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It must be made clear that the basic purpose of the Reece bill is to reinstate sound principles of American law into FTC procedure. Should the Reece bill be passed, the defendant in FTC cases would be given his day in court in the proper use of the term. It would do away with the heads-I-win-tails-you-lose brand of administrative justice. Not only would it require the Commission to predicate its action upon a preponderance of evidence, but it would open the courts to every defendant who sought a fair-minded, comprehensive, and searching review of the order with which the Commission had confronted him.


Now, in making these observations, I do not mean to assert that the FTC has not been a highly beneficial agency of Government. It has much constructive accomplishment to its credit. It has substantially curtailed unfair competition, and it has in general raised the moral tone of many business practices. It has exercised a salutary influence upon the advertising of drugs and medicines and cosmetics, and has fashioned the outlook of the drug and cosmetic industries to a higher pattern than had once been the case.

But its record—which I admit is rather imposing-does not justify the onesided procedure which it follows, nor the lop-sided justice which frequently results. While the Commission must, as a practical matter, institute the prosecution and collect the evidence, there is certainly grave doubt as to the propriety of its determining the verdict.

Certainly if it is to be permitted to determine the verdict which may, and frequently does, involve basic civil rights, then surely every fact leading up to the verdict should be subject to judicial investigation and review.

As I see the situation, the passage of the Reece bill is absolutely essential to the stability and security of important segments of the drug industry. It does not require much stretch of the imagination to see that under the present set-up the Commission could place the industry in a strait-jacket, insofar as many of its necessary activities are concerned.

If the Commission is to continue as the sole judge of the facts and as the sole expositor of the law, it follows that the industry must conform to whatever policies the Commission may feel inclined to dictate.

The Commission may announce its own conception of professional rectitude, its own brand of advertising morality, its own pattern of business conduct. In other words, it is possible for the Commission to regiment these segments of the drug industry to any degree and to any manner which it arbitrarily conceives.

Now, obviously, all the assertions I have made with respect to the arbitrary power of the Federal Trade Commission over the drug industry applies in full force an deffect to any industry. The Commission, as the law now reads, may remake, revise, or refashion any business through the simple device of declaring that certain of its practices constitute unfair competition.

Of course, we can expect the Commission to fight the bill, and we can expect it to make the best fight possible. Agencies never voluntarily give up authority, As Comptroller General Warren remarked, “There are always loud yelps and snarls when administrative powers are curbed."

Not only should the Reece bill be passed because of the specific purposes it serves but success with this one piece of legislation will give encouragement and impetus to the efforts of all serious-minded citizens who are convinced that administrative agencies must be held to sharply defined, limited powers, and that the right to judiciol review of administrative actions is an inalienable right of every American.

Mr. RABIN. Mr. Frates.



Mr. FRATES. Mr. Chairman and gentlemen of the committee, my name is George H. Frates. I am the Washington representative of the National Association of Retail Druggists, an organization composed of 30,000 independent retail pharmacists practicing their profission in every State of the Union and in the District of Columbia. Its membership also includes State and local pharmaceutical associations in every part of the United States.

We are present today to offer our support to the Honorable Carroll Reece in behalf of H. Ř. 2390.

As retail druggists, we are constantly concerned about the Federal Trade Commission's and the Food and Drug Administration's rulings.

Under the provisions of the law, as it now stands, the Federal Trade Commission may issue a cease-and-desist order against a manufacturer of proprietary medicine because of predetermined alleged misstatements in the advertising of a particular product. Conversely, the Food and Drug Administration is concerned with the labeling of a given product and sits in judgment and governs the purity and efficaciousness of any

medicine sold in interstate commerce. Thus, we have dual authority endorsed by two separate Federal agencies in respect to the sale of medicine.

Under these circumstances, it is difficult for a manufacturer to know or understand his rights and privileges. If his label has passed the scrutiny of the Food and Drug Administration, he might find that the Federal Trade Commission will object to his advertising. The irksome overlapping of jurisdiction between the Federal Trade Commission and the Food and Drug Administration is complicated to say the least.

In our opinion, if H. R. 2390 is passed, it will place all labeling control exclusively under the Food and Drug Administration. It will give the circuit court of appeals power to review any Federal Trade Commission ruling, particularly as to determining whether or not “preponderance of evidence” supports the Federal Trade Commission's position. Likewise, it places a ceiling of $10,000 on penalties for violating FTC orders.

As the law now stands, astronomical figures could be assessed against any violator. For example, each issue of a newspaper carrying an advertisement declared to be in violation and having a circulation of 250,000 could be used as an instrument in penalizing a manufacturer for each separate issue of the newspaper carrying the advertisement in question.

Whether due to usurpation, misinterpretation, or actual legal authority, the overlapping jurisdiction over labeling should cease.

Our Constitution provides that we shall have Government composed of counterbalancing legislative, executive, and judicial departments.

The purpose and intent of H. R. 2390, as now written, is that some measure of this counterbalancing be restored to at least one bureau that many

of us believe exercises all three. If this be true, then the cure rests with the legislative branch of the Government. It is within the power of the Congress to define the powers of any bureau it creates or permits to function. We believe that most of the judiciary will welcome such an act. Many who hold bureau jobs will, logically, oppose it on "principle.”

