1956, sold 600 hundred weight of oat flour to another customer at a price of approximately 10 cents per hundred weight below cost and in July 1957 respondent also sold 600 hundred weight of oat flour to this customer at prices which were approximately 10 cents per hundred weight. below cost. There are other instances during the years 1956 and 1957 of sales of oat flour by respondent at prices that were below cost or otherwise unreasonably low.

‘Par. 8. The result and effect of the sale of oat flour by respondent to purchasers thereof at prices below cost, or otherwise unreasonably low, has been and is now to suppress, lessen and eliminate competition between respondent and its competitors and between the customers of respondent who are in competition with each other in the resale of products containing substantial quantities of oat flour. Par. 4, The acts and practices of respondent, as alleged herein, are to the injury and prejudice of the public, have a tendency to and have actually hindered, suppressed, lessened and eliminated competition in the sale and distribution in commerce of oat flour and products con- ' taining substantial quantities of oat flour, and have a tendency to hinder competition or to create or further a monopoly in respondent in the manufacture, sale and distribution of rolled oat products. Said acts and practices constitute unfair methods of competition, or unfair or deceptive acts or practices in commerce within the meaning of Section 5 of the Federal Trade Commission Act. Mr, Lewis F. Depro and Mr. Benjamin H,. Vogler supporting the complaint.

Mr. John T. Chadwell and Mr. Luther C. McKinney of Chadwell, Keck, Kayser, Ruggles & McLaren, Chicago, Il., for the respondent. THE QUAKER OATS CO. 1135 1181 Initial Decision Initra, Deciston sy Watrer K. Bennert, Heartne Examiner OCTOBER 21, 1963 PRELIMINARY STATEMENT This proceeding, among other matters, tests the legality under Section 2(a) of the Robinson-Patman Act of a general industry practice, followed by respondent in submitting differing “competitive” bids for deferred deliveries of oat flour to its customers who use the flour as a raw material for baby foods, cereals and bakery goods. It also presents questions on the scope of the term “like grade and quality.” A second count charges a violation of Section 5 of the Federal Trade Commission Act.

The original complaint issued September 11, 1960, charged the Robinson-Patman Act violation. An amended and supplemental complaint was issued by the Commission after the hearings had commenced and as of December 11, 1961. The amended complaint charged, among other things, that respondent’s prices had been made unreasonably low or below cost. with the intent, purpose and effect of hindering competition in oat flour and tending toward a monopoly in rolled oats.

Pleadings, Facts Admitted and Issues Raised Thereby The original complaint in the first four paragraphs alleged that respondent is a New Jersey corporation, having its principal place of business in the Merchandise Mart Plaza, Chicago, Illinois (Para. 1); it is engaged in the production and processing, sale and distribution of various food preducts (which are described) and has plants located in some 28 cities in twenty States: it produces oat flour at. Cedar Rapids, Iowa, and sells it to large industrial users for processing Into various food products including cereals and baby foods; its sales of rolled oats amounted to approximately 75 per cent of the total industry sales, and its sales of all products in 1959 exceeded $3800,000,000 while its oat flour sales in 1959 exceeded $1,000,000 (Para. 2); it is engaged in commerce as defined in the Clayton Act (Para. 3): it sells to persons in competition with each other, and it competes with other corporations in commerce (Para. 4). The foregoing allegations are all admitted by the answer, with the exception of the percentage of rolled oats and the allegation that respondent manufactures one food product—macaroni, which it no longer produces. The admitted allegations are accordingly found as facts.

Initial Decision 66 F-T.C.

The critical allegations are contained in Paragraph Five of the complaint which charges that respondent, since about 1955 has been “* * * discriminating in price between different purchasers of its oat flour by selling such product to some purchasers at prices substantially higher than the prices at which respondent sells such product of like grade and quality to other purchasers * * *.” The complaint further charges that respondent does not maintain a formal list of prices but instead submits prices in response to requests to bid. Illustrating, the complaint charges that the discrimination has ranged from one to five per cent or more and as much as 24 cents per cwt., whereas as little as five to ten cents differential will cause a buyer to shift suppliers. Respondent denies these allegations but admits that it has no price list and alleges that it sells oat flour on a bid basis because of many factors, including the constantly changing market for grain. It further alleges that oat flour is a non-inventory item milled in response to each individual order in conformity with the customer’s specifications. Paragraph Six of the complaint charges, in statutory language, that the acts described have a tendency to lessen competition or create a monopoly in oat flour, and, in addition, “* * * to hinder competition or to create or further a monopoly in respondent in the manufacture, sale and distribution of rolled oat products.” Paragraph Seven states the conclusion that Section 2(a) has been violated. Respondent denies all the allegations in these paragraphs and asserts that suit is not in the public interest. Respondent asserts also that it is contrary to the purpose of the antitrust laws to restrict in any way the present system of competitive bidding. The answer interposes, as affirmative defenses, allegations that the differentials (1) were to meet competition, (2) made only due allowances for differences in cost, and (3) were in response to changing conditions affecting the market for or the marketability of the goods concerned. Also, the practices are industry-wide and require industrywide treatment. Thus, the central issues raised by Count I are: (1) The applicability of Section 2(a) to competitive bidding situations, (2) The applicability of the term “like grade and quality” to the circumstances here disclosed, and (8) The affirmative defenses.

The amended complaint repeats the allegations of the original complaint as Count I and adds, as Count II, the charge of violation of Section 5 of the Federal Trade Commission Act. After repeating the first four paragraphs of the first count in Paragraph One, Count II alleges, in Paragraph Two, the nub THE QUAKER OATS CO. 1187 1131 Initial Decision of the charge which is that, “* * * from time to time since 1956 [respondent] sold or offered for sale its oat flour to certain customers at prices below cost or otherwise unreasonably low with the intent, purpose and effect of injuring, restraining, suppressing and lessening “competition in the sale of oat flour and rolled oat products.” It then cites three examples and states there are other instances. The examples are:

Date Quantity | Amount below cost Cut. Per cwt.

a 20, 000 30¢ August 1956... 22.22.0222 eee ee eee ee eee eee eennee 600 10¢ JULY 1957.22. ene ee ee ee ee eee eee e ee 600 10¢ Respondent’s answer to this paragraph is a simple denial. Count II, Paragraph Four, alleges that the effect of such sales has been to lessen and eliminate competition in both the primary and secondary lines. The last paragraph alleges in effect that the acts “** * have a tendency to and have actually hindered, suppressed, lessened and eliminated competition in the sale and distribution * * * of oat flour * * * products containing * * * oat flour, and have a tendency to hinder competition or to create or further a monopoly in respondent * * * of rolled oat products * * *.” Said acts are in violation of Section 5 of the Federal Trade Commission Act. Respondent’s answer to these paragraphs is also a denial.

Course of Proceedings A prehearing conference was held December 12, 1960, at which counsel agreed to cooperate in the advance exchange and authentication of exhibits. This resulted in cooperation of a superior order and substantially reduced the time required for the hearings. Some sixteen hearings thereafter were held at the instance of counsel supporting the complaint in Chicago, Illinois; Minneapolis, Minnesota: St. Louis, Missouri; Pittsburgh, Pennsylvania; New York, New York, and Washington, D.C., commencing May 22, 1961, and continuing with the long intervals permitted under the rules applicable to this case through August 17, 1962.

During the course of the Commission’s case, a special hearing was held in Washington, D.C., on July 18, 1961, on a motion to place certain documents 7m camera. The motion was denied in part by order dated August 8, 1961. Petition for an interlocutory appeal was denied August 25,1961.

Shortly after the 7 camera motion, the motion to amend the com- Initial Decision 66 F.T.C..

plaint by adding the second count was made by counsel supporting the complaint. This was denied by the hearing examiner by order dated August 4, 1961. The Commission granted an interlocutory appeal from such denial and issued an amended and supplemental complaint dated December 11, 1961, by its order of the same date. This order instructed the hearing examiner “* * * that the evidence heretofore introduced in support of and in opposition to the original complaint shall have the same force and effect. as though received at hearings under the complaint, as amended and supplemented * * *.” It also informed him that he was to rule on motions for further crossexamination and to take such further action “as may be appropriate to protect any of the respondent’s rights.” After a conference held January 5, 1962, in which the decision of the Commission was announced, the hearing examiner by order dated January 10, 1962, expressly fixed January 19, 1962, as the time for making motions pursuant to the Commission’s Order of December 11, 1961, and reserved a time and place for taking additional crossexamination, should counsel for respondent desire it. Respondent made no application pursuant to that order for added cross-examination or for other relief, taking the position that the amendment. violated its rights irreparably.

Motions to strike certain of the evidence received, subject to a motion to strike and to dismiss the complaint, were made June 25, 1962. These were argued August 16 and 17, 1962, immediately after counsel supporting the complaint had offered tabulations, summarizing the transactions concerning which evidence had been offered, and had rested. The motion to strike was granted in part and denied in part by order dated September 21, 1962, and the stricken exhibits were ordered placed in the rejected exhibits file. Some were later reoffered and received during rebuttal.

Counsel for respondent moved to dismiss Count I and Count IT on the ground that counsel supporting the complaint had failed to make a prima facie case. Specifically, he charges a failure of proof that: (1) price differences were comparable in point of time or terms of sale, (2) the flour sold at the higher price to any customer was of like grade and quality to that sold at a lower price to another, (3) there was competitive injury, (4) there were sales below cost with a predatory intent, and (5) there was competitive injury from sales claimed to be at an unreasonably low price. The matter was argued at length and after discussion decision was reserved. The motion is now denied. Respondent’s case was commenced September 24, 1962, at Chicago, Illinois, and continued at intervals until January 16, 1963. Rebuttal THE QUAKER OATS CO. 1139 11381 Initial Decision testimony then commenced and continued at Chicago, Illinois, and at Washington, D.C., until May 17, 1968.

Basis oF DECISION Proposed findings were filed July 15, 1963, and briefs and counterproposals September 3, 1963. Time to file this initial decision was extended by the Commission to October 21, 1963. On the basis of the entire record, the following findings of fact, conclusions therefrom and order are made. All proposed findings not made in terms or in substance are denied as erroneous or immaterial. FINDINGS OF FACT 1. The admissions contained in respondent’s answer to the complaint heretofore described are hereby adopted as fact. These will not be repeated except in the interest of clarity or for the purpose of emphasis. Ensuing findings will be grouped under subheadings to which they primarily relate. Such grouping is not intended to insulate the groups which are in many instances related one to another.* The Industry and Competitive Bidding 2. Oat flour is an intermediate product milled from the grain oats and then used in the manufacture of some consumer product. Oat flour is not customarily sold directly to ultimate consumers. (CF 12; RF 13) 3. Oat fiour is used in producing, among others, the following products: baby food (both canned and dry), dry cereal, pancake and bakery mixes. The amount used varies by product. In some instances, it is used as a stabilizer, as, for example, in canned goods and frosting mixes. In other instances, it is the principal ingredient as in oat cereal and certain baby cereals. (RF 18; CF 3) 4, Millers of oat flour include respondent, the Quaker Oats Company, sometimes referred to as Quaker, and the following companies which are sometimes described by the name appearing in parentheses after the full name:

1 Pursuant to Rules effective August 1, 1968, citations to exhibits or to testimony will be made. The citation of a particular reference does not mean that there are not others or in any way detract from the fact that the entire record has been considered. Exhibits will be cited either as “CX” for Commission exhibits or “RX" for Respondent’s exhibits. Transeript references will be cited as ‘Tr.’ or where appropriate to refer to the testimony of a witness as a whole by the name of such witness. In certain lenses where proposed findings of both parties are in substantial agreement references will be made to such findings as SCF" and “RF.” meaning Commission's Proposed Finding and Respondent’s Proposed Finding, respectively.

Initial Decision 66 FLTC, Albers Milling Company (Albers), A Division of Carnation Company Fruen Milling Company (Fruen) Purity Oats Division of General Mills, Inc. (General or Purity) Ralston Purina Company (Ralston) National Oats Company (National) (CF 10; RF 20) 5. Albers recently re-entered the market; hence, its impact on this case ls minimal (RX 1C).

6. The manufacturing facilities of Ralston and General are at times the subject of so many orders for the manufacture of oat flour for the production of consumer goods which they also produce that, at such times, they are not interested in making sales to others (Tr. 1161). Oat flour is not their major product. General Mills also had difficulty with some specifications (Tr. 2405).

7. Fruen has sold continuously only to Mead Johnson. It has occasionally sold also to Gerber (Tr. 1495-1507). It had not been able to meet the specifications of Gerber at times or those of others (Tr. 1596, Tr. 1608 e¢ seg.; RX 5aandb).

8. National Oats Company specializes in the production of oat products, including oat flour and rolled oats. It is also engaged in producing popcorn. It offers all of its oat flour for sale and does not produce consumer products from it. While, with Quaker, it is regarded as one of the prime regular producers of oat flour for sale, total net earnings from its entire business (as of 1957) were less than two per cent of the total net earnings of Quaker. It, however, produced and sold as much or more oat flour as did Quaker during the period 1955-1959 (Tr. 686, 816, 2202-8, CF 4, 5 citations).

9. Proof of sales in this case has been limited generally to sales to customers who ordinarily purchase oat flour in carload lots. There is some evidence that sales are also made to bakeries and a few samples of sales for experimental purposes or to fill out a carload are shown. 10. The largest user of oat flour is Gerber Products Company (Gerber), a baby food producer which has plants in Oakland, California; Rochester, New York; Asheville, North Carolina, and Fremont, Michigan (Tr. 2049). As the Asheville plant started operations late in 1959, the evidence does not concern it. Gerber uses approximately 10,000 cwt. of oat flour per month (Tr. 2075).

11. Other companies active in baby food production which compete with Gerber, and among themselves, are:

H. J. Heinz Company (Heinz), with plants in Tracy, California: Medina,. New York; Chambersburg and Pittsburgh, Pennsylvania (Tr. 2192, 938) Beech-Nut Lifesavers, Inc. (Beech-Nut) Duffy-Mott (Duffy-Mott or Clapp) Mead Johnson & Co. (Mead Johnson or Pablum) (Tr. 2333 et seg.; CF 11; RF 19) “THE QUAKER OATS CO. 1141 1131 Initial Decision Mead Johnson and Duffy-Mott do not manufacture a full line of baby products and Duffy-Mott sells its Clapp strained foods at a lower wholesale price than Heinz, Beech-Nut and Gerber (Tr. 2340 et seg). Swift and Company manufactures straight meat products for baby food (Tr. 23840), and Libby McNiel and Libby were in the baby food business but discontinued it prior to 1955 (Tr. 2342). 12. Two companies using oat flour were engaged in the breakfast cereal business—Post Division of General Foods Corporation and Kellogg Sales Company—during the period 1957-1959. These companies are of comparable size and have national distribution of their cereals in one of which each uses oat flour. Serutan (also known as Life and Pharmaceutical, Inc.) also produces a regularizing cereal or dietary addition in which oat flour is used (Tr. 897, 227). 18. Pillsbury Mills and Procter & Gamble utilize oat flour, the former, in its frosting mix and, the latter, in certain pancake mixes. The proof does not establish how they compete with other users (Tr. 227, 2794, 2798).

14, Eastern States Milling and Missouri Farmers Association (M.F.A.) purchase oat flour for animal feeds (Tr. 3696, 3742). 15. Both respondent and National Oats engage in the production of rolled oats (or oatmeal). Rolled oats are used as a breakfast cereal and in baking. Respondent’s share of the national rolled oats market exceeds three-fourths of all the rolled oats produced. National Oats has the next largest volume of something less than one-twentieth of the national volume. It is active in only one-fifth of the United States. Rolled oats as a breakfast cereal exceed all other hot cereals used for that purpose.

16. Purchasers of oat flour usually buy in carload lots and publish | written specifications to the suppliers. These specifications are regarded as trade secrets and the documentary evidence regarding them was received in camera. A tabulation has been prepared listing such specifications without disclosing the name of the purchaser. A copy of such tabulation is attached as Appendix A.

17. The normal method of purchasing oat flour is for the purchaser to call, write, or wire two or more suppliers and ask each for a bid for covering a specified quantity deliverable over a stated period of time. Specifications of the purchaser have previously been made available to ail likely sellers, and the bids are made for flour meeting such - specifications, Suppliers, so requested, ordinarily submit bids, although, in some instances, no bid or a high bid will be submitted if the supplier is not interested at the moment due to other commitments in the manufacture of flour. The purchaser will usually award the Initial Decision, 66 E.T.C, contract to the seller making the lowest bid. In some cases, however, where the bids are close, the purchaser may split his purchase to insure continuance of the availability of two suppliers (CF 20; RF 24, 26 and 27).

