matters where the decedents were franchisees whose income in one instance equaled and in the other far exceeded the above-suggested formula and yet the U.S. Treasury Department readily acquiesced that there was no goodwill in both instances only because of the shaky relationship between manufacturer and distributor.

Should there be a termination of the franchisee there should be paid a premium over and above the goodwill in those instances where there had been long years of meritorious and fruitful services. Such substantial increases in volume are often the result of long hours of sweat and substantial out-of-pocket expenses that are often not even deducted for income tax purposes under the stringent regulations of section 274 of the Internal Revenue Code. It is urged, therefore, that goodwill incorporate the following supplement-not substituted.

In addition to the above calculation for goodwill the franchisee should be paid a premium for the growth in his business in the more recent years by a bonus on increased unit sales above a base yearwhere the latter type of calculation is feasible-in each case added to the number of years in excess of 5 as a franchisee. For example, in the brewing industry, where sales are measured in barrels 31.5 gallonsit is conceivable to establish the premium on that basis. To illustrate: During the first 2 years of operation the franchisee averaged 30,000 barrels per annum. He has held the franchise for 15 years and during the last 5 years his average sales were 50,000 barrels per annum, an increase materially attributable to his sweat, long hours, and substantial out-of-pocket expenses, a result not always measurable by net profits. It would not be unreasonable if upon termination of the franchise, for the franchisee to anticipate some additional compensation. Suggested might be 5 cents for each barrel increase for each year after the first 5. In this example, an increase of 20,000 barrels and his service as distributor for 15 years, the premium would be 20,000 times 0.05 times 10 or $10,000.

Section 5 limits the use of arbitration to a special area where the franchise agreement provides for such arbitration. Such a provision may very well prove impractical since the franchise agreement is written by the franchisor. Furthermore, who is to determine what is fair?

It is my urgent recommendation, if we are to eliminate time-consuming costly litigation and even complicated formulas for goodwill, that section 5 be broadened to provide arbitration, with the written consent of both parties, in all areas of this bill where a disagreement arises. However, the arbitration decision shall be in accordance with the provisions of section 3 and the mechanics of arbitration shall enable the franchisor and the franchisee to each appoint an arbitrator and in 10 days the two shall be obliged to select a third member to the panel. Should they fail, then within 1 week they shall petition a court having jurisdiction to select another third panelist. The majority decision of such panel shall be rendered in 60 days from date of formation of said panel and such decision shall be binding upon both parties. Again, I express my sincere thanks for the privilege to be heard. Mr. HOPKINS. Thank you, Mr. Wiss.

Our final panelist will be Maurice V. Hassell, executive secretary of the Wisconsin Wholesale Beer Distributors' Association, and former officer and director of the Beer Distributors Secretaries' Association of America.

STATEMENT OF MAURICE V. HASSELL, EXECUTIVE SECRETARY, WISCONSIN WHOLESALE BEER DISTRIBUTORS' ASSOCIATION

Mr. HASSELL. Senator Hart and gentlemen, in view of the reduction in time, I would like to suggest to the reporter that I do have the final form of my statement, which will be just reduced in length from this one, the prepared form.

My name is Maurice Hassell and I am executive secretary of the Wisconsin Wholesale Beer Distributors' Association, with headquarters in Milwaukee, Wis.

The Wisconsin Wholesale Beer Distributors' Association is made. up of over 200 independent businessmen who have always urged me, during my 15 years as their executive secretary, to protect them against "overnight checkouts," without consideration, leaving them almost destitute with their hundreds of thousands of dollars worth of specialized transportation equipment, specialized warehouse and refrigeration equipment, inventory, a high investment in advertising and promotions for a product he will no longer be selling, and, most important, they lose many years of their lives that were devoted to building a successful livelihood.

During the past year, we have been extremely encouraged that some brewers have made written contracts available to their wholesale distributors and as the direct result of legislative pressure in some States, other brewers have indicated that they would offer contracts to their distributors. It is our fear, however, that without some guidelines, such as are in this Senate bill S. 2321, and even more substantial amendements that could be added, no meaningful improvement will be realized.