Reference is again made to false advertisement. The term means an advertisement other than labeling, which is misleading in a material respect; and in determining whether an advertisement is misleading, there shall be taken into account not only representations made or suggested by statement, word, design, device, sound, or any

combination thereof, but also the extent to which the advertisement fails to reveal facts material in the light of such representations.

H. R. 2390 is proposed with a view to overcoming the conflict in the jurisdiction of the two Federal agencies which affect the regulation of commerce in food, drugs, devices, and cosmetics.

The Federal Food, Drug, and Cosmetic Act is administered by the Food and Drug Administration of the Federal Security Agency. It applies to the composition and labeling of foods, drugs, and cosmetics and therapeutic devices. The Federal Trade Commission administers the Federal Trade Commission Act. That act is designed to prevent the false advertisement of foods, drugs, cosmetics, and therapeutic devices.

We believe that the intention of Congress should be to formulate a pattern of regulation which would operate smoothly as a whole without conflict between the agencies administering the two laws. Conflict, however, has developed and it has grown largely out of the administration of the Federal Trade Commission Act.

The Wheeler-Lea Act expressly excludes labeling from the definition of the term “false advertisement." This exclusion was to insure again dual administration as to the contents of the labeling of these products because the regulation of the labeling was made the subject of the Federal Food, Drug, and Cosmetic Act.

The nature of the proceedings with respect to advertising cases is such as to make it quite appropriate for the courts to review the evidence upon which the Commission has acted. The advertising cases involved decision on pure questions of fact—questions peculiarly within the province of the court.

The National Association of Retail Druggists believes that H. R. 2390 is a good bill and that its enactment into law will clarify the 'misunderstanding and confusion now existing because of conflicting decisions often rendered by the two governmental agencies involved.

(The following was submitted for the record :) STATEMENT BY ROBERT E. CANFIELD, OF WISE, CORLETT & CANFIELD, ATTORNEYS

My name is Robert E. Canfield. I reside at Port Washington, N. Y.

I am a practicing lawyer with the firm of Wise, Corlett & Canfield, with offices at 122 East Forty-second Street, New York City, and have represented or participated in the defense of many respondents in a number of proceedings before the Federal Trade Commission. My practice also involves counsel and advice to several trade associations and industrial groups.

I appear in support of H. R. 2390, sometimes referred to as the Reece bill, which would amend the Federal Trade Commission Act in several respects and, while I am entirely sympathetic to all of the amendments suggested, my principal interest and concern is with the proposal to amend section 5 (c) of the act so as to require a preponderance of evidence to support a finding of fact by the Commission.

May I say, also, that I am not representing or speaking for any trade association or organization, although two of them with whom I have discussed the matter, American Paper and Pulp Association and Tag Manufacturers Institute, have expressed approval of my making this statement and approved of the Reece bill

. I have no doubt but that others, if consulted, would take a similar position. I am making this statement in my individual capacity as a citizen and as a member of a profession having close contact with the Federal Trade Commission Act and its administration. I also desire to emphasize that what I am about to say is in no way to be interpreted as a personal attack upon the Commission,

I thank you.

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its members, its agents, or its employees, and, while I shall be somewhat critical when candor compels, my criticism is intended to be entirely impersonal and without rancor.

Of late years we have witnessed an enormous expansion in this country of what has come to be known as administrative law. Because of the complexity of modern life, the public needs, the exigencies of war, the genesis and growth of abuses of one kind or another, and various other reasons, we have been subjected to a degree of regulation of our individual affairs which was once unknown and undreamed of. Whether much of this regulation is necessary or desirable is a question upon which there is great difference of opinion which we need not here discuss. I believe, however, that no one will dispute the fact that such regulation as may be required or imposed should be reasonable in extent, justly and efficiently administered, and designed to achieve its purpose within the framework of our constitutional safeguards and established rules of law.

The Federal Trade Commission is one of our oldest administrative agencies in the regulation of trade and commerce. There was need for its creation, and in its comparatively long life it has served a variety of useful purposes. To do this it has been invested with wide powers of investigation and control, and these have been uniformly upheld by the courts. In the field which we are now considering it has issued countless orders against individuals and groups commanding them to cease and desist from methods and practices which it has found to be in violation, actual or threatened, of the antitrust laws or other statutes governing our trade and commerce at home and abroad. These orders, unless vacated or modified on review, are enforceable through the circuit courts of appeals and have the effect of an injunction obtained after a due trial of the issue in a court of equity.

Because of this it becomes important to examine the basis of any action taken by the Commission against the one or more respondents against whom proceedings are brought. As we all know, the Department of Justice brings many civil suits in equity to restrain violation of the Sherman Act. The Attorney General commences these actions when his preliminary investigation satisfies him that the law is being or is about to be violated. The United States is the complainant and the case is presented to and tried before a district judge who has no connection with any party. The complainant, as in any other case, has the burden of proof and is required to prove its case by a preponderance of credible evidence. The recognized rules of evidence apply and any hearsay or other incompetent evidence is rigidly excluded. If the proof for the complainant outweights that of the defendant, an injunction issues. If the weight of the evidence is the other way, the complaint is dismissed, and the defendant goes his way. Such is the law of the land.