18. Exceptions to the normal method of purchase include the following:

(a) Prior to March 1954, National Oats had a contract with Gerber to sell oat flour to it on a cost plus basis. This contract was not renewed in 1954 or thereafter, but Gerber made a number of purchases from National Oats up until the middle of 1955 on a cost plus basis (Tr. 699, 2052-2055, 2087; CX 495, 602, 612, 615, 630, 868). (b) Pillsbury Mills purchases oat flour only from respondent because, although they have endeavored to do so, National cannot produce an oat flour to meet Pillsbury’s specifications (Tr. 782, 875). (c) Mead Johnson allocates its purchases among suppliers and secures different prices from the same supplier, depending on what prices ‘it is able to secure from other (Tr. 462-468, 3500-8501, 3682-3683 : CX 156b).

feespondent’s Method of Calculating Bids 19. Respondent issued a cereal report (CX 369-872) daily to its interested departments, including the Industrial and Institutional Division which was concerned with oat flour. This report gave the estimated standard and the estimated full costs for various oat flours, among other products here which are not material. So far as oat flour is concerned, the standard cost included the purchase price of oats of the day before plus perhaps a half cent (Murray Tr. 3842) and the manufacturing cost calculated from time to time by the accounting division. Full costs contained, in addition, an allocation of general — administration and sales expense (Fenner Tr. 181). According to testimony of Richard R. Fenner, respondent’s man in charge of bidding, the full costs in the cereal reports were not used (Fenner Tr. 184- 85). Such costs include selling expense not chargeable to the Industrial and Institutional Division. Some calculations were made on exhibits received in evidence by C. H. Leavitt, the assistant to Richard R. Fenner which included full costs (CX 186A, 187, 189A, 210-216, 219, 920, 251A, QQA, Q4A, QA, WGA, VTA, VBA, 259A, QGOA, ILA, 962A, 263A, 26GA, WTA, BSA, 26DA, VTOC, Q7ZA, Q7SA, QTIA, 371, 372, 4492, 443, 463, 464, 564A-C, S26A&B, 827B, 8294-C, 880A-B). It is not entirely clear whether these were contemporaneous calculations or notes made for a congressional committee. 20. Fenner, after taking over the Chicago Industrial and Institu- THE QUAKER OATS CO. 1143 1131 Initial Decision tional Division in May of 1956 (Tr. 221), was responsible for the oat flour bids made (Tr. 176). He sometimes consulted William G. Mason, & vice president (Tr. 176), but there was no question about his own authority (Tr. 176-183), although there was an understanding that che would not sell below standard costs (Tr. 655, 1293). 21. While he could not recall details of particular cases (Tr. 161, 198, 205, 217 and 259 as examples) Fenner stated he would normally get.a standard cost projection in the morning (Tr. 172; CX 368-872). If there were a bid on several cars within a month, this standard cost would be used, but if the bid were for a long term or a large amount, he would consult the grain department (Tr. 172-78). He would then get.a report from the accounting department as to per hundred weight estimated cost (Tr. 174). To this would be added freight and a reasonable margin (Tr. 175). On occasion, he would consult with his immeciate superior, Mr. Mason (Tr. 176). Sometimes the special standard cost received from consulting the grain department would exceed and other times be less than current standard costs (Tr. 1 79). The margin to be added would depend on the fee] of the market (Tr. 181). Fenner quoted to try and get as much as he could for the product and still be competitive enough to get the business (Tr. 182). Fragmentary Evidence Fixing Dates 22. Records reflecting transactions by respondent are fragmentary due to respondent’s regular destruction policy (Tr, 261) and due to the fact that certain records were not preserved; e.g., records of special costs secured from the requests to the grain department (Tr. 3512, 3845-3866) and logs showing special instructions to millers (Tr. 3411). In addition, in making records, a day or so variation sometimes occurred between the occurrence and the date a record was made of it (Tr. 128). The date the record was made might be incorporated in the record and might thus indicate an occurrence one or more days later than it actually took place. accordingly, inferences must often be made on the basis of probabilities as it is impossible, as one witness testified, to recall transactions after such a lapse of time as has occurred (Tr. 205, 217, 259).

23. Following a bid transaction, customers prepare a purchase order bearing a date within four or five days of the date the sale was consummated (Tr, 2116, 2271, 2356-57). In some instances, the customer will note on the face of the purchase order the date the sale was confirmed (Tr, 2272), At or about the same time, Quaker prepares either a contract or a mill order (Tr. 822-23). A contract is prepared if only 856-438—70:-——_73 Initial Decision 66 B.T.C.

general delivery dates have been furnished by the customer (Tr. 225, 322-93). If specific dates have been given, a mill order for each car is prepared. All of the above-mentioned documents are evidence of a sale within four to five days of the actual transaction. If a contract has been prepared, the customer will, at a later date, supply Quaker with specific shipping dates. Quaker then writes a mill order, the date of which may have no relation to the date of sale (Tr. 313-14, 3580). Vhen a carload of product is shipped, Quaker prepares an invoice (Tr. 282). Such invoices bear a date which may have no relation to the date of sale (Tr. 209, 6045, 6253).

24, Most. oat flours are shipped in carload quantities by rail (Tr. 194-95, 1648) in bulk or in 50 or 100 Ib, jute or cloth bags (Tr. 194-95). Different methods of packing and delivery entail different costs (Tr. 780), bulk shipments being the most economical, and 50 Ib. bags the most. costly.

Like Grade and Quality Minute details concerning the proof offered which relates to the grade and quality of the oat flour sold to competing customers of Quaker are set. forth in the following findings, because of the significance of the problem in this case and the dearth of controlling authority.

25, Respondent’s oat flour is not held in inventory (Fenner Tr. 315-16, 319), but instead is milled to specifications only after an order is received (Tr. 319, 1632). The cats used by Quaker in milling its oat flour are U.S. Grade 1 and 2 of milling quality (Tr. 8821-23, 3851-53). 26. Customers are not concerned with whatever names a supplier attaches to his oat flour (Tr. 2266, 2325, 2351). Instead, the customers develop specifications (Tr. 8202) which they submit to the suppliers defining the characteristics required in their oat flour (Tr. 781, 2152- 53). When a customer orders an oat flour, it is on the understanding that the required specifications will be met (Tr. 2350-51, 2302, 2152- 53). Upon receipt by the customer the oat flour is checked for compliance (Tr. 2317). Specifications of various customers are set forth in Appendix A. If an oat flour supplier ships oat flour which does not conform to the customer’s specifications, the customer promptly sends the oat flour back to the supplier (Tr. 251, 8110; CX 31, 3k, 4b, 4c, 4d, 4e). The supplier is then obligated to supply another car which does meet specifications (Tr. 251, 1517, 2178, 2199, 2204, 2806-07, 2760-61, 3281, 3384, 3464, 3699; CX 108b).

27. Differences in the same customers’ specifications will cause price deviations (Tr. 5491). For example, Quaker, on the same day, THE QUAKER OATS CO. 1145 1181 Initial Decision quoted a different price to Mead Johnson on flour from the No. 14 system than for flour from the No. 5 system (CX 155a). Similarly, Heinz was quoted different prices (RX 32), as was Pillsbury (RX 48b). On the other hand, Quaker oat flour No. 14 and 36 carry identical standard costs (CX 368-72).

28. In the food field, manufacturers are dependent on analytic techniques for defining products (Tr. 3831). Thus, all designate the oat flour which they wish to purchase by specifications (Tr. 2152-58, 2349, 2747, 2939, 4500) and on occasion, require a “written agreement a0 that all physical and chemical limits can be met” by a supplier (CX 469). Onecustomer stated:

The granulation is unsatisfactory, the bacteria is high, there is a very strong positive tyrosinase, the fat is low and the ash is high. The only conclusion that can be drawn is that this material does not meet our specifications, and therefure [it is] unsatisfactory for our use. (RX 38a) Customers’ specifications for oat. flour include “proximate analysis” tests dealing with crude protein content, fat content, fiber content, mineral content, and moisture content. In addition, there are specifications defining performance properties of the flour (Tr. 2815). These may include measurements of viscosity or dispersibility, contamination by bacteria or other micro-organisms, residual enzymatic activities, particle size (granulation), texture, and other properties, depending upon the needs of the particular customer (Tr. 2682; CX 855a-b). In addition, customers include, either expressly or impliedly, (Tr, 3280, 4515) the requirement that the flour perform satisfactorily (Tr. 2688, 2938-39, 3307, 3331). A flour may meet specifications and yet perform unsatisfactorily (Tr. 3108, 3835, 8485). For example. Kellogg in a letter to Quaker said:

You are meeting the standards we set for the raw material, and we are ata loss to know why we have problems * * *, Unless your product satisfies our production people, we will be unable to purchase additional quantities from you * * * (CX 440b; see also Tr. 2815, 3096). 29. Heinz was offered a flour from Quaker’s No. 14 system at a lower price than it was then paying for a flour from Quaker’s No. 5 system (RX 25, 32). Heinz, after determining that the cheaper flour met its specifications (RX 30), tried it in a production run and summarized its experience by stating: “No. 14 Oat Flour—No Good— Grayish Cast—Cannot Use” (RX 31). Heinz concluded that it would not purchase the cheaper flour at any price (Tr. 2308, 2313-15). In 1957, Quaker met Post’s sieve specifications, but the granulation of the flour nevertheless caused trouble and a change was required (Tr. 4488). Similarly, Quaker met Post’s fiber requirements, but the Initial Decision 66 F.T.C.

configuration of the fiber was such that it tended to plug Post’s machinery. A change was required (Tr. 4489-90). 50. Post was offered Quaker’s No. 2 flour and a flour from the No. 14 system (Tr. 4481). No. 2 was rejected at the outset (Tr. 4481), and flour from the No. 14 system proved unsatisfactory, despite changes made in it by Quaker over a six-month period in 1957. 31. Pillsbury was offered five different samples at estimated prices ranging from $5.15 per ewt. on No. 2 flour to $4.71 per ewt. on flour from the No, 14 system (RX 48b). Pillsbury’s tests indicated they were different (RX 43d-g; Tr. 3308). Pillsbury used only No. 2 thereafter, although it was one of the more expensive samples. 32. Similarly, Kellogg tried flour from the No. 14 system and rejected it (CX 440b). Thereafter, Quaker had difficulty satisfying Kellogg (Tr. 2808-15, 8096).

33, When a customer inquired concerning an oat flour possessing particular characteristics or informed Quaker of a problem which had occurred in the use of a Quaker flour, Quaker assigned M. P. Wineberg, its cereal chemist, to deal with the problem (Tr. 2677-78, 2932). It was Wineberg’s practice then to visit the plant of the customer in question and observe the nature of the manufacturing process in which the problem was occurring or for which flour was required (Tr. 2678, 2745). After visiting the plant, Wineberg would determine what was required in the milling of the flour (Tr. 2745-46, 3065; CX 887). He would then order an experimental production run. Thereafter, Wineberg would again visit the customer's plant and observe the performance of the flour in the customer’s operation (Tr. 2679, 2747). Wineberg dealt with problems experienced at Gerber (Tr. 2748, 2764-65, 2769, 2771-72, 2779), Heinz (Tr. 2743, 2787, 3063-64) Kellogg (Tr. 2748, 2809-11, 2814), Post (Tr. 2748, 2809-11), Beech-Nut (Tr. 2748, 2802, 2861), Pillsbury (Tr. 2748, 2794-97), Procter & Gamble (Tr. 2748, 2798-800), and Mead Johnson (Tr. 2743). 34. Customers also buy to a certain extent by sample (Tr. 2265, 4221- 22), For instance, they ask Quaker to match a sample of oat flour which has proven satisfactory (Tr. 2688, 2908-09; CX 892), or they ask Quaker to submit a sample (CX 489) or a series of samples until one is found which works (CX 392, 440b; Tr. 2815-16, 2988-39). Thereafter, Quaker mills against the successful sample (Tr. 8068). 35. Quaker deliberately attempted to meet but not exceed Gerber’s specifications in its development of flour manufactured under the No. l4system (Tr. 162-8, 234, 3483, 8595-98).

36. National claims it has only one grade Lab-16, though it also mills a Lab-109 which differs only in grind (Tr. 759, 4929). It regards THE QUAKER OATS CO. 1147 1121 Initial Decision its oat flour as of higher quality (CX 527A), meeting the specifications of all but Pillsbury which requires a finer grind than National is capable of producing (RX 40). National has experimented with the use of different grinds and variations in procedure, and, in shipping samples, has indicated costs would differ (RX 224, 92A, 93). 37. Ralston exceeds customers’ specifications in its oat flour and recognized that it might be able to provide a special flour for a particular customer (Tr. 1164-65, 4220-23).

38. General Mills claims to have two “grades,” one of which is used in ready-to-eat cereal (Tr. 1642-43). The differences were not explained.

39. The oat flour purchased by the various buyers from time to time from Quaker is used interchangeably with oat flour purchased from others (Tr. 2267, 4477-79, 4512). Post manufactures an oat cereal called “Alpha-Bits” and uses oat flour purchased from Quaker and National in the preparation of such product. Post. does not keep separate the oat flour from National from that obtained from Quaker, and if a’situation should arise where the oat flour of one of the suppliers fails to meet a particular oat flour specification, Post remedies this situation by blending this oat flour out with the oat flour of the other recognized supplier that will be or is in conformance with Post’s specifications (Tr. 4512).

40. There are no objective standards (such as grain standards) set up for oat flour by any agency of the government or business (Tr. 497S- 4981, 5002).

41. When oat flour is deliberately manufactured to specifications with different uses and applications in mind, it is not in most cases interchangeable among customers (Tr. 2913). Different oat flour customers have different specifications because they (1) manufacture ditferent products; (2) employ different manufacturing procedures; or (3) formulate their products differently (Tr. 2750, 3182). 42. Quaker’s policy has been one of meeting each customer’s specifications as economically and as efficiently as possible (Tr. 2751, 2747, 2757, 3068, 3182). It has made no effort to develop a universal flour satisfactory to all customers (Tr. 2747), contrary to the practice of other suppliers.

43. There are differences in the products produced by Quaker’s customers which require differing characteristics in the flour used (Tr. 2746, 2827, 8075). Similarly, different manufacturing procedures permit the use of a flour having differing characteristics (Tr. 578, 2678, 2725, 2730, 2746). Gerber utilized a type of enzymatic digestion in manufacturing their dried cereals which resulted in a sheet of pre- Initial Decision 66 E.T.C.

cooked cereal possessing a higher tensile strength than that manufactured by Heinz (Tr. 2790, 2822-23), or Beech-Nut (Tr. 2805). Since a higher tensile strength permits the use of a higher fiber content oat flour, Gerber could tolerate higher levels of fiber and bran in their flour than could their competitors (Tr. 2755-56). Gerber also had a device for removing a portion of the fibrous component from the slurry while it was being cooked on the drum drier rolls (Tr. 2756, 2790, 2822-24). Other producers of drum-dried cereal did not use such a device (Tr. 2756).

Because of the differences in their equipment and processes, Heinz could not have used the flour going to Gerber at any time during 1957, unless they had been willing to tolerate excessive manufacturing costs (Tr. 8118-19). Mead Johnson could not use the flour which was used by Gerber due to different processing methods (Tr. 235, 2760), nor could Beech-Nut (Tr. 2759). Moreover, customers use different recipes for their finished products even where they are producing a product similar to that produced by a competitor (Tr. 3119). For example, Beech-Nut uses one type of iron enrichment in its dry cereal, whereas Gerber uses another type. Beech-Nut’s iron enrichment tended to react with certain organic acids present in fragments of an oat kernel called pericarp and perisperm to produce a discoloration in the finished product. Gerber did not encounter that reaction. Since Beech-Nut would not. tolerate that situation, Quaker found it necessary to fractionate out pericarp and perisperm from Beech-Nut’s flour (Tr. 2804, 2839, 3197).

44. During the period 1955 through 1959, Quaker made an oat flour possessing different characteristics for each of the following eustomers: Gerber, Mead Johnson, Heinz, Beech-Nut, Kellogg, Pillsbury, Procter & Gamble, and Post (Tr. 2750). With the exception of shipments for experimental runs, at no time during the period 1955 through 1959 did Quaker send the flour with identical characteristics to more than one of the customers with which Wineberg had dealings — (Tr. 2900-02).

