FRANCHISE LEGISLATION FRIDAY, OCTOBER 13, 1967 U.S. SENATE, SUBCOMMITTEE ON ANTITRUST AND MONOPOLY Washington, D.C. The subcommittee met, pursuant to recess, at 9:40 a.m., in room 1318, New Senate Office Building, Senator Philip A. Hart (chairman) presiding. Present: Senator Hart. Also present: S. Jerry Cohen, staff director and chief counsel; Charles E. Bangert, assistant counsel; Peter N. Chumbris, chief counsel for minority; James S. Schultz, minority counsel; Gladys Montier, clerk; and Patricia Bario, editorial director. Senator HART. The committee will be in order. As too often happens, our schedule became complicated and I am very grateful that several witnesses scheduled for today are going to do their best to summarize in about 10 minutes. Each of the prepared statements will be printed in the record in full as though given. First, I welcome the general counsel for the Association of Home Appliance Manufacturers, Mr. Lamb. Would you introduce the gentleman with you? STATEMENT OF GEORGE P. LAMB, GENERAL COUNSEL FOR THE ASSOCIATION OF HOME APPLIANCE MANUFACTURERS, ACCOMPANIED BY C. H. RIPPE, VICE PRESIDENT OF MARKETING, HAMILTON MANUFACTURING CO. Mr. LAMB. Good morning, Senator. I do appear here this morning as general counsel for the Home Appliance Manufacturers Association. I have with me Mr. C. H. Rippe, vice president of marketing of the Hamilton Co. of Two Rivers, Wis. We are going to endeavor to live within the limits that were suggested for our presentation this morning. To start with, I should like in my capacity as a lawyer, to make some opening comments with regard to this legislation and then to comment specifically on behalf of the Association of Home Appliance Manufacturers. I have practiced antitrust law since 1934. I am not only counsel for this association but some 19 other trade associations. I have engaged actively in litigation over these many years. I have served as defense counsel in quite a few cases. As a matter of fact, I was a member of the Attorney General's Committee To Study the Antitrust Laws back in 1953 during the Eisenhower administration. There has been a trend in the decisions of the courts and the legislation introduced in the Congress which as an antitrust lawyer and as a citizen of the United States I deplore. I am very much concerned with the growth of soft competition. I am concerned over the fact that every time somebody seems to be aggrieved they have to have some kind of legislation in order to correct the situation. Professor Bork, of Yale, in a very thoughtful article in Fortune magazine recently, in speaking of the Procter & Gamble Clorox case chastised the American businessmen and the bar for not being sufficiently vocal with regard to the growth of this soft competition. I, therefore, feel it incumbent upon me as an antitrust lawyer to say to you that I think this franchise legislation is just another piece of the type of legislation which is spelling the downfall of our competitive system. When the Sherman Act was passed in 1890, it was designed to protect our competitive system. It was to preserve innovation. It was designed to give the consumer the benefit of competition in the marketplace. This competition was designed to lower prices, to make for the distribution of the largest amount of goods so that the consumer could get fine products, and that manufacturers would use their best efforts and research and development to put on the market new articles from which the consumer could benefit. This legislation is not consistent with that policy laid down in the Sherman Act and interpreted by the courts except for the past few years. This kind of legislation is designed to protect competitors, not to protect competition, and when it is designed to protect competitors, it then does violence to our basic antitrust philosophy. Senator Hart, this has been going on since about 1930, 1931, when the fair trade laws were first introduced in the various States and later enabling legislation was introduced in connection with the Miller-Tydings law. In 1936 when the Robinson-Patman Act was introduced, this was a further erosion on the hard competition that was laid down by the Sherman Antitrust Act. The decisions of the Supreme Court of the United States and the philosophy espoused in some of the cases by the Federal Trade Commission is a further erosion on the hard competition theory which was laid down by the founders of our antitrust policy in 1890. I think the time has come when this committee should take another fresh look at the erosion of our basic antitrust policy and stop the type of legislation which goes to the point of protecting competitors. In the appliance industry there is quite a difference from the usual franchise operation. I now direct myself to these two bills; in reading this legislation at first it seemed that it was directed to what we normally think of as a franchise-type operation. The Holiday Inns, the Tastee Freez type situation. Home appliances are not franchised in that sense, but the definition of franchise in this legislation is so broad that it would include the relationship between the manufacturer of appliances and his distributor and it would include the relationship of the appliance manufacturer and his dealer. S. 2321 and S. 2507 fit into the trend toward "soft" competition in that they seek to protect the distributor of goods or the furnisher of services from those who produce the goods and services. The ideas behind the bills seem to be that the distributor, be he wholesaler or retailer, is always right, and the producer is always wrong; that the two have antagonistic interests; and that, since the producer is the larger of the two, the distributor, whether he is efficient or inefficient, successful or unsuccessful, interested or disinterested, must be protected by special statute. All industries, whatever their systems of distribution and problems, are to be blanketed by that statute. The premises on which the bills are based and the remedies the bills would provide are wrong as far as the appliance industry is concerned. Manufacturers and distributors, both wholesale and retail, are mutually dependent upon one another in this or in any industry. A manufacturer, unless it is to operate its own distribution system, must have a network of efficient, reliable and aggressive distributors. The distributors, unless they are to expand into manufacturing, must have products they can market successfully from a reliable innovative producer. S. 2321 and S. 2507 fail to recognize this mutuality of interest, or the extent to which freedom to adapt to changing patterns of distribution is necessary, both for manufacturers and distributors. AHAM's members oppose both S. 2321 and S. 2507 primarily on the ground that there is no need for the legislation as far as this industry is concerned. The members oppose both bills on the further grounds that the bills are vague in defining key terms; they interfere unnecessarily with the very foundation of our business life, the right to contract; they