But consider the procedure before the Commission. Here the Commission, through its agents, makes a preliminary investigation. If the result appears to warrant further proceeding, the Commission issues its complaint against the supposed offenders who must then answer or submit to an order issued on their default. In principle, the procedure is the parallel to that of the Department of Justice in bringing a civil suit for injunction. In practice, however, it is quite different.

The complaint is issued by the Commission in accordance with the rules made by the Commission. It is not and need not be in the form of a pleading in equity." No demurrer lies against it. It is usually drawn in broad terms which includes conclusions both of fact and of law which could not be sustained in a suit. The respondents who must defend themselves against a broad charge of conspiracy to fix or manipulate prices or production cannot obtain any bill of particulars. Nor can they move to dismiss for any reason or take any effective steps to narrow the issues. All they can do is to admit or deny what appears in the complaint and proceed to hearing on the issues so raised.

In a court of equity the case is heard by a district judge who has no connection whatever with either party to the controversy. The evidence adduced must be competent, relevant, and material under the long-established rules of evidence. Hearsay, rumor, and speculation are barred. The trial is held in the district where one or more of the alleged conspirators resides or can be found and, once begun, is usually completed without a break.

In a case before the Commission, the trial is replaced by a series of hearings before an examiner who is, himself, a salaried employee of the Commission. He knows full well that his employer, the Commission, has investigated the case and has issued a complaint which would not have been issued had the Commission thought that there was no basis for the charges. Say what you like,

this fact alone is sufficient to create in the mind of the examiner an impression that the respondents are probably guilty. This has been demonstrated time and again by the tendency of the examiners to magnify everything offered by the Commission and minimize or ignore the evidence of the respondents. Illustrations of this will be given later. I have not the figures, but I would not hesitate to say that the dismissals of equity complaints by the courts overwhelmingly outnumber, in proportion, the reports of examiners favorable to respondents before the Commission. In short, the examiner is almost invariably what we sometimes call a "hanging judge” and, notwithstanding his desire to be impartial, he almost always is unconsciously biased in favor of his employer. This is not said with any animus against the examiner. It is merely a statement of a perfectly human trait as observed from experience.

The examiner is not bound by any formal rules of evidence. He may, and frequently does, admit hearsay—and sometimes even double or triple hearsayrumor, gossip, speculation, and report.

For example, in a recent case the examiner admitted, over objection, as evidence of what transpired at a meeting, a letter from a person who did not attend stating that another person who also did not attend told him that he had talked to still another person who told him what yet another person had said at the meeting.

Thousands of letters and documents are permitted to encumber the record merely because they may contain some reference to a "price" or a “competitor" or an "understanding” notwithstanding that the context on its face negatives any connection with the issues. This, of course, results in a record and expense far beyond any reasonable or necessary scope and a corresponding handicap to any intelligent or effective review of the proceedings. The mere expense of an appeal is often a deterrent to an assertion of individual rights. The Commission, of course, cares nothing about this, since its disbursements are made from the public funds.

The hearings themselves may extend over a period of years and often held in an area covering the entire continent from the Atlantic to the Pacific. Here again the matter of expense is a serious one for the respondents whose counsel must attend every hearing wherever held but is of no concern to the Commission.

When these hearings are completed, the examiner prepares his report on the evidence. The law says that the findings of the Commission shall be conclusive if supported by evidence, and it is his business to find the evidence. The result is that he combs the enormous record, page by page and line by line, in search of anything which will support or can be made to support the claims of conspiracy exhibited in the complaint. He goes through every exhibit with the same care and the same purpose. He usually finds what he is looking for and, having done so, proceeds to sustain all of the charges made. It makes no difference what may be the evidence to the contrary—he can disregard it or disbelieve it. All he needs is some evidence and his objective is gained. Let me illustrate.

Some years ago, the Commission issued a complaint of price fixing against a number of manufacturers of book paper and their trade association for which I am counsel. One of the charges was that the respondents had, during the period of NRA, promulgated and published in printed form a set or code of trade customs by which all agreed to be bound in selling paper and which, it was claimed, tended to produce uniformity of prices and to restrain trade. It was further alleged that after the NRA had been abolished, these allegedly restrictive customs had continued to be observed by agreement among the respondents.

Now, everybody knows what a custom is. It is a voluntary rule of conduct which has been observed as a matter of habit since time immemorial and is universally followed as a matter of course. It is customary to raise one's hat to a lady; it used to be customary for a baker to sell 13 rolls as a "baker's dozen"; 6 percent was once the customary rate of interest, and so forth. Trade customs have existed since the beginning of recorded history. Contracts have been interpreted in their light. Everyone has taken them for granted and observed them as a matter of course. Exceptions have always been made to suit particular circumstances, but the customs have persisted and nobody has given them a second thought. Frequently, as in this case, they have been printed and issued in booklet form for convenient reference and for the information of all concerned. Neither before nor since the NRA has there been any agreement that they must be observed in any case.


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