45. The physical and chemical characteristics differed. These differences were controlled; they were intentional; they were responsive to customer specifications (Tr. 2749-50). These differences occurred : in condition or state of the fat, condition or state of the protein, as well as protein content (Tr. 2736, 2918, 2963-67) , the amount of microbiological contamination, viscosity characteristics, texture (Tr. 2749- 50, 2880, 2914), degree of enzyme inactivation (Tr. 2749-50, 2694, 3433), tree fatty acid content (Tr. 3066, 8419-20), fiber content (Tr. 2780, 3043, 3066, 3382), granulation (Tr. 2725, 2829, 8406), moisture, THE QUAKER OATS CO. 1149 1181 Initial Decision viscosity (Tr. 2718, 2749-50), gum (Tr. 2919, 2964), gelatinization (Tr. 2720, 2964), and bran content (Tr. 2731-32, 3396-97). 46. The miller can, depending upon the techniques used, vary the end characteristics of the flour produced (Tr. 2698-99, 2749-50, 3266). He can prevent undesirable reactions from occurring during the milling process, and at the same time, he can alter his process in such a way as to create desirable characteristics in accordance with specific requirements of the customer (Tr. 2697-98). For example, in some cases, the miller must inhibit some enzymes that are dispersed throughout the flour when it is ground. Those enzymes may react with the fat in the oat kernel to create free fatty acid. The free fatty acid, in turn, may combine with starches to form an amylose complex, which affects the production of extruded ready-toeat cereals, or with atmospheric oxygen to form carbonyls, which create rancid, bitter off-flavors (Tr. 2697, 2704, 2715, 8003). Similarly, the miller can control the fiber content through removal of more or less of the branny outer layers of the kernel which are high in indigestible fiber (Tr. 2730-31, 3045, 3066). He can vary the gun content by removing more or less of the fractions high in gum content (Tr. 2719). The granulation can be changed by virtue of the grinding and the classification after grinding (Tr. 3265), as well as the rolling (Tr. 3038-89). Through variations in drying, steaming, granulation and fractionation, the miller can control the viscosity of the oat flour (Tr. 2718-19). Bacterial contamination is controlled abore and beyond that point which is a part of good milling practices through dry steaming, as well as certain sterilization techniques (Tr. 3065-66, 3183-35). The texture (sharpness or fuzziness of the particle) is controlled through the rolling and drying processes (Tr. 2728, 3082). The gelatinization of the finished flour may be varied by the amount of water applied in the form of steam (Tr. 2719-20, 2964, 3010-11, 3134-35). The moisture content of oat flours is controlled by the degree or amount of drying of the oats, the amount of water added prior to steaming, the amount of steam used during steaming, and the amount of water gained or lost during grinding, screening or air classifying (Tr, 2783). Both the protein content and quantity can be controlled (Tr. 2736). The protein content can be controlled by the removal of more or less of the aleurone laver of the kernel which is rich in protein (Tr. 2736, 2965-67, 8054). The nature of the protein is affected by heat treatment, which causes a phenomenon known as “denaturation” (Tr. 2965). ;

The miller can also vary the end characteristics of. the oat flour by ‘selecting specific raw material. He can select oats low in fiber content Initial Decision 66 F.T.C:

in order to control that characteristic (Tr. 2870-31, 3043-45, 3966). He can select oats low in free fatty acid content and control that characteristic (Tr. 2708, 2980-81, 2987). He can select oats high in protein to increase the protein level (Tr. 2966).

47, In order to contro] the variations in the characteristics as among the various flours that Quaker produces, a customer performance sheet is prepared by the head miller before each production run for the benefit of the personnel in the mill. It specifies the system on which the flour is to be produced: the necessary machine settings; the raw materials to use; how to steam the product (add moisture, avoid moisture, or steam at normal moisture rates) : how to set the cooling operation underneath the rolling and steaming operation: how to set the roils (the tension to be applied and the rate of rolling); how to set the grinder (the size of perforation in the grinder screen and the air setting) ; how to classify to obtain the proper granulation (the size and combination of sieves) (Tr. 8408-10). None of these sheets or logs are maintained as permanent records (Tr. 8411) and none were accordingly offered at the hearings.

48. Quaker utilized several different combinations of the same milling machines to produce its various flours. A particular combination of machinery was referred to as a system (Heck, Tr. 3376-3473). The No. 5 system included all of the manufacturing steps available to Quaker. It involved cleaning; drying; hulling; separation of the oat stream into “A” grade groats (plump and free from hulls) and “B” orade groats (some hull fragments) ; steaming: rolling; grinding and sieving (RX 46).

The No. 14 system differed to the extent that the portion of the cleaning system which rejects light oats was shortened. The drving step was eliminated and, at the outset. in 1955, the groats were not separated into “A” grade and “B” grade. Subsequently, in 1958, the grading of groats into “A” and “B” grade was reinstated; “B” grade was used on the No. 14 system, and “A” grade was used on the new No. 36 system (RX 47).

In 1958, the No. 36 system was developed. It eliminated a storage step to prevent the build-up of free fatty acid in the groats after hulling. Also, “A” grade groats, free from hulls, were used (RX 48). The No. 6 system did not employ the rollers or the steamer. The groats went directly to the grinder (RX 49). The No. 60 system involved the additional step of long time storage of the groats at high temperatures. This was accomplished through a process of pre-heating the oats (RX 39b; Heck, Tr. 3441, 8470). 49, Following is a summary of the history of the problems of the THE QUAKER OATS CO. 1151 1182 Initial Decision principal baby food customer manufacturers, the systems used to produce the characteristics required, and the variations from such systems: (a) Beech-Nut uses oat flour in both canned goods and drum-dried pre-cooked cereals (Tr. 2744). Beech-Nut began to purchase fiour from the No. 14 system in 1956 (Tr. 456). Beech-Nut could not, however, use the same flour which was being shipped to Gerber. Beech- Nut’s process was such that the tensile strength of the sheet of drumdried cereal was low and would fracture if too much fiber was present. Beech-Nut did not have a clevice such as that used by Gerber to remore excess fiber. Also, the nature of Beech-Nut’s handling equipment caused flow problems if the flour was too fine. Finally, Beech-Nut required the removal of that fraction of the oat which, when combined with certain iron enrichments added by Beech-Nut, caused discoloration of the finished product (Tr. 2759, 2802-03; CX 410a). Accordingly, Quaker removed more fiber, more pericarp and perisperm and changed the grind on the Beech-Nut flour (Tr. 2804-05). (b) Duffy-Mott used four manufactured under the No. 14 system (CX 3662). Details concerning problems, if any, were not offered. (c) Gerber manufactures both canned goods and drum-dried cereals containing oat flour (Tr. 2744). They were particularly concerned with bacteriological aspects of their oat flour (Tr. 2920; CX 876). In 1955, Gerber purchased a small quantity of flour manufactured from steamed, rolled dried groats produced on the No. 5 system (Tr. 2754). By late 1955, Quaker was selling Gerber a flour with a high fiber content produced from undried groats (green groats) on the No, 14 system (Ty. 234, 2754-57). In late 1958 or early 1959 (CX 381b), Gerber dis- ‘continued its purchase of flour from the No. 14 system because the flour was not performing properly (Tr. 389, 1885, 2175, 2760; CX 377, 380, 882a, 889). Gerber was furnished a sample of flour from the No, 86 system in 1959 (CX 386) but it never purchased that. flour in quantity. To solve Gerber’s problem, Quaker altered the viscosity characteristics of the flour by introducing, for Gerber only, the storage of dried oats for prolonged periods at relatively high temperatures (Tr. 2766-67, 2770-71; CX 393-94). This process was known as the special No. 14 system and later, the No. 60 system. After 1959 Gerber went to a low protein flour referred to as No. 65 (Tr. 1886), as well as a flour from the No. 5 system (Tr. 8082-83). (ad) Heinz manufactures both canned goods and pre-cooked drumdried cereals containing oat flour (Tr. 2744, 2787). In 1954, Heinz was using a flour manufactured from unsteamed groats (Tr. 2790), which ‘caused a rancidity problem (Tr. 2742, 2789, 3063). To overcome this ‘problem, Heinz began using a flour from the No. 5 system and con- Initial Decision 66 F.T.C.

tinued to do so until 1958. In 1958, Heinz went to a flour produced on the No. 86 system. Heinz was offered flour from the No. 14 system early in 1956, but it chose to reject that flour (Tr. 2788-89). During the 1955-1959 period, Heinz encountered bacterial contamination problems (Tr. 2789, 8065) as well as “cold water viscosity” problems (Tr. 2791-92). To overcome such problems, a change in steaming was ordered (Tr. 2793).

(e) Mead Johnson used oat flour in drum-dried pre-cooked cereals (Tr. 2806). From 1955 to 1957, Mead Johnson used flour from. the No. 5 system. In 1957, Quaker undertock to sell Mead Johnson flour manufactured from green groats on the No. 14 system. Mead Johnson immediately encountered difficulty (Tr. 3549), because they had a 20% tighter fiber requirement than Gerber. Steps were taken to fractionate off more of that type of material (Tr. 2857). The Mead Johnson flour was produced from 100% of the groat stream, whereas Gerber’s flour was produced from the 70% containing a high percentage of hulls (Tr. 2873). Mead Johnson encountered a granulation | problem with flour from the No..14 system in 1957, and it was necessary to alter the particle size of the flour to satisfy them (Tr. 2868; CX 398a).

50. Following is a summary of the history of the problems of the principal ready-to-eat cereal manufacturers, the systems used to produce the characteristics required, and the variations from such systems:

(a) Kellogg uses oat flour in extruded ready-to-eat cereals (Tr. 2744). Kelloge’s first purchase from Quaker was flour from the No. 14 system in August of 1959 (CX 189a). While the flour met Kellogg’s specifications, they were dissatisfied with its performance and refused to use it thereafter (Tr. 2809-10). Kelloge’s experience with ficur from the No. 14 system has been summarized as follows: Kellogg cannot run O.K.’s with Quaker’s flour except when it is blended with Lab-16 [National’s] oat flour. They can run O.K.’s with Lab-16 oat flour alone, but not Quaker’s. (RX 74b) oO Kellogg did not purchase again from Quaker until 1962, (Tr. 2808, 3096).

(b) Post manufactures extruded ready-to-eat cereals containing oat flour (Tr. 2744). Post began experimenting with oat flour in 1954 for use in its ready-to-eat cereals (Tr. £501). It tested flours from the No. 2 and No. 5 systems in 1957 and found them unsatisfactory (Tr. 4481). In June of 1957, it bought its first carload of oat flour from Quaker (Tr. 496) which was the same as that supplied bv Quaker to Gerber. That flour proved to be too high in free fatty acid THE QUAKER OATS CO. 1153 1131 Initial Decision (Tr. 4481, 4505-06) and was, therefore, unsatisfactory (Tr. 4482). Post informed Quaker of the trouble, telling them that the free fatty acid level would have to be reduced (Tr. 4506) as it adversely affected the extrusion characteristics of the dough (Tr. 2705, 2776). On subsequent shipments of flour manufactured on the No. 14 system for Post, Quaker made alterations in an effort to overcome those problems (Tr. 2774-75; 4484-85). Thereafter, Post had difficulty with flour from the No. 14 system because it was too finely ground, and caused trouble in Post's handling equipment (Tr. 2782; Tr. 4485: CX 417). Quaker made changes to correct that problem (Tr. 2782; Tr. 4488-89: CX 416, 4182). Also, the configuration and amount of fiber in that flour caused difficulty and required changes (Tr. 2772-78: Tr. 4489-90: CX 421). In early 1958, Quaker developed the No. 86 system for producing a flour for Post (Tr. 2772-73, 2783). Due to the free. fatty acid problem, Quaker made Post’s flour from fresh groats, as well as the best 80% of the mill stream of oats (CX 882b). This was done for no other customer (Tr. 2777-78).

(c) Serutan which uses oat flour in a cereal supplement used flour manufactured under the No. 2 system (CX 808). 51. Following is a summary of the history of the problems of other customers, the systems used to produce the characteristics required and the variations from such systems:

(a) Pillsbury uses oat flour in cake icings or frostings (Tr. 2744, 2794). In about 1954, Pillsbury was using a No. 1 flour produced from unsteamed groats which created a shelf life problem (Tr. 2797). To overcome that problem, they switched to a No. 2 flour. Thereafter, they encountered a crystallization problem in their finished product. This is a condition in which sugar crystals grow progressively larger as the product ages (Tr. 2795). Oat flour, if finely ground, will overcome that problem (Tr. 2795; Tr. 8278). Since 1955, Quaker has produced progressively finer flours for Pillsbury (Tr. 2796). Presently, they are receiving a No. 108 flour. Pillsbury was offered flour from the No. 5, No. 14 and No. 86 systems, which was not satisfactory to Pillsbury (Tr. 3308). .

(b) Procter & Gamble manufactures dry pancake mixes (Tr. 2r44, 2798). Originally, Procter & Gamble used flour from Quaker’s No. 6 system, but in 1958, due to a shelf life problem created by that flour (Tr. 2800), it began purchasing flour from the No. 14 system. Thereafter, Procter & Gamble complained that the flour from the No. lt system was causing a problem of speckiness in their finished product. Accordingly, Quaker adjusted its manufacturing procedures to remove more of the pericarp and perisperm fragments of the oat kernel (Tr. Initial Decision. 66 FE.T.C.

2799-2800). Also, Procter & Gamble complained regarding texture and Quaker accordingly supplied a finer grind flour (Tr. 2800). In 1958, Procter & Gamble was offered No. 2 flour as well as flour made of the No.-5 and No. 36 systems (CX 458).

(c) Missouri Farmers Association and Eastern States did not require a controlled oat flour. They used it in an animal feed. The only controls required were steaming and grinding, without further classifving (Tr. 3442-48, 3471-72). The No. 14 system was used in producing flours for these customers.

52. Appendix B is a table which summarizes the foregoing three findings. In making these findings the hearing examiner has relied heavily upon the carefully prepared testimony of M. P. Wineberg, the cereal chemist and Werner Heck, the chief miller of respondent, despite their interest. This was based among other things upon their demeanor, and the manner of answering the questions posed. Their testimony was corroborated by two customers, Pillsbury and Heinz. No rebuttal testimony was offered from other customers in contradiction of their testimony.

58. The hearing examiner took the position during the trial that he would take the facts covering the differences claimed to exist in oat flour delivered to varicus customers but would not receive opinion testimony whether such flours ave of like grade and quality because in his view such an opinion would involve a mixed question of law and fact for the examiner and the Commission and was not a proper subject of expert testimony. The questions and answers are, however, recorded and are thus available.

Quakers Casting Practices 54. Quaker does not figure the actual cost of any individual product produced in its oat mill (Tr. 1424, 1428). Quaker prepares no caleulation of actual costs on oat flour (Tr. 1268-69; Tr. 1425-26; Tr. 3860; Tr. 3918-19). Quaker has no records from which such an actual cost could be calculated (Tr. 8806). The only figures calculating cost are periodic estimates of what costs will be (Tr. 1424). 55. Quaker’s accounting department prepared a Daily Cereal Report (see e.g., CX 369, p. 1), reflecting estimated standard cost (Tr, 1431- 32), It wasan aid to the sales department (Tr. 173, 649). 56. Standard cost is a term used in accounting practice (Tr. 1481). Tt includes three basic elements: raw material cost; milling cost: and plant overhead (Tr. 8915-16). Development of such standard cost requires pre-production assumptions (Tr. 3915-16, 8983; Tr. 4748) regarding: the quantity of raw material required (Tr. 5321), the value pened Or THE QUAKER OATS CO. 1 1131 ' Initial Decision of the raw material (Tr. 5322), the quantity of by-products to be expected, the value of the by-products (Fr. 5823), the method of production (Tr. 5823-24), the time required to produce, the factory overhead to be associated with the product (Tr. 5323), and the volume over which the costs are to be spread (Tr. 5325-27). 57. Quaker’s standard cost includes an estimated value of raw material, less estimated realization from the sale of by-products at some future date, plus estimated manufacturing cost, plant overhead and packing cost (Tr. 174; Tr. 1483, 8774).

Daily, at 1:15 p.m., the close of the grain market (Tr. 3855), Quaker’s grain department estimates replacement cost of oats for use in the next day’s standard cost projection (Tr. 3841, 3855), as well as the estimated by-product values (Tr. 8841).

