equitable settlement is arrived at in the case of termination like this, and comparable types. Your reply would be helpful, I am sure. (The letter referred to above is found on p. 354.) Senator HART. I realize that when the witnesses for Chrysler were on the stand, I neglected to ask them that question that I asked this morning's witnesses with respect to Negro franchises. I shall ask them if they will provide an answer for the record, giving the name and address of such franchisees, if any. I happen to know the one in Detroit, so I know there is one for Chrysler. Does American have any Negroes? Mr. PICKETT. No. We have two excellent prospects, Senator, one is for South Philadelphia. We have both Senators Scott and Clark working with SBA to help this group of men get an SBA loan. The other, which I think will be located in Newark, N.J., but we are not positive yet, has come about from a consortium of Negroes who have kind of an industrial development board in that area apparently helping them get started. We found a facility and I think we are certainly within 30 days, and I can furnish you the names of these prospects. Senator HART. Perhaps we ought to do that, but if in fact the contract is entered into, give us the name. Mr. PICKETT. We will furnish it. Senator HART. This question is not limited, I am sure, to American. It would describe the practice of any large manufacturer considering establishing a franchisee. When you are thinking about putting an American dealership in a place or someone comes to you and wants to put one in, some sort of survey is made to determine the feasibility; is that right? Mr. PICKETT. That is right. We have a vast, for us a vast department-General Motors is probably 20 times our size-dealer development and market survey department in which we have laid the plats out on the entire United States and have planned our planning potential which is based on what we would like to be selling, realizing we are far and away the smallest of the four companies, based on some historical 5-year period in an area, plus keeping up to date with economic and population shifts and other things. So we can lay out any area of the United States, and based upon the facilities that a dealer has, can he adequately service that area. Naturally he gets first choice toward expanding an existing operation and a great many of our dealers do that. They will increase their capital 100 percent in the course of a year. On the other hand, where we have a known open area and a man comes in and makes application, we have a series of things we put him through, including real estate survey on the facilities, and business management and all the relevant things to the business, to be sure that where he would like to go into business, if he perseveres on the franchise and knows what he is doing, could he make a living and would it be prosperous to have it there. We are very honest with people. We have turned down some good applications. Senator Morse intervened in behalf of a friend of his in Oregon who wanted to get a location in downtown Portland. We convinced the man that is not the place to go. We finally convinced him to go 14 miles out of town. We had his banker talk to him and he finally agreed it would be a struggle to do this. We don't want our signs all over the place just because we have got a lot of franchises. They must make money. Senator HART. Thank you very much. Mr. Cohen? Mr. COHEN. No questions. Senator HART. Mr. Chumbris? Mr. CHUMBRIS. Thank you, Mr. Chairman. Just two items because the time is getting late. I think one item should be in the record because sometimes Government redtape hurts in some of these programs that Small Business Administration is trying to do in helping the minority groups on this program of franchising. We had a situation that was brought to our attention where the Small Business Administration was ready to give a loan to Negro business people in this particular State but there was redtape in two Government agencies approving labels in the business that they were going into. It reached the point where the people were almost knocked out of business before they got started, because they had to get clearance from Agriculture and Health, Education, and Welfare Departments to get their labels. It was on that approval they could get the loan and operate their business. So I can understand the problem that Small Business has and you, yourself, have in acquiring franchises for people who do not have the funds and have to go either to a bank or Small Business Administration to get the loan. One other item that I wanted to bring up, and that is the testimony of the previous witnesses on the plan where Mr. Brownell makes the final decision. Do you have anything similar to that? I noticed you stated you will receive calls from any franchisee to help them out. Mr. PICKETT. We do not have an independent arbiter. We do have a dealer advisory board similar to the other three, but in no instance is this advisory board empowered to take up anything that has to do with dealer termination. I guess I am the court of last resort, or our chairman is. But let me assure you that our system is very finite. I make no judgment on it until our vice president of finance, our president, and our general sales manager have had action on it, and it is a very difficult decision for me to make. I don't make them toward cancellation very often. Not until after the 90 days means nothing. We have got what we call a scouring team and we will put a sales manager in a man's premises and will loan him a service manager. We will put a secretary-treasurer in there to help him with his books, to try to keep him moving. And we revived a lot of dealers and saved them that way. But we do not have a Herbert Brownell. Mr. CHUMBRIS. I know that the question of voluntary arbitration is being used more and more. I understand in the beer industry now there are three major beer manufacturers or brewers who have placed voluntary arbitration into their franchises, one of them I mentioned earlier today, and the chairman has placed it into the record of hearings. What is interesting is that we have a case in the courts in which a problem that is effective in this case is similar to what was worked out by this voluntary arbitration plan that the beer dealers have. And this was a case of James A. Bruno v. Pepperidge Farms, Inc., 256 Fed. Supp. 865, decided in 1966. There the plaintiff who had a franchise lost a part of the territory of the franchise because the franchisor, maybe unwittingly, gave part of their territory to someone else. The substance of the case was the question of arbitration, whether only damages were to be arbitrated or other issues affecting part termination of their territory. So they went to the trouble of going to court and the expenses entailed with it. And in this case the plaintiff, or the franchisee, was successful up to the point where the court sent it back to the lower court and said, reexamine the issues on these particular points. What is interesting, if I may read it-it is very brief-in this arbitration plan, the question is: What was the second case filed by a distributor under the Carling plan— Mr. RUSSELL. In September of 1965, our divisional vice president for the central division received a complaint from a small Carling wholesaler to the effect that a certain portion of