Our fear is that this legislation will be sidetracked at the encouragement of the very people who have indicated interest in offering franchises with the argument that legislation is not needed. We feel it is extremely necessary to pass Federal legislation on this subject to guarantee that certain safeguards to the public are a part of any franchise or contract between a wholesaler and manufacturer.

It is important to note here that I am not indicting the industry to dramatize the need for franchises. What I am saying is that some entities of our industry have forced others to be hurt because of conditions that could be eliminated if franchises were required.

It might be argued that Senate bill S. 2321 is not in the public's interest and should be considered a "fence me in" law. Nothing is farther from the truth when all that wholesalers are trying to do is get some assurance of fair equitable treatment that in turn would correct injustices further down the line of commerce and eventually benefiting the consumer.

Let us take a swift look at how the public will be protected and benefited:

The obvious fact is that a wholesaler without a franchise or contract is not recognized as a good banking credit risk. Loaning institutions recognize that a wholesaler without a performance contract would be unable to satisfy his obligations if the wholesaler's brewery should arbitrarily stop supplying beer. The existence of a franchise or contract between the manufacturer and wholesaler would greatly improve the chances of businessmen securing lower cost financing through regular

banking channels. This would eliminate the present conditions under which many wholesalers must depend upon their suppliers' line of credit or pay prohibitive interest from questionable sources in order to meet some suppliers' demands.

This leaves the wholesaler with no opportunity to determine what his operating policy will be and leaves the brewer with his credit to offer an open field to make legal and illegal demands that might severely damage the local wholesaler's reputation and future.

Because of the exceptionally high value that brewers have placed on the Wisconsin market, there has been an excessive amount of pressure placed on beer wholesalers to follow unreasonable pricing and merchandising demands or be out of business for lack of a contract. In Wisconsin we have found wholesalers, with their cash reserve to the wall, seek to raise prices and be threatened with losing their distributorship or losing their established line of credit with their brewer. This form of vertical price fixing cannot be prevented unless the wholesaler can be assured and sources of money can be assured so that he will not lose his beer distributorship because he is not following the brewery's unreasonable pricing and merchandising demands on his business.

A franchise or contract between manufacturer and wholesalers will eliminate vertical price fixing. Both Federal and State laws prohibit price fixing in any manner, but enforcement is almost impossible when both parties stand to lose and thus a conspiracy is created to protect each other.

We have had numerous examples of this type of price fixing and it works in many ways.

Because the wholesaler has no protection against the manufacturer's immediately without apparent legal cause-establishing a new wholesaler, the enforcement officials cannot depend upon these wholesalers who, in most instances, have been hurt substantially to testify that laws have been violated. Of course, it is impossible to prove that these same wholesalers have been coerced, but I have been told time and time again by my members that they were fearful of retaliation by their suppliers if they did not do what was demanded of them legally or illegally because they had no protective franchise.

Under section 2(b) of proposed Senate bill S. 2321, we would strongly urge requiring that all contracts between franchisors and franchisees affecting one brand or manufacturer be for a specific period and identical in language. I feel that this is important to prevent discrimination between wholesalers or franchisees and assure franchisees, regardless of size, that they are being treated fairly.

Under the same section, we strongly believe that the provision requiring a certain percentage of business to qualify for a protective contract is unrealistic. The damage to a franchisee who does not do a substantial amount of business with a franchisor is only different in degree if his source of livelihood is eliminated. The fact of the matter is that a franchisee puts a great deal more time and effort into a minor brand or product in an effort to improve his total sales than he does other brands and, therefore, this escape clause should be eliminated or substantially reduced from 25 percent of total business.

It is no secret in Wisconsin that for over a year we have had a vertical price-fixing investigation in the brewing industry by the attorney

general's office. It is my understanding that this investigation has exposed a system of rebates by some major brewers that were based upon the price wholesalers charged for the brewers' beer. Some wholesalers, because they had no franchise felt that they would be eliminated as a distributor if they did not follow the brewery pricing policy. This is a dramatic example of what can happen when a supplier can play one distributor against another because the wholesaler has no written franchise protecting his wholesalership from cancellation.

A franchise or contract would permit wholesalers to sell the products that they want to sell and not be threatened by a supplier if they choose to broaden their future by selling another supplier's product. Again, this would be almost impossible to prove in court, but again I have been told by many wholesalers that they have been warned that if they sell another brand or product, they would be replaced by another wholesaler with nothing to show for their investment and hard work.