Those estimates, however, cannot be inserted into standard cost until an estimate regarding yield is established. Accordingly, Quaker’s head miller, its accounting people and its grain people met monthly to agree upon a yield to be used. The estimated yield was in terms of the total number of pounds of oats necessary to manufacture a net _hundredweight of product (Tr, 1841-1842), The following items were included in the manufacturing cost estimates (Tr. 8772-73) : department labor, supervision, electric power, steam, machinery repair, elevator expense, grain elevator expenses, depreciation, hull grinding, car preparation supplies, mechanical handling equipment expense and plant overhead. The plant overhead estimate included (Tr. 8773-74): personnel service labor, vacation and holiday pay, illness and accident pay, 140hour guaranteed time, 70-hour lay-off time, sundry expense, Workmen’s Compensation Insurance, general salaries and expense, auto and truck expense, donations, demurrage, methods engineering, trainee program, insurance, taxes, plant. service labor, sundry depreciation, building repair, sundry power—electric, and sundry power—steam. Estimated packing costs are added to these estimates to arrive at standard cost.

The items listed above, taken together, constitute the estimated cost of the product (Tr. 1482) at the mill. It does not include administrative selling expense or general overhead.

58. It was this “standard cost” that Fenner, under Vice President Mason's instructions (Tr. 1293), used as a floor in making bids (Tr. 181-8, 654-5, 3498, 3510, 3604-5, 3612-5), as heretofore pointed: out. 59, Fenner testified, however, that he did not work from the Daily Cereal Reports when he had a request for a quotation on large or future contracts (Tr. 173) (ones involving more than a month or more Initial Decision 66 F.T.C.

than several cars). Instead, he would go to the grain department (Tr. 496) and ask for a new appraisal of raw material cost and byproduct credits for the extended period (Tr. 172; Tr. 8842-43). The grain department insisted upon this procedure (Tr. 3599-3600). in response to such a request, the grain department supplied a new estimate to the accounting department: (Tr. 173; Tr. 8843, 3845, 8857), which, in turn, computed a new projected milling expense (Tr. 1846-7) and notified Fenner of the new estimated standard cost applicable to the particular bid (Tr. 654; Tr. 1294; Tr. 3845-46). The messages from the accounting department were in the form of a pened note, teletype message (Tr. 668), or telephone call (Tr. 3660-61). No records were maintained reflecting the new estimates which were used on futures sales (Tr. 3512; Tr. 3856). Quaker maintains a technical staff which continuously appraises current and long term market conditions for the major ingredients Quaker buys (Tr. 8885-86; Tr. 4050). It assists John Murray, the vice president of the grain department, in timing purchases so as to minimize both short term and long term ingredient costs (Tr. 4057-58). The services of this staff were used in connection with future sales of oat flours (Tr. £060).

Dallas Western, a crop expert (Tr. 4085-86), is in charge of providing estimates of crop conditions and prospective yields for various grains (Tr. 3832). Quaker’s Economic Research Department uses these prospective supply estimates, along with its own estimates of various demand factors (Tr. 8844) in statistical analyses designed to indicate the most probable future price action (Tr. 4049). The statistical analyses (generally of the multiple correlation type) ave applied to different locations and. for different time periods. Weights are derived which indicate the relative importance to oat price of the supply and demand factors included. A single given factor may be more important in one month than in another (Tr. 3844). For example, in the first quarter of the new crop year (July-September), the total supply of old crop oats will be important (Tr. 4065). In the second quarter, new crop corn must be considered as influencing the price of oats (Tr. 4071-72).

Normally, the peak of oat prices occurs in early or mid-winter, and then declines into the July-August harvest period (Tr. 3497; Tr. 4107). Often, however, forces may exert influence sufficient to overwhelm this seasonal tendency. For example, according to Fitzgerald, March 15-20, 1956, the government’s March 1 planting intentions report indicated a decline in oat acreage, and a marked upward revision in general price anticipations was called for (Tr. 4083). THE QUAKER OATS CO. 1157 1181 Initial Decision In addition to forecasting the replacement value of oats for a deferred delivery contract, an estimate must also be made regarding the value of by-products (Tr. 3795-96). By-products have an important bearing on the cost of making oat flours because they act as a credit against the cost of grain (Tr. 849). Estimates regarding by-product values over an extended period may be different from current estimates. By-products also tend to fluctuate in value during the course of the year (Tr. 780-81, 849; Tr. 1460).

60. Beginning in August 1956, Quaker prepared an accounting advice which showed the amount of general, administrative and selling expense applicable to oat flour sales at that time to be 34¢ per ewt. In August 1957, another accounting advice sheet was issued by Quaker purporting to direct that the amount of general, administrative and selling expense applicable to sales credited to the Chicago Institutional and Industrial Food Sales Division should be 36¢ per ewt. The increase was determined from a study made in which past. experience was one of the elements. It was customary for Quaker to review the advices in relation to the past and to the future, once or twice yearly. (Tr. 1425- 52, 3761-65, (Whitfield RX 51 to 55).) In making their comparisons of selected sales to different customers of Quaker, counsel supporting the complaint has utilized these accounting advices (RX 51 to 55) as additions to standard costs to arrive at adjusted full costs. (CX 877A- 225.) The adjusted cost, so arrived at, includes the standard cost and the estimated general, administrative and selling expense applicable to such sales, 61. General administrative expenses are period charges which are not identifiable with specific units of production (Tr. 5943-44). General administrative expense includes the president’s salary, the controller’s salary, legal department expenses (Tr. 8784-85, 8800), state income taxes, franchise taxes (Tr. 8804-05), central office rent, and accounting department expense (Tr. 1488). It is a catch-all for expenses not directly allocable to products (Tr. 1488, 3779, 8800). During the period 1955-1959 it amounted to between 34¢ and 36¢ per cwt. for industrial sales (RX 51-35).

62. The Daily Cereal Reports also reflect an estimated unit full cost. Full cost is the sum of standard cost, plus estimated selling and general administrative expense (Tr. 1438). This full cost shown on the Daily Cereal Reports was inapplicable to industrial sales of oat flours (Tr. 1866; Tr. 8761, 3763) because it included selling expense incident to Quaker’s general sales organization (Tr. 1853-55; Ty. 8780-81, 3783, 3786, 8797-98). Fenner testified that he sometimes quoted above estimated full cost on oat flours (Tr. 185) and sometimes below (Tr. Initial Decision 66 FLTC.

668), but he did not pay any attention to full costs (Tr. 184) in preparing bid quotations (Tr. 8498, 8612), because the relevant cost, insofar as he was concerned, was standard cost. As heretofore pointed out some of the records maintained by Quaker show for particular sales a comparison of full costs and prices. Fenner testified that he never authorized his assistants to bid below standard costs, and in the event it happened, it was simply anerror (Ty. 655). Price Discrimination and Sales Below Cost 63. Counsel supporting the complaint introduced evidence concerning more than 550 transactions involving sales of oat. flour by respondent during his direct case. In addition, he offered evidence concerning the delivery of portions of such sales through invoices and “mill orders’ where no proof of sale could be secured (RF ? Appendix, pp. 50-107, and exhibits cited therein). At the request of the hearing examiner and at the close of his case, counsel supporting the complaint offered an Exhibit, 825a-z25, showing the transactions which he claimed showed price discrimination and sales below cost. These transactions were later the subject of proof by the respondent. Near the conclusion of his rebuttal counsel supporting the complaint offered a revised comparison (CX 877a-z25) which showed, in addition to the differences in price and full costs, the amount of flour ordered, the delivery period and the adjusted cost [i.e., the standard cost plus the allocation of general administrative and selling expense which was allocated by respondent to the Industrial and Institutional Division (RX 51-55) J. In his proposed finding forty second, counsel supporting the complaint pointed out eight examples of sales claimed to be discriminatory (CF 42, pp. 84-85).

64. Counsel for respondent, in each of the instances described in Exhibit CX 877a-z25, sets forth his reasons why the comparison did not establish a price discrimination in Appendix to respondent’s proposed findings of fact (pp. 108-188, incl.). These reasons are wholly supported factually in almost all cases by the testimony and exhibits cited in support of such reasons. (See exhibits and testimony cited to show why there is no discrimination or no sale below cost in the instance cited.) However, the conclusions of respondent contained in such reasons are rejected in the instances set forth in the following findings for the reasons there set forth.

65. The following comparisons constitute examples of sales to competing baby food manufacturers made at discriminatory prices 2RF means Respondent's findings. CF means Counsel Supporting the Complaint's findings.

THE QUAKER OATS CO. 1159:

1131 Initial Decision (despite testimony that the flour sold to one could not be used by the other) because the flours were roughly comparable; were the same in appearance; the same in estimated cost; from identical raw material ; were to be used for the same purpose by firms known by respondent. to be in competition with each other, and were made at approximately the same time:

(a) The sale to Gerber on April 30, 1957 of 15,000 ewt. of No. 14 flour to be delivered within 76 days at the mill net of 4.44 and the sale to Beech-Nut on May 2, 1957 of 1,800 cwt. of No. 14 flour to be delivered within 50 days at 4.63 or 19¢ per cwt. above the price to Gerber (CX 877d).

Respondent’s explanation (RF Appendix, p. 112) that the Beech- Nut flour had been subjected to additional aspiration and contained. less fibre does not constitute a difference in grade or quality, merely a difference in treatment at no significant additional cost. No competent evidence has been offered to establish the difference in cost be-. tween the dates of delivery or arising by reason of differences in amount, and, it has not been established that the sale of 20 carloads over 2144 months committed Quaker’s capacity to such an extent that it was unable to bid for 8 carloads at the same price. An examination of bids by other firms during April 1957 does not indicate that the bid was made to meet competition (RF Appendix p. 63). (b) The sale to Gerber on July 23, 1957 of 15,000 ewt. of No. 14 oat flour at a mill net of $4.24 per cwt. deliverable in 67 days and the sale to Mead Johnson on July 80, 1957 of 600 ewt. of No. 14 oat flour to be delivered in 64 days at $4.44 per ewt. as part of an order of 7,200 ewt. of No. 5 oat flour sold at $4.60 per ewt. or 20¢ above the price to Gerber (CX 877e).

Respondent’s explanation (RF Appendix, p. 118) that more effort was made to control fibre for the Mead Johnson flour and that the Gerber flour was made so as to hold bacterial contamination to a minimum does not constitute a difference in grade or quality; merely a difference in treatment at no significant difference in cost so far as the No. 14 oat flour was concerned. It has not been established that the inclusion of November and December in the Mead Johnson contract would have caused a commensurate increase in cost or that the sevenday interval between the sales made the contracts not comparable in time. Examination of bids preceding the sale in the month of July 1957 (RF Appendix, pp. 64 and 65) does not indicate that the bids were made to meet competition.

(c) The sale to Mead Johnson described in subparagraph b above and the sale to Gerber on July 31, 1957 of 50,000 cwt. deliverable over 356—438—70——_T4 Initial Decision; 66 F.T.C.

238 days at a price of $4.20 (CX S77f) or 24 cents below Mead Johnson’s price.

Respondent’s explanation (RF Appendix, p. 114) to substantially the same effect as that made with respect to the comparison made in connection with the sales described in subparagraph b does not constitute a defense for the reasons stated under said subparagraph. (d) The sale to Gerber described in subparagraph c above and the sale to Beech-Nut on August 6, 1957 of 600 cwt. at a mill net price of $4.45 or 25¢ above Gerber’s price (877g). Respondent’s explanation (RF Appendix, p. 115) that the Beech- Nut flour had less of certain fibres which had led to discoloration and Gerber had a finer grind flour does not constitute a difference in grade or quality; merely a difference in treatment at no significant difference in cost. It has not been established that the difference in price is justified by a difference in cost of the two sales or that the eight days’ difference in the dates of sale was significant. An examination of the bids preceding the sale in the months of July and August 1957 (RF Appendix, pp. 64-66) does not indicate that the bids were made to meet competition.

(e) The sale to Gerber on April 8, 1958 of 3,200 ewt. of No. 14 flour deliverable in 13 days at a mill net price of $4.36 and the sale to Mead Johnson on April 8, 1958 of 1,200 cwt. of No. 14 flour deliverable in 24 days at a mill net price of $4.50, or a difference of $.14 per ewt. (CX 877s).

Respondent’s explanation that Mead Johnson’s flour was of a coarser granulation and not made with bacterial control in mind and that the Gerber flour was made from the lower 10% of the groat stream and was bacteria controlled (RF Appendix, p. 122) fails to constitute a difference in grade and quality but merely a difference in treatment. It has not been established that such a difference in treatment caused any significant difference in cost. To the contrary, the projected standard costs in the cereal reports were identical. The testimony of Fenner (Tr. 8501, 3564-65) that there was no way of determining when price changes were made for Mead Johnson is not adequate to counteract the record evidence that the price was made on the date indicated. 66. The hearing examiner rejects the comparison offered by counsel supporting the complaint of the sale to Gerber on September 3, 1957 of 18,000 ewt. of No. 14 flour at a mill net of $4.40 deliverable in 143 days and the sale to Beech-Nut on September 13, 1957 of 600 ewt. of No. 14 flour deliverable in 16 days or a difference of 11 cents (877h). Respondent's explanation (RF Appendix, p. 115) so far as grade and quality is concerned is substantially the same as under subparz- THE QUAKER OATS CO. 1161 1131 Initial Decision graph d of paragraph 44 and is also rejected. However, the difference in projected standard costs was 17 cents (877h) and thus more than the difference in the net prices; accordingly, it does not appear that the difference in the two prices can be regarded as other than competitive bids made in good faith.

The hearing examiner also rejects the other comparisons contained in proposed finding forty second proposed by counsel supporting the complaint because it has not been established that the persons whose sales were compared were in competition with each other. 67. The comparison of sales exemplified by Finding No. 65 because of the lack of evidence of recent comparable bids by others, (see Tabulation if Sales & Bids—pp. 50-107, RF Appendix) the extent of the price difference, (CX 877) the differences between Quaker’s bids and the competing bids made by its competitors (see CF Appendix charts I, TT and III) demonstrate that the price differences were not differences which might normally be expected in cases of good faith competitive bidding.

The Proof Concerning Below Cost Sales and Reasonadleness of Quaker's Prices 68, It has not been established that Quaker sold oat flour below actual costs and could not have been established because Quaker does not calculate the actual cost of any product produced in its oat flour mill (Tr. 1424-1428). Moreover, it keeps no records from which such an actual cost could be computed (Tr. 8806). That no actual costs for oat flour are computed was repeated by all respondent’s witnesses concerned with it (Tr. 1268-69; Tr. 1425-26 ; Murray, Tr. 3860 and J. ons, Tr. 3918-19).

69. Respondent’s witnesses also pointed out numerous reasons why standard costs could not be used as a basis for estimating even actual production cost. The cost of the grain may well be more or less than the estimate (Tr. 1461-1466). Volume of production may also vary the actual unit manufacturing cost from the estimate (Tr. 3971) which would render the standard calculated invalid (Tr. 5848). The increasing volume of Quaker production thus would tend to have its standard costs understated (See CX 491-92). And, the use of new manufacturing systems where no experience had been developed would make for further inaccuracy. (Tr. 5324-25.) 70. National’s experience that it was required to recalculate its estimated costs under its cost plus arrangement after actual costs were ascertained substantiates respondent’s position that prospective costs Initial Decision 66 F.T.C, should not be regarded as synonymous with actual costs (CX 671; Tr. 4233-84; RX 14, RF Appendix 26A and 27).

71. The foregoing findings establish, therefore, that the standard costs set forth in the respondent’s so-called cereal reports (CX 368-872) cannot be used as the actual cost applicable to the production of oat flour. They are not the “cost of goods sold,” to use a customary accounting phrase.

In the case of the special costs estimated for long-term or large quantity contracts, there are no figures available (Tr. 8512, 8856). We are left with a hindsight speculation as to what estimates may have been made at the time, and such estimates likewise may bear no correlation to the actual costs. This is true because as respondent's witnesses testified the grain department has alternate methods of coverage as follows:

(a) The grain department may rely upon existing oat inventory (Tr. 849, 4585) which may exceed 5 million bushels, depending upon the time of the vear (Tr. 6614) ; ;

(b) It may buy the requirements in the cash market (Tr. 3846, 4093) and place them along with other oats in the 10 million bushels of storage capacity at Cedar Rapids (Tr. 6614) : (c) If there is an insufficient flow of cash oats, it may buy futures, selling them out later as equivalent amounts of cash oats are purchased (Tr. 8870) ;

(d) It may hedge the requirements in the futures market (Tyr. 3898, 4098) ;

(e) It may stand on the short position in expectation that the raw material price will decline (Tr. 3846, 4586) ; or (f) It may enter into a contract with a third party for deferred delivery on cash oats (Tr. 6615).