would have the immediate effect of "freezing" a producer to his present system of distribution, and the long-range effect of encouraging the establishment of factory-owned wholesale and retail outlets. The last would be detrimental not only to "franchisees," but to smaller manufacturers and to new manufacturing companies, who are frequently the developers of new products. Turning to specific provisions, both bills do violence to the traditional concept of the "franchise." The word "franchise" has meant a grant by a manufacturer to a distributor to deal in the manufacturer's goods, usually within a designated territory and through a written document. A franchise may be exclusive, with the distributor to handle only one manufacturer's goods; or non-exclusive, with a distributor handling several manufacturers' goods. The broad definitions of the word franchise in the two bills cover any arrangement, even the most informal, under which a distributor handles a manufacturer's products; and no distinction is made between exclusive and non-exclusive franchises. Certainly a distributor whose arrangement with a manufacturer is only informal has a standing different from one who has a formal contract, even though the manufacturer's goods may account for a fixed percentage of the distributor's sales. Certainly, the problems a franchisee may face in the termination of an exclusive franchise, as the term has been understood in the past, differ from those faced by a franchisee under a non-exclusive franchise. S. 2321 and S. 2507 make no distinctions between these arrangements, and I doubt very seriously whether legislation can be drafted to recognize the many differences in distributive arrangements to the satisfaction of all persons concerned. S. 2321 would recognize as justifiable the termination of a distributor arrangement for the distributor's "conscious malfeasance or willful failure" to perform his duties. S. 2507 does not recognize this justification; and neither bill would recognize justifiable termination for other reasons such as, failure of a distributor to perform his duties satisfactorily because of inefficiency or lack of ability; shifts in population that may reduce the demand for the manufacturer's product in the distributor's territory. If any satisfactory system of independent distributors is to exist, termination of a distributorship for a cause must always be possible without subjecting a manufacturer to a penalty. Both S. 2321 and S. 2507 would relieve a manufacturer from liability if a termination is with the franchisee's consent; but these provisions are without substance. The greater the reason for cancellation the greater the reluctance of the distributor to give his consent. In addition, a serious question arises in my mind on the existence of constitutional due process, when one person's liability to another, especially for double damages as under S. 2507, de the failure of the party who is to collect the damages to give his "co the United States, and in your vigorous efforts to do so, it seems to me, the time has come when we should not hit these things piecemeal. It seems to me we should try to make all this legislation consistent with the basic antitrust philosophy which was in the Sherman Act and still is in the Sherman Act, which is being interpreted differently at this time. Senator, this is the end of my formal statement. I will be glad to answer questions here or Mr. Rippe will proceed with his opening statement and we will both be happy to answer your questions at the close of his statement, whichever you would prefer. (The full statement of Mr. Lamb follows. Testimony resumes on p. 133.) STATEMENT OF GEORGE P. LAMB, GENERAL COUNSEL, ASSOCIATION OF HOME APPLIANCE MANUFACTURERS Mr. Chairman, committee members, I am George P. Lamb, general counsel for the Association of Home Appliance Manufacturers, sometimes called AHAM. I have with me Mr. Charles H. Rippe, vice president in charge of marketing for the Hamilton Manufacturing Company, Two Rivers, Wis. We will discuss S. 2321 and 2507, the two franchise bills pending before the subcommittee. I will comment on the legal aspects of the bills, and their relation to the antitrust laws. Mr. Rippe will discuss the practical problems that arise in the distribution of home appliances, and the effect S. 2321 and 2507 might have on the appliance industry. The Association of Home Appliance Manufacturers was organized a little more than a year ago to bring together into one trade association manufacturers of the many appliances used in the home. It is a successor to the American Home Laundry Manufacturers' Association, a 50-year old association in the home laundry field, and the Consumer Products Division of the National Electrical Manufacturers Association. AHAM's 48 regular members manufacture 85 percent of the home appliances made in the U.S. (A list of the members is attached to this statement.) Their products include major appliances, such as refrigerators, freezers, washing machines, clothes dryers, and air conditioners; and small, portable appliances, such as hair dryers, electric irons, electric knives, humidifiers, and so on. It is estimated that the industry placed some 50 million products in American homes last year, worth $5 billion at retail. This mammoth job of production and distribution could not have been done had any degree of friction or lack of mutuality of interest existed between appliance manufacturers and distributors, at either the wholesale or the retail levels. Both S. 2321 and S. 2507 are, in my view, part of a larger trend that is all too apparent in the enforcement of the present antitrust laws and in proposed legislation. This is a trend toward "soft" competition. The philosophy of "soft" competition is that every competitor, especially every small company, is to be protected from the rigors of competition, whatever the cost to our economy, to our competitive system, and to the consumer. "Soft" competition seeks to protect one competitor not only from illegal behavior, but also from what would normally be looked upon as good business practices by another. The economy may suffer, from lack of innovation, and the consumer may suffer; but each businessman is to be guaranteed some degree of success. Our basic antitrust statute, the Sherman Act, sought to eliminate illegal or excessive restraints on competition, but otherwise to preserve the principle of "hard" competition. "Hard" competition is the situation that exists when each competitor does its utmost to produce a better product or service at a lower price. "Hard" competition encourages the maximum use of individual effort. Its goals are the production and distribution of better goods and services, for the benefit of the consumer. Some competitors, those who do not succeed in providing goods and services the consumer wants, at prices the consumer is willing to pay, will be lost in the struggle; but the economy as a whole and the consumer in particular will benefit. This is the philosophy of "hard" competition. |