We have no objection to a wholesaler being discontinued for substantial cause. But in Wisconsin, we have seen instances of wholesalers being eliminated, after years of hard work and many dollars invested, that have been nothing more than a payment to a friend or a penalty for not following questionable practices. Substantial cause should go far beyond not liking one man and liking another when the lives and future of qualified businessmen are involved.

Here I would like to suggest that stronger language be used in section 6 protecting the franchisee from being accused of fraudulent conduct and violating a contract when in truth he had been induced and threatened into an act that the franchisor considers valid reason to cancel a franchise.

Under section 3 (c) we feel that it is of the utmost importance to include the section referring to "fair market value and goodwill" when establishing the value of a distributorship or franchise. We are satisfied that the courts will recognize your legislative intent and make determinations on a realistic and knowledgeable basis. As the result of including the wording of section 3 (c) in the law, with the intent clear, I feel that section 5 of the proposed law should be eliminated in its entirety and leave the entire determination to a regular

court of law.

The existence of a franchise or contract covering a specific period outlining specific demands would permit an area of negotiations to exist that would allow differences to be considered and rationalized before a wholesaler would be eliminated. Business lives have been snuffed out in the heat of sales pressure and resentment that were totally unwarranted and without substantial cause.

A bona fide wholesale contract or franchise will assure the public that no unnecessary or illegal pressure is being exerted on their suppliers because the wholesalers are at the complete mercy of the manufacturer.

Employees of wholesalers will benefit because families will be assured of continued full-time employment that will not be affected by decisions of distinguished people that would leave the employer without a product to sell and financially unable to create employment.

In the interest of time, it is almost impossible to go into the actual cases that have prompted me to be so concerned about the need for this

proposed law. If the members of the committee do wish more specific information or facts, I would be glad to answer any questions that you might have regarding the points I have outlined.

With the extreme interest and urgency that I have expressed, you might naturally ask me why we have not introduced or passed a State law on this subject. My answer to this is that we feel this is not a localized problem and is of national concern for the benefit and welfare of all franchisees and could be solved in total as contrasted to 50 legisla tive battles.

In conclusion, I would like to state that our association members feel that they need the protection of a Federal law to guarantee that they will be offered the protection of a meaningful franchise or contract with their suppliers and that bill S. 2321 would be a substantial step in this direction.

Thank you very much.

Mr. HOPKINS. Mr. Chairman, this comprises our panel. I think we got in under the wire and there might be a few minutes left for questions if you have them.

Senator HART. You sure have. You were very considerate and we are very grateful.

In the prepared statements there are a number of suggestions that have been made, all of which will be studied by the committee.

Mr. Kaplan, you suggest an arbitration formula. You indicate you think an arbitration formula would not be fair unless it included as minimum compensation the items that are contained in (a), (b), and (c) of section 3. I thought that the bill did provide that these would be a factor. Would you expand a little on the reason that you feel that way. I wonder if we do not achieve this in the bill as introduced in the language in section 5 of the bill. It says in the case of an agreement which contains a formula for fair arbitration, and items covered in sections 3 and 4 of this act:

In case of existence of any franchise agreement between the franchisor and franchisee containing a formula for fair and equitable arbitration which provides for the arbitration covered in those items 3 and 4 the provisions of 3 and 4 of the act will not be applicable.

Mr. KAPLAN. Yes, Senator. My comment points out the difficulty the courts may well find themselves in in trying to determine what is a fair and equitable formula for arbitration. It would seem to me that extensive litigation could ensue. On this point, in order for the courts. to have litigative guidelines, it is my suggestion that a formula, before it can be considered to be fair and equitable, should meet the minimum standard in section 3 of the bill. This would at least give the court. some guidance in determining whether or not a contract does contain such a fair and equitable formula and, therefore, section 3 would not. be applicable.

Senator HART. All right. We are in agreement, then?

Mr. KAPLAN. Yes.

Senator HART. Whether our language does it or not is something you have to stew about.

Mr. KAPLAN. That is correct.

Senator HART. Did Mr. Wiss have something?

Mr. Wiss. Along the same lines, since the voluntary franchise agreement is made between the franchisee and the franchisor but in most in