Which alternative is followed depends on the price outlook (Tr. 3846). If a price rise in oats is anticipated, the Economic Research Department will urge Vice President Murray of Quaker’s Grain Department to cover Quaker’s requirements in the cash market (Tr. 4092). If a decline in price is anticipated, they will urge Murray to buy hand-to-mouth. (Tr. 4092). If they feel the futures price of oats will advance more than the price of milling quality oats, they will advise that futures be purchased (Tr. 4092-97). 72. In any event, taking standard costs on the day of the bid as contained in the cereal reports (CX 368-372) the number of instances pointed out of sales approaching standard costs are so few that. they substantiate Fenner’s testimony that it was a mistake if he bid below standard cost (Tr. 655). To the contrary, during the delivery period THE QUAKER OATS CO. 11638 1181 Initial Decision there were a number of instances when delivery was mace on a cate where the price was below the standard cost shown by the cereal report for the date of delivery (CX 854). It was not established what the grain cost was for the entire contract. It could not be because the grain department kept no records from which the accuracy of its predictions could be determined (Tr. 3870-71). 73, On the other hand, the standard cost or the cost of goods sold despite the accounting convention that it alone is utilized to determine gross profits in juxtaposition to the price received (Tr. 8911-4013, 5514) cannot, purely as a matter of mathematics, be regarded as the sole measure of what it costs a company to do business in a particular product (Compare Tr. 4553-54, 6607-08). Some account must be taken of general, administrative and selling expenses. v4, For products other than those sold by the Industrial and Institutional Division, the cereal reports calculated daily a figure reflecting selling and general administrative expenses (CX 368-372; Tr. 1438). These expenses included the salaries of the president, comptroller, the legal department expense, state income taxes, franchise taxes, central office rent, accounting expense and all other expenses not directly connected with the production of a particular product (Tr. 1438, 8779-3805). While those contained on the cereal reports (CX 368-372) were not applicable to industrial sales of cat. flowers according to the uncontradicted testimony (Tr. 1866, 3761-63), commencing in August 1956 a special accounting advice was circulated which allocated such costs to the Industrial and Institutional Division (RX 51-55; Tyr. 3763-64, 3781-87). Thus, Quaker clearly recognized that its projected standard costs failed to compensate it for the entire cost of doing business in a particular product. It arbitrarily allocated an additional sun to cover that additional charge against total income (RX 51-55). 75, There is no recognized accounting practice which determines just how general administrative and selling expense must be allocated to a particular product. Corporations adopt different methods of doing so (Tr. 3915, 3937, 5463, 3914-15, 4613-14, 2954, 3914-15, 4751). Quaker as a matter of administrative discretion, not based on a factual survey, (Tr. 5980) allocated the percentage shown on its accounting advice to oat flour sales (RX 51-55), although oat flour accounts for such a small percentage of Quaker’s total business that precise allocation is difficult (Tr. 8974-75).

76. Quaker’s action in projecting standard costs (CX 368-372) and allocating general administrative and selling expense to its oat flour sales (RX 51-55) is regarded by the hearing examiner as setting up a standard or floor to determine, in the absence of bona fide competi- Initial Decision 66 FVT.C.

tion, what was the least price it was reasonable for it to secure for its oat flour. This price has been designated in the exhibits offered by counsel supporting the complaint as the adjusted full cost (CX 877a-z25).

77. If we compare the sum of the standard cost (as shown on the applicable daily cereal report [CX 368-72]) plus the appropriate accounting advice (RX 51-55) with the price in the series of instances which counsel supporting the complaint charges constitute price discrimination in favor of Gerber; we find that Quaker sold Gerber at a price below such sum in the following instances: July 31, 1957 (Si7g) ; September 8, 1957 (S877h) ; and May 28, 1958 (ST7w). These instances in the opinion of the hearing examiner constitute examples of sales at unreasonably low prices.

Factual Basis for Finding Price Discrimination in. Competitive Bidding 78. Counsel supporting the complaint take the position in their proposed findings, conclusions and order that more than a mere difference in price is essential to establish price discrimination in the oat flour industry under its competitive bidding practices. (See VI Summary of Facts and Conclusions, p. 64.) They reach the conclusion that “the price discrimination must be determined, therefore, on the bid cost relationship between the various customers between 1956-1959” (id.). However, counsel for respondent take the position that cost and bids are immaterial. At the same time, they seem to concede that if there can ever be price cliscrimination in a competitive bidding situation (which they vigorously deny—Answering Brief, pp. 8-8) all counsel supporting the complaint need show is that: “* * * the actual delivered prices are proved to be (1) different, (2) between comparable transactions, (8) involving goods of like grade and quality, and (4) there is an accompanying competitive injury” (Respondent's Answering Brief, p. 10).

79. It has been established in the proof described in the foregoing findings that in the instances set forth: (1) actual delivered prices have been different, (2) in transactions which have not been shown to be incomparable by reason of differences in cost, (3) which involve oat flour of like grade and quality, and (4) such differing prices are made to persons actively competing against each other in goods in which oat flour is a significant ingredient, thus tending to impair their ability to compete with each other.

80. In support of their position that more then mere price difference must be shown in an industry where competitive bidding is the rule, THE QUAKER OATS CO. 1165 1131 Initial Decision complaint counsel have demonstrated: (a) that the oat flour market was an expanding market (CF Table III, CF, p. 51), (b) that prices charged in 1956-1957 to Gerber were generally closer to standard costs than prices charged to others (CF Appendix Table IT), (c) that during 1956-1957, over the delivery period, the contract prices on the dates of delivery were less than the adjusted costs on that day in 93% of the cases and less than standard costs in 30% of the cases, whereas the percentage was significantly less in cases involving other customers (CF Appendix Table III), (d) that the difference between Quaker’s price and the next bid was in the great majority of cases (almost 34) greater than 10 cents per ewt. (CF Table XIV), (e) that, as a matter of economic probability, in an expanding market, where, as here, there were relatively few buyers and sellers, prices would tend to exceed production costs plus selling and general administration costs by a margin of profit. (Watson 5404-5407, 5416-5419, 5422, 5425-5427, 5429, 5449, 5476.) 81. The hearing examiner finds that while the statistical presentation made by counsel supporting the complaint under the force of skillful cross-examination was shown to have many detailed errors due to the haste in which it was prepared, Scott Walker, the Commission expert under whose direction it was prepared, on the basis of all ef his testimony, was candid in admitting errors and in withdrawing his support for exhibits which were clearly erroneous. The examiner, therefore, has accepted as factually approximate the charts and tabulations received in evidence as corrected which form the bases for the preceding finding (Walker). With the exception of Table XTII (See R. Answering Brief, p. 82), counsel for respondent, appear to accept the impact of other tabulations while vigorously denying their applicability. (e.g., R. Answering Brief, p. 9.) Evidence Bearing on Intent 82. With the exception of a few instances, not shown to have been acted upon at the management level, where salesmen have in their competitive reports sought retaliatory action against National Oats (CX 664 et seq.) there is no evidence in the form of statements of intent to injure National Oats (CF p. 112). Counsel supporting the complaint, presumably to establish such an intent demonstrated: (1) that prior to 1954, the year before Quaker actively returned to the oat flour business, National Oats had an exclusive cost plus contract with Gerber, the largest user of oat flour, which was terminated in 1954. (Tr. 2051, 2126, 2134, 2138, 4236, 4241; OX 671, RX 10), (2) that Quaker in its competition with National Oats for the Initial Decision 66 F.T.C.

Gerber oat flour business, formerly National’s largest customer, consistently favored that company over its competitors during the years 1955 to 1957 (see preceding finding), (3) that in two of its rolled oats promotions Quaker sought by special cash allowances to increase its share of the market. in two territories in which National Oats was strongest in sales of that commodity during the period when it was actively competing with National Oats for the Gerber oat flour business (Tr. 1811-1818, 1766; CX 641, 652A-— D; Tr. 2018, 1392 1404; CX 646), (£) Quaker acquired two companies, both of which had previously purchased oat products from National Oats (Tr. 1339, 1340, 1978, — 1984; CX 667, 668).

83. Quaker’s vice president in charge of sales testified that Quaker’s decision to set up the Industrial Sales Department was not. directed at competitors; that he did not even know that Fenner was competing with National for some oat flour accounts (Tr. 1805-1306) and that there was no connection between the promotions of rolled oats and the sale of oat flour (Tr. 1391, 1811). Mr. Proctor, of National Oats, stated there was no direct tie-in (Tr. 893). He felt there was some looze connection because rolled oats and oat flour were made in the sune plant (Tr. 889). Both Quaker (Tr. 1315) and National Oats engaged in regional promotional activities prior to those described in the preceding finding. (Tr. 864, 2029, 2042-45.) The Effect on Competition in the Primary Line 84. Following is a statistical summary showing total sales in hundredweight. (ewt.) by each of the sellers of oat flour during the period 1955-1959 :

National Quaker Ralston 3 Gent Mills Fruen Albers Industry Year (CX 494) ox (CX 602a-j) (CX 680b) (CX 615b) (CX 612e) total 141, 764 42.666 *(CX 602a) 28, 840 5, 400 1, 440 (*) 100, 239 105, 105 18. 500 34, 600 13, 800 686 272, 930 128, 772 165, 456 8. 815 54, 900 22, 200 546 380, 689 292, 260 191, 456 10, 090 28, 800 32, 100 2.412 557, 058 368, 985 213. 917 37, 160 27, 600 23. 400 17, 765 688, 827 3 Includes Rol-Cut oat flour as well as Ralston oat flour. *Not available.

Source: (R. Appen‘tix p. 44).

(Compare CF p. 51, Table III which shows slightly lower figures for Quaker, presumably because CX 491, 492 were not considered. and combines totals of firms other than National and Quaker. From lack of criticism of this table in Complaint Counsel's Reply (pp. 38, 39, 58-55), we assume that they agree on the correctness ofrespondent’s appendix.) Respondent’s figures thus establish that by Quaker’s activity in 1956, it increased its share by 62,439 ewt., while in the same period the share ‘THE QUAKER .OATS CO. 1167 1181 Initial Decision of National Oats was decreased 41 525 ewt. In the following year 1957, the total market increased by some 107,759 cwt. and Quaker’s share 60,351 ewt., while National Oat’s share of the increase was somewhat less than half that amount or 28,533 evwt. 85. Complaint Counsel compares Quaker, National and the sales of others to Gerber, the recipient of the alleged discrimination in its Table X. While admittedly the Universe and sales to others cannot be complete because of the unavailability of Ralston’s figures for the year 1955, the share of Quaker in the Gerber business increased some 56,470 ewt. between 1955 and 1956, while National's decreased some 55,296 ewt, Similarly in 1957, Quaker’ s sales to Gerber increased another 49,530 cwt. over 1956, and National's sales decreased some 1 7,200 cwt.- 86. Comparing these figures with the 1955-1956 overall increase in Quaker’s share and decrease in National's s, we find the following: National's Total Decrease National's Decrease to Gerber 41,525 ewt. 55,296 cwt.

Quaker's Total Inercase Quaker's Increase to Gerber 62,489 ewt, 56,420 cwt.

87. From the complete statistics available following 1956, the following tabulation sets forth the approximate percentage of market shares and Industry Total in ewt.:

Industry Market Shares Year total (thousands of National Quaker Ralston General Fruen Albers ewt.) Mills 272 37.7 39.5 4.4 13.0 5.2 -3 380 34.1 43.8 1.6 14.5 5.9 «1 557 52.5 34. 4 1.8 5. 2 5.8 4 688 6 31.1 5.4 4.0 3.4 2.6 Source: RF 80. R. App. p. 44.

(Compare CF p. 53, C Reply, pp. 38-39, #60 which concedes the differences are slight.) In comparing figures subsequent to 1957, note is to be taken of a number of circumstances which may tend to modify trends which might otherwise be anticipated :

(1) In 1958 and 1959, General Foods (Post) and Kellogg first made significant purchases from National as follows: (In hundredweight] 1958 1959 Kellogg.....22.2222.-22-- wn cee ee ee eee ene eee eee eee ee nce eee 118, 615 POSt 2... 2-22 2-2 eee ee EE 210, 206 138, 372° (Souree: CX 494b, 868c, Table IX), Initial Decision 66 FVT.C.

Whereas in the same years they purchased much smaller amounts from Quaker, the latter being a competitor in dry oat cereal. (In hundredweight] 1958 1959 Post. 2.222 en ee eee ee nee eee pene eee ce ee nee 20, 231 55, 757 Kellogg. _. 2-2-2 ---- ee eon eee eee enn ee ee ee een ee eee eee nee ee 28, 400 (Source: id.) (2) Moreover during this same period and by 1959, the Small Business Committee of the House of Representatives undertook an investigation of the industry and Quaker added a fixed margin to its bids. (Tr. 1210, 1214; 1980-1937; 1244-1248: 1272-1274: 1290-92; 1329, 1374-7; 1450; 1905. CF p. 29.) (3) Ralston from about 1956 devoted their oat flour production priarily to dog. food because of limited production. (Tr. 1153-5: 1173; 4177-8.) This was later overcome thru increased plant capacity and resulted in increased volume of sales to others. (Tr. 4179, 4158.) (4) General Mills is primarily interested in producing oat. flour for its ary cereal “Cheerios” and uses 80-85% of its production of oat flour therein (Tr. 1648-9). On occasions, it has declined to bid or quote high prices to other customers because of lack of capacity (Tr. 1710-2; 1719- 20; 2141; 2806; 2321-2). .

(5) Albers did not enter into the oat flour business on a substantial scale until 1959 (RX Ic).

(6) Fruen is primarily a supplier to Mead Johnson (Tr. 1495; CX 615 a-b). General Mills and Ralston cut into its business with Mead Johnson in 1959. (CX 680b; 6029-7.) It had difficulty in meeting specifications of Gerber (Tr. 1522-23; 1629), Being (1595-6; 1669), and Beech-Nut (Tr. 1609, 1624). However, when Gerber was satisfied with Fruen’s flour, its price was high. (Tr. 1514: 1524-5; CX 623.) Beech- Nut also complained of its high prices. (Tr. 1596.) _ (7) Quaker had some difficulty in performance of its flour at Gerber in 1958 (Tr. 889, 1885, 2760, 2175; CX 377, 3880, 382a, 889). 88. Despite the reduction in its overall business and in its sales to Gerber in 1956 and 1957, National’s financial statements as analyzed by Quaker’s public accountants (Tr. 4635 et seg.) showed net earnings during the entire period, 1954 to 1959, and, its total doilar sales, varied less than ten percent during that period (RX 68b: CX 563). [Note 1958 is for six months only. See R. Appendis, p. 45.] Financial Ratios areas follows:

THE QUAKER OATS CO. 1169 1181 Initial Decision NATIONAL OATS COMPANY {Financial ratios] 1954 1955 1956 1957 1958 1959 1960 = 1961 Current ratio t..2....2222--2---2- 22-2 eee 176 272 2.22 252 4.383 2.93 3.86 4, 23 Ratio-average 5 net worth to operating profit... 2220 eee ee eee eee eee ee 13.91 17.90 14.21 14.67 °10.82 20.02 15.40 19.98 Ratio-average ? net worth to earnings. ._.. 6. 46 8.27 = 6.15 6. 24 5.14 947 © 6,82 9. 08 4 The ratio of total current assets to total current liabilities (Johns R. 4635). The ratio is indicative of the company’s ability to meet its short-term obligations. The higher the ratio, the more satisfactory the financial condition of the company (Johns R. 4647). It is determined by dividing the total current liabilities into the total current assets (Johns R. 4636). 5 Obtained by dividing the average net worth into the operating profit (Johns R. 4642). 5 Six months only.