his area had been unilaterally removed from his area for the sale and merchandising of Carling products— Which was a similar issue to this other Pepperidge case. And he continues: The wholesaler complained that this had been done without his agreement, and he was making this written complaint under the provisions of article IV of the Carling distributor arbitration plan. The divisional vice president quickly made an investigation of all of the circumstances and concluded that Carling personnel had acted improperly in unilaterally removing this territory from the wholesaler in question. The divisional vice president then telephoned the wholesaler and apologized for this unilateral action on Carling's part and assured the wholesaler that the area in question would be immediately restored to him. This telephone conservation was later confirmed by letter. Accordingly, you can see that where we recognize we have made a mistake, we do not put the wholesaler to the time and expense of going through arbitration proceedings to receive justice. And, Mr. Russell, so that I may identify him for the record properly, he is the president of Carling Breweries and he is the one being interviewed about their arbitration plan. The reason I would like for the record to reflect this is because one of the advantages of holding these hearings is there are things that people in one industry can take advantage of that might be done in another industry, so it will bring better relationships between franchisor and franchisee. It corrected this particular problem where, in the Pepperidge case, they had to go to court, fight it out, and send it back for further determination, whereas by one telephone call from the vice president, the matter was worked out without even going to arbitration, which in itself is a savings plan as far as going into courts and appeals, and so forth. Senator HART. Gentlemen, did you have anything you would like to add? Mr. PICKETT. No. Thank you very much for inviting us. OTTINGER, MACKLEYS & GILBERT, Re SB-2321; SB2507 Termination of franchise. CHIEF COUNSEL, Senate Judiciary Antitrust Subcommittee, Senate Office Building, Washington, D.C. DEAR SIR: I have read with interest recently in the trade papers some reports on the subject bills now before your committee. It so happens that our law firm is currently defending a distributor who has become the victim of some of the practices which such legislation presumably is intended to correct. I thought it might be helpful to the Subcommittee to hear an account of another instance of how franchise terminations can be abused. The distributor agreement itself carried a termination provision authorizing either party to cancel same after giving written notice; no specific period of notice was stated. On February 20, 1967, a Detroit representative of American Motors verbally informed the management of Bohman-Warne, Inc. that effective March 1, their dealer and distributor franchises were being cancelled. That representative candidly admitted that the termination was in nowise based on any delinquency by Bohman-Warne, Inc. Notwithstanding the protests of Bohman-Warne, Inc., the franchise was in fact terminated on that date, and American Motors immediately took over the entire dealer network which Bohman-Warne, Inc. alone had built up over the 41 years. They also tried to solicit away the repair service personnel of the distributors. American Motors informed the dealers that the termination was being made in order to provide them better service, although it is clear that the dealers now have appreciably less service from the company than they did with Bohman-Warne, Inc. Late last winter American Motors was in serious financial troubles with the banks from which they had borrowed money, and obviously they felt that one way of improving their profit picture was to eliminate this distributor and take over its network of dealers, thereby increasing the gross profits of American Motors. Since the Kelvinator line represented about eighty percent of the gross annual sales volume of Bohman-Warne, Inc., this action amounted to what at the time seemed to be an immediate economic death warrant. Moreover, American Motors through its wholly owned financing subsidiary (Redisco, Inc.) filed suit to collect $40,000.00 still due American Motors. By cutting off their business, American Motors had effectively made it practically impossible for BohmanWarne, Inc. to pay off this balance, and Bohman-Warne, Inc. is now defending in the U.S. District Court in Baltimore a confessed judgment action commenced by Redisco. The threat of extinction was staved off for awhile because BohmanWarne, Inc. was able to obtain on an interim basis the right to sell products of Philco-Ford. Bohman-Warne, Inc. has had to lay off some of its employees, and it is able now just to keep its head above water. The $40,000.00 judgment, if not set aside, will finish off the distributor. Of course, we are planning to file a cross suit against American Motors, but under the existing law the distributor faces very much an uphill battle in making out a course of action against the manufacturer, since nearly a fraud case is necessary in this situation. I express no comment on a situation where a manufacturer cancels an agreement because of default or poor sales efforts on the part of the distributor. However, where the termination is solely for the convenience of the manufacturer, the gross disparity of economic power between the manufacturer and the distributor places the distributor in an untenable position if the manufacturer chooses to exercise its full rights under existing contract law. Therefore, as counsel for one of these victims, I certainly urge that the Congress enact legislation which will aim to prevent this abuse of economic power. Very truly yours, K. J. MACKLEY. We, under our revised schedule, will adjourn now to resume at 11 in this room tomorrow morning, at which time Prof. Jerome Shuman will be heard. (Whereupon, at 4:10 p.m., the subcommittee adjourned, to reconvene at 11 a.m., on Wednesday, Nov. 1, 1967.) FRANCHISE LEGISLATION WEDNESDAY, NOVEMBER 1, 1967 U.S. SENATE, SUBCOMMITTEE ON ANTITRUST AND MONOPOLY, Washington, D.C. The subcommittee met, pursuant to recess, a 11:03 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 come to order. As we explained yesterday, because of the time consumed with earlier witnesses it was advisable that the thoughtful presentation that had been prepared by Professor Shuman be delayed. That is why we convene today and welcome Prof. Jerome Shuman. I am inserting into the record a brief biography of Mr. Shuman. (The biography referred to follows.) (Major: Political Science-Minor: Accounting) LL.B cum laude, 1963, Howard University Law School LL.M., June, 1964, Yale University Law School J.S.D. Candidate, 1967, Yale University Law School (Dissertation entitled "The Antitrust Aspect of Francise Selling") BAR AFFILIATION Member of the District of Columbia Bar 1. United District Court for the District of Columbia 2. United Court of Appeals for the District of Columbia Circuit 3. Supreme Court of the United States TEACHING EXPERIENCE Associate Professor of Law, Howard University Law School, Washington, D.C. Consultant, United States Office of Education-Department of Health, Education and Welfare, Washington, D.C. American Bar Association ORGANIZATIONS |