7 Outained by dividing the average net worth into the net profit. (Source R. Appendix, p. 45.) 89. With respect to the cost plus contract between National Oats and Gerber the uncontradicted evidence is that this was terminated in 1954 (Tr. 2051, 2126, 2134, 2138, 4236, 4241, 4262 RX 10), some three years prior to Quaker’s establishment of its Institutional and Industrial Sales Department which sparked the rapid growth of the latter’s oat flour business. (Tr. 1214.) However, during the entire year 1935, National continued to be Gerber’s principal supplier. (C Table IX, p. 60; CX 494b, 868.) When Quaker commenced its operations and in 1956, 1957-58, National’s business with Gerber decreased from 86,296 ewt, in 1955 to 6,201 ewt. in 1958. (C Table X, p. 61.) While Quaker’s business increased from 8,800 ewt. in 1955 to 97,100 ewt. in 1958. (id.) 90. Apart from the fact that of necessity when Quaker was successul bidder, other suppliers lost the business, there is no proof in addition to that. set forth in the preceding findings from which the effect of Quaker’s campaign on such suppliers other than National can be quantitatively evaluated. Albers (RX 1) entered the business to all intents and purposes in 1959, and no supplier has gone out of business since 1955 (Tr. 854-55). General Mills increased its capacity in 1957 (Tr. 1711, 1732) as did Ralston. (Tr. 4179.) Possible Effect on Competition in the Secondary Line 91. No customers compete in the resale of oat flours (Tr. 277-79). ‘Oat flours are not resold as such, but are processed upon receipt and mixed with other ingredients to produce a variety of finished products (Tr. 2148; Tr, 2318), 92. Counsel Supporting the Compiaint called witnesses from three customer companies: Heinz, Beech-Nut and Gerber. They compete with each other in the sale of the following products: Gerber Heinz Beech-Nut DRY BABY CEREAL _ Oatmeal, mixed cereal, high-protein Oatmeal, pre-cooked cereal, high- Oatmeal, mixed cereal, highcereal, cereal quads (CX 669a). protein cereal (CX 780). protein sereal, cereal quartets (CX 820).

CANNED BABY FOODS Str. veg. & beef, str. veg. & chicken Str. beef w/veg., str. chicken w/ (CX 669a). veg. (CX 780).

Initial Decision 66 F.T.C..

93. The evidence offered does not establish the manner in which the following companies compete with any other customers in the sale of products containing oat flour:

Customer: Product Pillsbury ------------_--- Cake frostings (Wineberg Tr. 2794). Procter & Gamble__-__-___- Pancake mixes (Wineberg Ty. 2798; Fenner Tr, 227).

Serutan ------ ~~. eee Pharmaceutical product (Fenner R. 227). 94. There has been no proof that Eastern States and M. F. A. are other than non-competing regional producers. Eastern States is located in New York (CX 344). M. F. A. is located in Missouri (CX 840). Both produce a calf starter cattle food (Tr. 3696, 3742). 95. Kellogg and Post compete in the sale of ready-to-eat cereals containing oat flour (Tr. 897), but Kellogg purchased no oat flour from Quaker until late 1959, when it first entered the market (Tr. 897; CX 189a). It discontinued its purchases immediately (Tr. 2808). 96. The evidence concerning the following manufacturers of baby food is insufficient to determine whether or not they compete in all lines with Heinz, Beech-Nut, and Gerber:

Mead Johnson Duffy-Mott The evidence concerning them is that:

Mead Johnson produces a dry baby cereal or cereals containing oat flour which is marketed under the name “Pablum” (Tr. 226; Tr. 2841). Duffy-Mott does not manufacture dry baby cereal (Tr. 8742; Tr. 2340). While there is evidence that Duffy-Mott uses oat flour in canned baby foods (Tr. 8742-43), there is no proof as to the kinds of canned oat flour products it produces.

97. Gerber, Heinz and Beech-Nut are old, established companies in sound financial condition. A detailed tabulation of the three companies’ sales and net earnings follows: Net sales Heinz (CX 779) Beech-Nut (CX 817) Gerber (CX 670a) Amount Year Amount Year Amount Year ended ended ended 1955... 2-2 eee eee eee eee eee eee $234, 179, 207 4/27 $111,465,565 = 12/81 ___._.-.-------------- 1956 262,425,046 5/2 128,026,537 12/31 $99, 682, 746 3/31 1057 278, 852. 384 5/1 111,121,701 12/81 108, 120, 414 3/31 1958. 298,811,817 4/380 -:114,974,768 12/31 118, 636, 966 3/31 1959 316, 856,669 4/29 115,568,322 12/31 126, 833, 497 3/31 Net earnings Heinz (CX 779) Beech-Nut (CX 817) Gerher (CX 767) Amount Year Amount Year Amount Year ended ended ended $8, 782, 324 4/27 $6,498, 209 12/81 $ 10, 588, 044 5/ 2 7,998,599 12/31 . 453, 585 3/31 017, 537 3/31 an 10,626,252 5/1 8,583,803 12/31 7,771, 935 3/31 § 9,336, 913 4/30 8,121,605 12/31 7, 549, 728 3/31 11,095,742 4/29 8,104,045 12/31 7, 235, 050 3/31 § The decrease in Heinz’ net profits is attributable to some extent to changes in their method of distributing products (Brettholle R. 2247) to general business conditions (Brettholle R. 2255-56), and to a general. price reduction in its West-East market (Brettholle R. 2255-56). THE QUAKER OATS CO. 1171 1181 Initial Decision 98. While the cost of oat flour as an ingredient in baby foods is relatively small (Tr. 2147, 2144, 2200, RX 24) and relatively few baby foods contain significant amounts of oat flour in their recipe, (Tr. 2317, 2404-5 ; CX 780, 818 and 6692), thus making the percentage of sales of products containing oat flour relatively low (RX 23, CX 670b, 767; 817, 818 and 669a), and although wholesale prices of Heinz, Gerber and Beech-Nut tend to be the same, (Tr. 2832, 2388, 2341, 2148); the volume of cereals containing oat flour from Gerber for example ranged from $4,700,000 to $6,000,000 and of all items between $10,000,000 and $24,000,000 (CX 670b, Tr. 2061-62) and a very small difference in price is sufficient for a baby food manufacturer to shift from one supplier to another provided the products are of equal quality. (Tr. 2268-69.) Thus, each customer discriminated against suffers a reduction in gross profit by the amount of the discrimination which in many cases is substantial.

Respondent's Factual Basis for Meeting Competition Defense 99. In replying to both the price discrimination charge and the below cost selling, respondent avers that it was merely meeting the practices of its competitors.

It shows for example that General Mills quoted a price of $4.48 per cwt. to Gerber at Fremont and presumably claims that this justified Quaker’s price of $4.48 per cwt. (Respondent's answering brief, pp. 40-41.) However, it fails to point out that the General Mills bid took place in September 1955 while the Quaker bid was not made until the end of February 1956. (Respondent’s Appendix pp. 51-53.) In this regard respondent has failed to establish that the bids were comparable because in the meantime the oat flour bids to Gerber by others had risen as high as $4.60 per cwt., (Respondent’s Appendix p. 52) and Quaker itself had received a contract in December at $4.78 per ewt. (id.). The listing of prices at which sales were made without an indication of the dates at which such sales were made is not deemed adequate to constitute a meeting competition defense. With respect to below cost sales, Quaker in final argument pointed out twelve instances in 1956 in which its competitors had made sales below Quaker’s full costs for £14 flour, in nine of which the price was below Quaker’s adjusted cost and in six of which below Quaker’s standard cost all computed on the cereal reports for the day before the sale. The computation also showed figures for #5 flour showing fourteen cases where sales were mace below Quaker’s full cost, ten of which were below Quaker’s adjusted cost and four below its standard cost computed in the same fashion. (See CX 869 & 854 for source figures. ) Initial Decision 66 FVT.C..

REASONS FOR DECISION Because the combined research of counsel and the examiner has not found controlling precedent for three major issues in this case 4.e. 1. What is meant by like grade and quality? 2. When do differences in price in an industry in which competitive bidding generally prevails become violations of §2(a) of the Robinson-Patman Act? 3. What is cost or unreasonably low prices for the purpose of a regulatory proceeding? the hearing examiner has made findings of fact in much greater detail than would ordinarily seem necessary.

Like Grade and Quality The first approach to reaching a decision in this case is to consider the meaning of the phrase “like grade and quality” because unless there is a discrimination in price of goods of like grade and quality there cannot be a violation of §2(a) of the Robinson-Patman Act,® as charged in Count I.

The choice by Congress of the word “like” rather than the word “same” affords the first clue. Clearly Congress realized that if only identity of product was covered, avoidance would be too simple, and wholly within the control of a person intent upon violating the law with impunity. Similarly, the choice of the word “grade” in addition to “quality” imports something more than a mere difference. The difference must be one which is recognized not alone by the seller and the favored buyer but more generally in the industry. Moreover, the conjoined word “quality” appears to import the concept of intrinsic value, likeness in worth.

Hence as a starting point we may take the statement of the Attorney General’s National Committee that “The ‘like grade and quality’ concept, we think, was designed to serve as one of the necessary rough guides for separating out those commercial transactions insufficiently comparable for price regulation by the statute.” *° It is undisputed that Quaker manufactures its oat products from milling quality oats comparable to US grades 1 and 2. Clearly also, is it that there are no governmental or industry standards setting up grades. To the contrary, there is much evidence pointing to an indus- 9 Champion Spark Plug Company, 50 F.T.C. 30, 47 (1953). Austen, Price Discrimination and Related Problems under the Robinson-Patman Act, p. 88, (2nd ed. 1959).

The Attorney General’s National Committee to Study the Antitrust Laws (1955), pp. 157-158.

THE QUAKER OATS CO. J173 1181 Initial Decision try concept of only a single grade with possible modifications to suit particular problems of the subsequent users. On the other hand, Quaker takes the position that it tailor-makes its oat flour for each customer and Weinberg’s evidence is uncontradicted that one customer cannot use the oat flour supplied to another.. Physically also, the flour will differ much as a hard boiled egg will differ from a three minute egg. Both are cooked eggs of course, and both are likewise milled oats. However, to the customer the control of the enzymes, the viscosity of the slurry produced, the tensile strength of the resulting sheet on his roll or the bacterial content in his can will be of crucial importance meaning perhaps the difference between a profitable and a losing manufacturing operation. Desired results are obtained by the combination of the right proccesses in the proper order with appropriate delays and heat treatments to secure the proper particle size and the other appropriate physical characteristics. In this the same machinery is used with some steps or machines by-passed in some cases, and some adjustments of heat or screen size made in others.

Changes of the routing of oats thru the machines or the addition or omission of processes have been given separate system numbers (see Respondent’s Appendix, pp. 28-43) and, in addition there are adjustments in the machinery within the system to secure given results. As to these numbered systems, while no actual costs are available, Quaker had assigned in its daily cereal reports varying standard and full costs (see CX 369-372). It calculated no costs for its adjustments within systems and in fact does not even maintain as a permanent record the mill logs showing these adjustments. Some numbered systems bear widely divergent costs (eq. #5 & 414) and if the same customer on the same date seeks to purchase some of each he will have to pay a different price. As to these there may be some question whether they are of like grade and quality. However, for other systems such as 314 and #36 Quaker seemingly developed them to be competitive and has placed on each the same standard costs. While these are to be used for the same purpose (¢.¢e. for the manufacture of baby food) they would seem to be sufficiently comparable for the purpose of the statute. _ And, it would seem that by placing the same standard costs on each,. Quaker has intended that they should be.

This case is unlike Central Ice Cream Co. v. Golden Rod Ice Cream Co. because, in that case, there was a difference in the amount of butter fat in the ice cream sold to the allegedly favored customer. But- 11148 F. Supp. 312 (N.D. Ill. 1960 ajirmed 287 F, 2d 265 (7 Cir. 1961), cert. denied, 86S U.S. 829 (1961).

Initial Decision 66 F.T.C.

ter fat content is generally recognized as a measure of quality in the dairy industry. It has no counterpart in this case. Boss Manufacturing Company v. Payne Glove Company ™ likewise involved different quality raw material sold under different degrees of quality control. The “pork” ** and “gasoline” ** cases are likewise inapplicable since the differences were generally recognized as constituting differences in grade and quality.

The proper emphasis, it seems, is whether the product is actually costed for sale to competitors. Such a case is General Foods Corporation, 52 F.T.C. 798 (1956) where it was held that Maxwell House coffees were of like grade and quality where they were to be resold by competitors to the same type of customer even though the requirements of the competitors’ storage facilities necessitated the use of slightly different raw materials in the blend and divergent grinds. This situation seems comparable to a change in brand name," a change in sizing ** or a change in text of a stamp ?? which would not justify discriminatory pricing. Hence, as to those oat flour numbers which are substantially similar in cost, Section 2 (a) of the Clayton Act would seem to apply.s Having determined the jurisdictional question that oat flour of the same cost in this proceeding was of the same grade and quality, we next consider whether or not the fact that the industry customarily sells at competitive bidding removes the case from the purview of the Robinson-Patman Act. Competitive Bidding Under Section 2(a) The evidence is uncontradicted that competitive bidding to the manufacturer ?° customers of Quaker is entrenched as a custom in the industry despite the few exceptions. It is also clear that there is a shitt- 1271 F, 2d 768 (S Cir. 1934), cert. denied, 293 U.S. 590 (1934). 13 Atlanta Trading Corporation v. F.T.C., 258 BF, 2d 365 (2d Cir. 1958). 14 Midland Oil Company v. Sinclair Refining Company, 41 F. Supp. 486 (N.D. see 194). 3 Champion Spark Plug Co., 50 F.T.C. 30 (1953) ; Goodyear Tire and Rubber Co., 22 F.T.C. 232 (1986); U.S. Rubber Co., 46 F.T.C. 998 (1950) ; Sylvania Electric Products, Docket 5728 (1954) ; Page Dairy Co., Docket 5974 (19538); E. Elderman and Co., Docket 5770 (1955) ; Austen, Price Discrimination (1959 Ed.), p. 88. 16 Bruce's Juices, Inc, ¥. American Can Co., 330 U.S. 748 (1947), 87 F. Supp. 989, 187 F. 2d.919 (5 Cir. 1951).

V Samuel H. Moss, 86 F.T.C. 640, affirmed, 148 F. 2d 878 (2 Cir. 1945), opinion clarified, 155 F. 2d.1016 (2d Cir. 1946). See also, Jfoore Business Forms, Inc, v. Federal Trade Commission, 307 F. 2d 188 (D.C, Cir. July 12, 1962). 18 See also Columbia Broadcasting System, Inc. v. Amana Refrigeration, Inc., 295 F. 2d 875, 878 (7th Cir. 1961), and Austen, ‘Price Discrimination,” p. 38 (1959 Ed.). 19 Initially a question was presented whether the fact that the product was to be further processed, not sold, exempted its sale from Section 2(a). The conference report made while the bill was pending, demonstrates that this question was considered and a charge to have that effect was rejected. (H.R. Report No. 2951, 74-Cong. 2d Sess. 1-9, June 8, 1936.) THE QUAKER OATS CO. 1175 1131 Initial Decision ing floor under the bidding, z.e. the market price of oats.?° Under such circumstances we are inclined to agree with counsel for respondent that we must reconcile the Robinson-Patman Act and the Federal Trade Act “with the broader antitrust policies that have been laid down by Congress” by dismissing the complaint, unless it be shown that the competitive bidding carried on by Quaker was a mere cloak for discrimination between customers.?? Reading the Clayton Act to be sure that it is administered in a manner consistent with the Sherman Act ? would tend toward the approval of any plan so apparently productive of competition. For, the Sherman Act was specifically designed to protect competition against unreasonable restraints. It is a common legislative device, to insure competition of sellers to government, to require them to submit their offerings under sealed competitive bidding as a protection against collusion and as an insurance of a fair price.

Here, the private enterprise consumer seeks similar protection. And, he should be permitted to secure it. No one objects to the consumer insisting that his suppliers bid against one another. Bids to meet competition are expressly authorized under the Robinson-Patman Act. That does not mean, however, that suppliers under the guise of offering competitive bids may favor one customer over another. If there is such a favoring of one customer over another it makes no difference that in form there was competitive bidding. That is the essence which may be distilled from a number of decisions permitting a supplier to meet but not to beat his competitors’ lawful price.” If the supplier aggressively seeks to further undercut his competitor he would tend himself to engage in unlawful discrimination. There is a sharp dispute in this case both as to what the facts show concerning the sales made by Quaker and as to what normally should occur in lawful competitive bidding transactions. With respect to what has occurred, the hearing examiner has found 20 At an early stage in the case there was some contention, presumably based on Huber v. Pilisbury, 80 F. Supp. 108 (S.D.N.Y. 1989) that the market conditions proviso might apply to exempt this case from the provisions of the statute. Moore v. Mead Service Co., 190 F. 2d 540, 541 (10 Cir. 1951), cert. denied, 842 U.S. 902 (1952) and Balian Ice Cream Co. v. Arden Farms Co., 231 F. 2d 356, (9 Cir. 1955), cert. denied, 350 U.S. 991 (1956) seem to hold that the eiusdem generis rule has been applied to confine the exception to conditions similar to those expressly set forth. See Rowe Price Discrimination under the Robinson- Patman Act (1962) p. 326.

1 Automatic Canteen Co. v. F.T.C., 346 U.S. 61, 74 (1958). 2 Standard Oil Co. v. F.T.C., 340 U.S, 281, 249 (1951). 22 Standard iotor Products, Inc. v. F.T.C., 265 F. 2d 674, (2d Cir. 1959). Balian Ice Cream Company v. Arden Farms Co., 281 F. 2d 856 (9 Cir. 1955), cert. denied, 350 U.S. 991 (1956).

Standard Oil Co. v. F.T.C., 840 U.S. 281 (1951) ef. Sunshine Biscuits v. F.T.C., 306 F, 2d 48 (7 Cir. July 11, 1962, Docket 7708). 856-438—70 75 Initial Decision 65 F.T.C.

as a fact that respondent Quaker in the sales which it made to Gerber favored that concern over others to whom it made sales by agreeing to supply it with oat flour at a price considerably lower than it was offering oat flour of like grade and quality to other competing baby food manufacturers. It was even found that the difference between the price paid on Quaker’s sale and the price offered by other bidders was also high, and that Quaker’s price was much lower than the prices made on similar sales by other suppliers. Finally it was demonstrated that Quaker’s price in most instances failed to cover its productive costs and administrative and selling expenses. Respondent in addition to vigorously attacking the statistical proof of counsel supporting the complaint offered the testimony of two Economic Experts who created the impression that it was their opinion that. the pattern of bidding was what might be anticipated in any competitive bidding situation and that it did not appear to contain abnormalities which would point to discrimination rather than hard but fair competition.”

. Complaint counsel countered with his experts.?* These gentlemen between them pointed out that the oat flour industry is an oligopoly with its very few suppliers and customers. They also took the position that in an expanding market with increasing demands the tendency would be for suppliers to increase their prices until they covered both cost of production and general and selling expense and in addition accounted for a profit. The hearing examiner holds this position. With respect to the large discrepancy between Quaker when successful bidder and the next high bidder, there was a like conflict of economic opinion. The hearing examiner with the experience of the Attorney General’s Report on Identical Bidding on Public Procurement (1962) and the Presidential Proclamation Ex Order 10936 26 Fed. Reg. 8555 (1961) in mind maintains that, particularly in an oligopoly, where there are so few bidders that each is well aware of the capabilities of the others, there would be a natural tendency for bidders who desired the business (and no one contends that National was not at all times anxious to have it) would submit bids which closely approximated each other. Accordingly, with the relationship of cost to price which is disclosed and with which we next deal, the bid pattern in the instances charged as dicrimination appears to include characteristics which would not be found in normal competitive bidding and therefore is within Section 2(a) of the Robinson-Patman Act.

™ See Testimony of Professors, Thomas A. Hieronymus and Daniel C, Hamilton. 25 William R. Lemberg, Professors Donald §. Watson, Roy Ashman, and §. A. Walker. THE QUAKER OATS CO. 1177 1131 Initial Decision The Unreasonably Low Cost As to Count II, Respondent contends and the hearing examiner agrees that actual costs have not and cannot be shown. Respondent, however, also takes a position that for the purpose of a regulatory statute the only cost that can be considered is the cost of production. This, it says, is estimated in the standard cost supplied to the divisions in the so-called cereal reports and it has never been cut. Dismissal of Count II, however, cannot be so lightly accomplished. Economists and accountants agree that for purposes of ascertaining gross profits on a balance sheet all that should be considered are the cost of replacing the item sold ** but no one can deny that some share of the general overhead and selling expense plus a profit must be made on an item if a company dependent upon it for survival is to remain in business. Quaker so underpriced National in its competition for Gerber that National just was unable to remain in the running. This, however, was not a case of the more efficient company outstripping its less efficient rival—for Quaker a substantial portion of this time was bidding below the sum of its cost of production and its overhead and selling expense as it had itself estimated them.?* Surely a sale down to estimated standards cost might be justified to meet competition,” but its consistent adoption to beat competition continuously by a wide margin smacks of an unfair practice. Such conduct, therefore, both colors Quaker’s bidding practices withdrawing them from their character of good faith competitive bidding and itself constitutes a separate unfair practice,® which, if continued by a company so disproportionately well financed in comparison with smailer competitors that it will eventually, in the normal course, drive the latter out. of business. Having dealt with the major contentions of counsel, we turn now to the less difficult.

The first of these problems is whether or not the prices compared by counsel supporting the complaint are comparable because calling for different periods of delivery.

Transaction Comparability All parties agree that all circumstances must be taken into consideration in determining whether or not particular prices may be compared.*° 6 Johns, Hieronymus.

*} CX 367-872 ; RX 51 & 52.

*s See Hieronymus, Watson. .

*2 Compare U.S. vy. National Dairy Products Corp., 8372 U.S. 29 (1963). *% Chicago Sugar Co. v. American Sugar Refining Co., 176 F. 24 1, 8 (7 Cir, 1949) ; Krug v. International Telephone & Telegraph Corp., 142 F. Supp. 280, 285 (D.NJT. 1956) ; Rowe (supra) p. 50; Austen (supra) p. 25.

Initial Decision 66 F.T.C.

However, there is a sharp difference in the factors which are decisive in determining what periods of delivery will be considered. Respondent takes the position that there are three different kinds of transactions which cannot be compared at all. One transaction, it designates Rush, which calls for delivery in less than ten days. The second, it calls Spot, which calls for delivery of 1-8 cars anywhere from eleven days to one to two months. And, the third, a Futures Sale, calls for delivery of a large quantity stretched over several months. (RF 28.).

Complaint counsel properly points out that the distinctions are anything but clear-cut. It describes them as “arbitrary” (C Reply, p. 55) and, in addition, as not properly established (C R pp. 57, 58). The hearing examiner agrees that a Futures contract may not necessarily be discriminatory because it is sold at a price different from an over-the-counter transaction or Spot sale.*t However, Respondent had the burden of going forward once complaint counsel established that the transactions were made to competing customers at different prices when the standard costs of the two transactions were identical or differed by considerably less than the price difference. Respondent’s proof was vague and indefinite on the point that the milling costs were different between Rush, Spot and Futures transactions. No one could recall and there were no records of grain costs where more than three cars were to be sold over a period of a month or more. Sometimes, the estimate of costs might be greater, sometimes, less than the cereal report standard cost according to Respondent’s witnesses. In these circumstances, we believe that the transactions compared must be considered comparable. Our next inquiry is whether or not injury to competition was probable.

Injury to Competition The test to be applied under Count I and that to be applied under Count II, respondent contends differ immeasurably. Under Count I, both the statute and the pleadings are satisfied if injury to either competition among respondent’s competitors (the primary line) or competition among respondent’s customers (the secondary line) may be anticipated. With respect to Count II, it contends, the pleadings require that complaint counsel establish both an intent to injure competition and an effect on competition.”

There is little difficulty in this case in finding a probable injury in both the primary and secondary lines of competition. While respond- 31 See Chairman Dixon's address before the Millers National Federation 4/26/61. 2 R Brief, pp. 19-29.

33 R Brief, pp. 48-46.

THE QUAKER OATS CO. 1179 1181 Initial Decision ent contends that probable injury to its competition is not established by loss of volume to a particular customer,” surely, discrimination in favor of one customer (a competitor’s largest), a sharp drop in the sales of a competitor of respondent to that customer in this industry, where there are so few buyers and sellers, cannot but have an impact on competition as a whole.** So also on the secondary line where competition is so keen that a cent difference in cost will result in a shift of a supplier, consistent favor in large amounts to one of three fully competitive customers cannot help but result in a diminution of the gross profits of the other two and a consequent injury to competition among them.*° With regard to Count II under the pleadings there must be intent to injure as well as actual injury to competition.’ At the conclusion of the case for the Commission, drawing all inferences favorable to the complaint, there was sufficient evidence to prevent dismissal. The coincidence that Quaker sold oat flour to National Oat’s largest customer at prices far. below Quaker’s estimated full cost: (this comparison was then the same evidence from which the Quaker’s estimated production cost plus its estimated general administrative and selling cost might be inferred) and, that Quaker was at about the same time engaging in a promotion in rolled oats in National’s almost exclusive territory could be stretched into an inference that Quaker was intentionally attempting to further its dominance in the oat products business thru this twopronged attack on National Oats. However, the uncontradicted and credible testimony of Quaker’s officials and employees coupled with Proctor’s (of National Oats) denial that there was a direct connection between the two events, made the inferences no longer tenable. In addition, Quaker’s economic proof while insufficient to persuade the hearing examiner that Quaker’s competitive behavior was not favoring Gerber demonstrated that an industrial concern might well hold some of the views expressed with respect to the propriety of bidding down to its production or standard costs as a proper competitive maneuver— not an act of unfair competition. Hence, the hearing examiner determined that there was a failure of preponderant proof of intent to % Respondent’s Answering Brief, pp. 29-84. 3 See Forster Mfg. Co., Docket No. 7207, March 18, 1963, regarding Atlas Building Products Co. v. Diamond Block & Gravel Co., 269 F. 2d 950, 954 (10 Cir. 1959), cert. denied, 868 U.S. 843 (1960).

3¢ Federal Trade Commission v. Morton Salt Co., 334 U.S. 87 (1948), In the Matter of American Oil Company Docket No. 8188, June 27, 1962, Scott Publishing Co. v. Columbia Basin Publishers Inc., 298 F. 24 15 (9 Cir. 1961) Handler, Problems of antitrust 62 Columbia LR. 930, 950.

31 Comparison of the language in the motion of counsel supporting the complaint with the amendment allowed by the Commission shows that the latter substituted “and” for “or” thus demonstrating its intention that both must be established by proof. Initial Decision 66 F.T.C.

injure National Oats.** With this determination, it becomes unnecessary to consider whether the pleaded actual, as distinguished from a probable injury to competition, occurred.

Accordingly, the hearing examiner has reached the following conclusions.

CONCLUSIONS 1. The respondent is engaged in interstate commerce and the sales complained of occurred in interstate commerce. Hence, the Federal Trade Commission has jurisdiction over respondent and the transactions here involved.

2. The adoption by an industry of the practice of competitive bidding for raw material having the fluctuating cost characteristics of oat flour (ze. connection with prices quoted on a recognized commodities exchange) does not of itself make the suppliers, who engage in the practice, violators of Section 2(a) of the Robinson-Patman Act merely because there may be differences in the price charged two customers due to fluctuations in the cost of the basic raw material on the commodity market.

3. Despite the prevalence of competitive bidding in an industry, a supplier whose prices consistently favor one purchaser over its competitors to the probable detriment to competition is guilty of violation of Section 2(a) of the Robinson-Patman Act if the goods sold are of like grade and quality.

4, The following factors may be considered in determining whether a supplier is favoring a particular customer : (a) Sales below the supplier’s estimated production cost plus the supplier's estimated allocation of general administrative and selling expense when the market is expanding, (b) The pattern of bidding by other suppliers in the immediate past, (c) A consistently higher second bid by other suppliers to the purchaser alleged to be favored, (d) The fact that the difference between the price at which the product is sold to the favored purchaser is considerably less than the price charged other purchasers and is also considerably more than is normally required to secure the business.

5. Considering the factors included in conclusion four, respondent has favored Gerber over Beech-Nut and Mead Johnson to an extent not justified by normal bidding procedure. The hearing examiner has not failed to note that a few salesmen’s competitive reports (CX 664 et seg.) urged Quaker to take specific action directed against National. The significant fact is that Quaker management was not shown to have followed these suggestions.

THE QUAKER OATS CO. 1181 11381 Initial Decision 6. Beech-Nut and Mead Johnson compete with Gerber in interstate commerce in the sale of products made in part from the oat flour sold. 7. Oat flour designated by Quaker as number 14 or number 36, which was the subject of the sales to Gerber considered discriminatory because sold at prices lower than sales to Beech-Nut and Mead J ohnson, was of like grade and quality despite some differences in physical characteristics necessitated by the further manufacturing processes employed by Gerber, Beech-Nut and Mead Johnson which were somewhat different.

8, Whether a commodity is of like grade and quality is a legal question and is not a proper subject of expert testimony. 9. In determining that the oat flour sold Gerber, Mead Johnson and Beech-Nut was of like grade and quality, the hearing examiner, while recognizing that the flours sold the three firms were not interchangeable because of slightly different physical qualities and because of resulting performance characteristics which created production — problems if flour made for one was used by another, took into consideration (a) that the oat flour was made from the same grade of oats, in the same machinery—with adjustments and variations in the extent of the types of processing— (b) that there are no generally recognized grades of oat flour, (c) that in estimating the costs of the flour supplied to the three cus- tomers the standard costs of each varied at the same time and in the same amount throughout the period, (d) that Quaker customarily made adjustments in milling procedure to meet production problems of particular customers without charge, (e) that no records were retained which demonstrate the actual changes in milling which were made, (£) that the physical differences resulted primarily from the length and order of heat treatment and storage and from the adjustments in machinery governing particle size and shape without in any way changing the quality or grade of the product itself. The changes appeared to be of the same nature as alterations in a ready-made suit or differences in the grind of coffee, and not differences which would ordinarily have commercial significance. The adoption of a rule in which such changes would prevent the application of Section 2(a) of the Robinson-Patman Act would nullify the statute. 10. Respondent did not sustain its burden of going forward to show that the prices compared were not comparable. Initial Decision 66 F.T.C.

11. Complaint counsel established that all transactions called for delivery at a future date and were, hence, not over-the-counter transactions. Thus, the burden of going forward was on respondent. Respondent’s witnesses in describing the types of transactions as Rush, Spot and Futures without a clear distinction and definite proof of cost differences between them did not sustain that burden. The absence of records showing special costs on the larger transactions coupled with testimony that they might call for a higher or lower standard cost fails to establish any difference which has legal significance. 12. The proof established that on the primary line competitors of respondent lost business and one such competitor lost a large proportion of the business it had previously had with the customer favored by respondent’s discriminatory prices. This created the probability that competition might be injured.

13. The proof established that on the secondary line respondent favored by discriminatory prices one baby food manufacturer which was | a competitor with two others in a line in which the wholesale prices of the finished product were generally identical. Thus the less favored customers sustained a lessening of gross profit vis-a-vis the favored baby food manufacturer. This created the probability that competition — might be injured.

14. The proof fails to establish that respondent sold below actual costs.

15. For the purpose of Section 5 of the Federal Trade Commission Act, cost must include an appropriate allocation of general administrative and selling expense.

16. The proof established that Quaker in sales to a favored customer frequently sold below the sum of its estimated cost and allocation of general administrative and selling expense. Such a price in an expanding market was an unreasonably low price, unless mace to meet specific competition.

17. The proof created a suspicion of intended injury to competition but failed to establish that respondent priced its oat flour with the intent of injuring competition in the sale of oat flour or rolled oats. 18. Under the pleadings, proof of Count II fails by reason of the failure to establish intentional injury to competition and accordingly it is unnecessary to determine whether actual injury to competition occurred.

19. Count IT is accordingly dismissed.

20. Respondent has failed to justify its price discrimination because it has not established :

THE QUAKER OATS CO. 1183 1181 Initial Decision a) that its oat flour prices were made in good faith to meet competition, b) that its oat flour prices were in response to changing market conditions, c) that respondent’s price differentials made only due allowance for differences in cost of sale or delivery.

21, This proceeding is in the public interest and a violation of Section 2(a) of the Robinson-Patman Act has been established as alleged in Count I.

22. The following order is accordingly issued. ORDER It is ordered, That respondent, The Quaker Oats Company, a corporation, and its officers, agents, representatives and employees, directly or through any corporate or other device, in connection with the sale of oat flour in commerce, as “commerce” is defined in the Clayton Act, do forthwith cease and desist from discriminating, directly or indirectly, in price by selling such oat flour to any purchaser at prices higher than those granted to any other purchaser for oat flour of like grade and quality:

1. Where such other purchaser competes in fact with the unfavored purchaser in the sale of products consisting in whole or in part of oat flour or 2. Where respondent, in the sale of oat flour is in competition with any other seller.

Provided however, That nothing herein shall prevent respondent from engaging in good faith in competitive bidding without collusion in any industry in which the practice of buying oat flour under that system has been established or from engaging in submitting sealed competitive bids without collusion in response to requests from any governmental agency. For the purpose of this order, Respondent shall not be deemed to be engaged in good faith in competitive bidding if: (1) its prices to any customer or customers are consistently lower than its prices to others who are competitors of such favored customers unless it can justify such differences by differences in cost, and (2) its prices fail to include either its actual cost of sale (including the cost of acquisition, processing, preparation for marketing, sale and delivery of the oat flour) or its estimated cost therefor, whichever is higher.

Initial Decision 66 F.T.C.

APPENDIX Source:

OAT FLOUR Code Letter Assigned By Protein Fat Per Cent Counsel to Company Issu- Catechol Oxidase Free Fatty —— — ——————__—_—_ ing Specifications to Avoid Test Acid (Max.) Min, Max. Min. Max. Revealing Identity .

Aine nena nn neeenn ene n en enone Very slight pink NS2_.__..... 14 Asdeliv- 6 As delivcolor. ered ered.

basis.

.: an NS 2. 222 - eee 30 3_..2..-..- 17.20 -----.2.---- (Moisture 8.9 free basis) Bowen n ene e nee enon eee eee eee ee NS...22------ +e 80.-....-2--- 17.2 Moisture (Moisture 8.9 free free basis basis).

Bio i eee enon eee eee eee e ee NS.-..----.----.--- 30.....--.--- 17.2 Moisture (Moisture 8.9 free free basis basis).

Ones NS... 2-22 - eee NS......---- 16 19 NS? (Moisture free basis) wee 17.00 -222-------- -0 (A.H.) -- 16.5 (181%) 6.5 (7.82 2%) 20 or less.... 17 (Dry 7 8 basis) (dry basis) ween ne nnee 15.2 17.2 5.5 7.5 (As is moisture (As is moisture basis) basis) is NS._.---- eee e eee NS....-.---- 15.2 17.2 5.5 7.5 (As is moisture (As is moisture basis) basis) GLiiee eee ee eee eee e ee nee eee Must show ab- NS.._.L2..--- NS: 6 7 ; sence of enzyme. (12% moisture basis) Guinan nnn eee eee eee e eee eee Must show ab- NS....------ NS 6 _ 8 . sence of enzyme. (12% moisture basis) [Ce Must show ab- NS......---- NS 6 8 sence of enzyme. (12% moisture basis) |: Negative...----..- Less than 17 (Dry 7 8 20. basis) (dry basis) See footnotes at end of table.

Initial Decision 66 F.T.C.

APPENDIX Source:

OAT FLOUR Code Letter Assigned By Counsel to Company Usage Behavior Test Issuing Specifications to Avoid Revealing Identity Anon ieee eee nee eee ee eee An 8% solution by weight of a representative sample to be prepared, canned, and processed; resulting gel system shall possess no off odor or off flavor.’ Foie eee eee eee nee eee eee eee ee eee eee eee Performance of this material shall be such that product specifications for product or products utilizing it are met.

Phone ee eee een ee ne een ee ne een eee ce eee eee en ee eee Performance of this material shall be such that ; product specifications for product or products utilizing it are met.

wee en ee ne een ee ee ene een ee ee eee ce enn eeeee Must meet finished product standards... - -- Must meet finished product standards... -- Must meet finished product standard DS 1 Source: In Camera specifications except for customer H whose specifications are not In Camera but are represented by CX 414(a)-~(b).

* Not specified. . ;

3 Expressed in ml. of 0.1 N alkali required for a 10 Gm fat basis. 4 When used in canned goods.

5 Expressed as “‘minerals,””

Expressed as ‘crude fiber.”’ THE QUAKER OATS CO. 1189 1131 Initial Decision A—Continued CX 855a SPECIFICATIONS !—Continued .

Packing Miscellaneous 1st choice: multi-wall paper bags adequately closed, Testing procedure: 6 random selected samples; 12 * free from dirt and other foreign matter containing random selected samples if load exceeds 250 units; 100 Ibs. of oat flour net weight. 2d choice: cotton no sample smaller than 5 Ibs. Acceptance of all bags. deliveries shall be subject to inspection of the buyer of representative samples drawn from actual lots which the seller proposes to deliver.

Shall not have been packed hot_-.......-.---------- Free fatty acid and heavy extraneous materials tests escribed.

Shall not have been packed hot. Each shipment to Heavy extraneous materials test described. be supplied from one lot or as few lots as possible. Shall not have been packed hot. Each shipment to Heavy extraneous materials test described. be supplied from one lot or as few lots as possible. To be shipped in 100 lb. net 4 layer paper bags. 1st choice: multi-wall paper bags. 2d choice: cloth Testing procedure: AOAC vacuum oven method for bags, only when paper is not available. moisture; AOAC methods for ash and protein. Subject to inspection and approval upon arrival. 50 Ib. multi-wall paper bags_.-----.-..-.2--- 0-2-2 - ene ee eee Multi-wall paper bags, containing 100 lbs. of oat flour free from foreign matter.

NS 2L eileen eee ee eee eee eee eee eee Granulation test: Rotap for 244 minutes using 2 jar rings per screen; 100 g. sample.

NS _ ooo oo eee nee ee ene eee ee eee ee nee eee Test methods available to suppliers on request. Must be entoleted or equivalent prior to packaging. To be shipped only in paper bags 100 Ibs. per bag-.. Test methods available to suppliers on request. Must be entoleted or equivalent prior to packaging. NS.

NS.

NS. - NS ooo ne nee eee eee eee Granulation test: 50 gram sample ten minutes on a rotap sifter. Lactic acid test: 11 ml. of sediment minimum.

Opinion ‘ 66 F.T.C.

APPENDIX B Flour Produced Under Specified Systems Offered, Used and Refused by Quaker’s Customers Flour or System Customer No. 2 No. 5 No. 6 No. 14 No. 36 No. 60 No. 105 Flour System System System System System Flour BABY FOOD MFG:.:

Beech-Nut_.-...----2 2. ----- 2-02-22 oe eeeeeeeee U.1956-59 eee eee eee eee eee Duffy-Mott......2.2------- eee nen een eee eee eee U1959 eee ore eee =e . Gerber__.-..---------------------- 0.1959 R.1959 Heinz. -....-----------0------- eee U.1955-58 ....--.----- 0.1956 U.1958-59 _22.----- eee eee R.1956 Mead Johnson -----...------------ U.1955-57 .-2.2------- U.1957-59 CEREAL MFGS.:

Post_..-...----------- 0.1957 0.1957 -- -- U.1957 R.1957 R.1957 R.1957 Rellogg....-------------- on nn en nn en eee eee eee U.1959 eee eee eee eee eee eee eee R.1989 Serutan__....--------- U.1956-59 22 nen nn nen eee ee ene ee eee eee eee ee MISC. MFGS.:

Pillsbury. ...----.---- U.1956-59 0.1958 6 eee 0.1958 0.1958 = 6+ eee U.1959 R.1956 R.1956 Procter & Gamble... 0.1958 0.1958 U.1956-58 0.1957 0.1958 eee eee eee U.1958-59 Eastern States......------------- 22-2 eee ee ee ee eee eee eee U.1957-59 Missouri Farmers Si es U.1957-59 O.—Offered.

R.—Rejected.

U.— Used.

OPINION OF THE COMMISSION NOVEMBER 18, 1964 By Erman, Commissioner:

The complaint in this proceeding, issued September 14, 1960, charged respondent with, price discrimination in the sale of oat flour, in violation of Section 2(a) of the Clayton Act. Injury to competition at both the seller’s and buyer’s levels was alleged. On December 11, 1961, the complaint was amended to include a second count, charging respondent with having sold oat flour “at prices below cost or otherwise unreasonably low, with the intent, purpose and effect of injuring, restraining, suppressing and lessening competition”, in violation of Section 5 of the Federal Trade Commission Act. After full evidentiary hearings, the hearing examiner issued an initial decision in which he dismissed the second count of the complaint but upheld the first and entered an order to cease and desist. The matter is before the Commission on the cross-appeals of respondent and complaint counsel. During the period 1957-1958, respondent and one other company, National Oats, dominated the oat flour industry, accounting between them for more than 75% of total industry sales. In 1957 respondent’s sales were somewhat greater than National’s, but in 1958 their posi- THE QUAKER OATS CO. 1191 11381 Opinion tions were reversed. Prior to 1957 the Gerber Products Company, a substantial purchaser of oat flour, generally bought most of its requirements from National, but on a few occasions in 1957 and 1958 respondent was able to wrest Gerber’s business from National by offering Gerber a blend known as “run 14” at a lower price than respondent was charging other purchasers for different oat flour blends. It is these transactions that the complaint charges violated both Section 2(a) of the Clayton Act and Section 5 of the Federal Trade Commission Act. Respondent makes a threshold contention that the price discrimination law has no proper application to the oat flour industry because the normal method of purchasing is for a buyer to approach two or more suppliers and ask each for a bid covering a specified quantity deliverable over a stated period of time. However, if one purchaser receives lower bids from a seller than the seller makes to other purchasers under the same conditions and at approximately the same time, the resulting sales may be—and in the present case, we find, are— sufficiently comparable for purposes of applying Section 2(a). Cf. Corn Products Refining Co. v. F.T.C., 324 US. 726, 740. On the price discrimination side of the case, the most seriously contested issues concern the existence of injury to competition. Section 2(a) forbids price discrimination only “where the effect of such discrimination may be substantially 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 knowingly receives the benefit of such discrimination, or with customers of either of them”. Competition, like commerce, “is not a technical legal conception, but a practical one, drawn from the course of business” (Swift & Co. v. United States, 196 U.S. 375, 898), and in determining the legality of challenged price discriminations, we have been directed to “make realistic appraisals of relevant competitive facts. Invocation of mechanical word formulas cannot be made to substitute for adequate probative analysis.” #'.7'.C. v. Sun Oil Co., 871 U.S. 505, 527. The test under Section 2(a) is whether there is a reasonable probability that competition may be adversely affected by a practice under which a seller sells his goods to some customers at prices substantially lower than he charges their competitors for like goods. Corn Products Refining Co. v. F.T.C., 824 U.S. 726, 742; F.7.C. v. Morton Salt Co., 334 U.S. 87, 49-50. The record here lacks the requisite proof to establish such a probability. There is no showing that the cost of oat flour is a sufficiently significant element in the price of the finished product to be a cause of adverse competitive effects; fluctuations in the price of oat flour seem to have little or no competitive significance in the sale 356—438—7 0——76 Opinion 66 F.T.C.

of the finished product. See Alinneapolis-Honeywell Regulator Co. v. F.T7.C., 191 F. 2d 786, 791 (7th Cir. 1951). There is no showing that the ability of the allegedly disfavored purchasers to compete with Gerber was, or will probably be, handicapped by respondent’s sales of run 14 to Gerber. Gerber received so little practical benefit from purchasing run 14 at low prices from respondent that, after little more than a year, it discontinued using it and resumed the purchase of higher-priced blends.

In finding that run 14 was of like grade and quality to respondent’s other blends, the examiner gave controlling weight to the fact that respondent had not shown that the cost of manufacturing run 14 was © different from the cost of manufacturing respondent’s other oat flour blends and that there are no objective standards for oat flour set up by government or business. However, if there are substantial “physical differences in products which affect consumer preference or marketability”, Universal-Rundle Corp., F.T.C. Docket 8070 (decided June 12, 1964), p. 4 [65 F.T.C. 924, 955], such products are not of like grade and quality within the meaning of the statute regardless of whether manufacturing costs are the same or whether objective standards have been established by government or business. The record shows that run 14 had a substantially higher hull content than other oat flour blends, requiring reprocessing by the purchaser, and was generally unacceptable except to Gerber.

The complaint also alleges competitive injury at the seller level. Section 2 of the Clayton Act, as originally enacted in 1914, forbade price discrimination “where the effect may be to substantially lessen competition or tend to create a monopoly in any line of commerce”. 38 Stat. 730. The statute was “expressly designed with the view of correcting and forbidding a common and widespread unfair trade practice whereby certain great corporations * * * have heretofore endeavored to destroy competition and render unprofitable the business of competitors by selling their goods, wares, and merchandise at a less price in the particular communities where their rivals are engaged in business than at other places throughout the country.” H.R. Rep. No. 627, 63d Cong., 2d Sess. 8 (1914). As the Supreme Court has put it, the aim was “to curb the use by financially powerful . corporations of localized price-cutting tactics which had gravely impaired the competitive position of other sellers.” + When Congress in 1986 set about to strengthen Section 2 of the 1F.T.C. v. Anheuser-Busch, Inc., 363 U.S. 536, 548. See, e.g., Porto Rican American Tobacco Co. v. American Tobacco Co., 30 F. 24 234 (2d Cir. 1929) ; Fleischmann Co., 1 F.T.C. 119 ; Pittsburgh Coal Co.,8 F.T.C, 480. THE QUAKER OATS CO. 1193 ‘1131 Opinion Clayton Act by means of the Robinson-Patman amendments, its expressed concern was primarily with abuses of buying power—that is, with injury to competition among the purchasers from a seller engaged in price discrimination—rather than with abuses of selling power, involving injury to the seller's competitors. See, e.g., #.7.C. v. Morton Salt Co., 334 U.S. 87, 43. But there was no design to limit the application of the price discrimination law with respect to injury at the seller's level. 7.7'.C. v. Anheuser-Busch, Inc., 363 U.S. 586, 544; Moore v. Mead’s Fine Bread Co., 848 U.S. 115, 120. On the contrary, the Robinson-Patman amendments were intended to strengthen the statute’s proscriptions of such discrimination—for example, by making explicit that price discrimination having the requisite adverse effects on competition was unlawful even if only a single competitor was injured.? Of course, neither in 1914 nor in 1936 was it the intent of Congress that keen, vigorous and fair competition should be considered unlawful discrimination at the seller level. The Commission has recognized that there is a crucial difference “between normal and legitimate pricing activities designed to obtain a larger share of business in a marketing area and those which represent a punitive or destructive attack on local competitors and impair the vitality and health of the processes of competition.”* On this record, we cannot say that respondent’s competition with National for Gerber’s business was “a punitive or destructive attack” or “impair[ed] the vitality and health of the processes of competition.” All of the major producers of oat flour competed with respondent throughout the nation. National Oats—respondent’s principal competitor and the firm supposedly harmed by respondent’s pricing tactics—was a profitable, healthy concern and a strong competitor, and respondent’s sales of run 14 to Gerber did not weaken, or have a tendency to weaken, National’s ability to compete.

The Section 5 charges in the complaint must also be dismissed for failure of proof. We do not base dismissal, however, on the examiner's finding that respondents sales of run 14 were not below actual cost. Even nondiscriminatory, non-below-cost pricing may, in some circumstances, be an unfair method of competition. In the hands of a powerful firm, selling at unjustifiably low prices may be a potent weapon of predatory and destructive economic warfare, and hence 280 Cong. Rec. 9416-17 (1936) (remarks of Congressman Utterback). See, e.g., Maryland Baking Co. v. F.T.C. 248 F.2d 716 (4th Cir. 1957); B. B. Muller & Co. v. F.T C., 142 F, 2d 511 (6th Cir, 1944) Cf. Klor’s, Inc. v. Broadway-Hale Stores, Inc., 359 U.S. 207. 3 Reply Brief for the Federal Trade Commission, p. 8, filed in the Supreme Court in F.T.C. v. Anheuser-Busch, Inc. (No. 889, October Term 1959), 363 U.S. 536. Complaint 66 F.T.C.

unfair, especially where such sales are subsidized out of profits made in other product lines where the seller is strong and his competition weak. The present record, however, does not support an inference that respondent acted predatorily or otherwise unfairly in competing with National for the Gerber account.

Commissioner MacIntyre did not participate. Commissioner Jones did not participate for the reason that oral argument was heard prior to her taking the oath of office. Finat Orprer This matter having been heard by the Commission on cross-appeals by respondent and complaint counsel from the initial decision of the hearing examiner, and the Commission having determined, for the reasons stated in the accompanying opinion, that the initial decision should be set aside and the complaint dismissed, It is ordered, That the initial decision be, and it hereby is, set aside; and that the complaint be, and it hereby is, dismissed. Commissioner MacIntyre not participating, and Commissioner Jones not participating for the reason that oral argument was heard prior to her taking the oath of office.