provides for the arbitration of those items covered in section 3 and section 4 of this Act, the provisions of section 3 and section 4 of this Act shall not be applicable thereto.

SEC. 6. Any franchisee may bring an action against a franchisor who has terminated a franchise or preempted a customer without full compliance with any of the provisions of section 3 or section 4 of this Act, in any district court of the United States in the district in which the franchisor resides or is found, or has an agent, without respect to the amount in controversy, and shall recover the damages by him sustained by reason of the franchisor's failure to comply with section or section 4 hereof, and any other damages to which the franchisee may be lawfully entitled, together with the costs of the action, including reasonable attorney fees. In any such action it shall be a complete defense for the franchisor to prove that the franchise was terminated or the customer preempted by reason of the conscious malfeasance or willful failure of the franchisee to perform adequately, competently and in good faith the lawful duties imposed upon him by the franchise contract.

SEC. 7. Any franchisee shall be entitled to sue for and have injunctive relief in any court of the United States having jurisdiction over the parties, against cancellation of his franchise or the preempting of customers without full and complete compliance with section 3 or section 4 of this Act by a franchisor when and under the same conditions and principles as injunctive relief against threatened conduct that will cause loss or damage is granted by courts of equity, under the rules governing such proceedings, and upon the execution of proper bond against damages for an injunction improvidently granted and a showing that the danger of irreparable loss or damage is immediate, a preliminary injunction may issue.

SEC. 8. Any action brought pursuant to this Act shall be forever barred unless Se commenced within three years after the cause of action shall have accrued.

SEC. 9. No provision of this Act shall repeal, modify, or supersede, directly or indirectly, any provision of the antitrust laws of the United States. This Act is and shall be deemed supplementary to but not a part of the antitrust laws of the United States.

SEC. 10. This Act shall become effective six months after the date of its enactment.

Senator HART. Next, I want to apologize to those of you asked to testify today. The full Committee of the Judiciary very late yesterday afternoon announced a meeting at 10:30 promptly this morning. Under our rules the subcommittees are not permitted to sit. So, we will be required to adjourn at 10:30. Beyond apologizing, there is not much I can do about it.

The statements that several of the witnesses have prepared will be printed in the record in full as though given in full and I understand that you will try to summarize your statements. We will reserve our questions until each has had the opportunity to highlight his testimony. I think Mr. Hopkins is to begin.

STATEMENT OF RUSSELL H. HOPKINS, EXECUTIVE MANAGER OF
THE NATIONAL BEER WHOLESALERS' ASSOCIATION OF AMERICA,
INC.

Mr. HOPKINS. Thank you, Mr. Chairman.

Mr. CHUMBRIS. Before Mr. Hopkins starts, could we also have inserted at this point in the record following the two bills, the Automobile Day in Court Act, 70 Stat. 1125, which is pertinent to the issue, and also S. 2549 of the previous Congress, especially since the tobacco people who will be testifying are going to discuss their position on the bill as introduced in the last Congress.

Senator HART. All right. It will be printed in the record.

But normally I think we would print only the two bills that are before us at this opening page of the record.

Mr. CHUMBRIS. I thought it should be placed in the beginning so that people who read the record will see it in front of them and can follow it easily.

Senator HART. Well, let us put it in an appropriate place.

Mr. CHUMBRIS. And then at the same time, if we can also put in the appropriate place a recent decision from September 28, 1967, in the 10th Circuit Court of Appeals, American Motors Sales Corporation v. L. G. Semke, dealing with the first successful case reported in the field, as I understand, on the day in court bill.

Senator HART. This decision and any other pertinent court opinions the staff will identify will be printed in the appropriate place. (The material referred may be found in the appendix, pp. 369, 375, 537, 541, and 546.)

Mr. CHUMBRIS. Thank you, Mr. Chairman.

Mr. HOPKINS. My name is Russell H. Hopkins, executive manager, National Beer Wholesalers' Association, Chicago.

Due to the time limit we are faced with today, I will make only brief introductory remarks and have submitted our specific recommendations for the record which you have.

I will then introduce other brewing beer wholesaling industry witnesses to present their views in condensed form as the Senator has suggested.

And if there is any time for questioning, I assume this will be done at the conclusion of our talks here.

I appreciate the opportunity afforded me to present my views on S. 2321 on behalf of the National Beer Wholesalers' Association of America, which has a membership of over 2,000 independent businessmen throughout the United States.

Since we went into considerable detail concerning the competitive situation in the brewing industry and the need for some type of protective legislation during your subcommittee's investigational hearings into franchising almost 2 years ago, I shall assume that you are well familiar with this aspect of the matter and will, therefore, omit this background information in this prepared statement.

Let me assure you that very little has changed during the last 2 years regarding the competitive behavior in the brewing industry. The number of brewers continues to decline steadily as beer marketing becomes more national in scope. There are now less than 95 brewers in the United States, a decline of over 20 percent during the last 2 years. But even this figure is deceptive, since a handful of brewers sell most of the beer.

Furthermore, our members continue to report that beer wholesalers dependent on one or a few major suppliers have little or no freedom to set their own resale prices or to handle other brands or products. Such a state of affairs undoubtedly contributes toward the concentration of power in the hands of a few suppliers.

I would like to stress at the outset, a point which I believe is exceptionally important. The purpose of this act, S. 2321, is to prevent anticompetitive practices, as stated clearly in the preamble of the bill sponsored by Senator Hart.

The assumption, which I believe is based on a great deal of information and analysis, is that a number of serious anticompetitive practices

flourish because certain franchisees are unable to function as independent businessmen, since they are held hostage by the threat of termination and its often severely damaging consequences.

Therefore, if such franchisees can be relieved to some extent of the fear of termination, it is assumed that they will be able to resist supplier pressures to engage in anticompetitive practices.

What I want to emphasize is that this bill does not seek to enrich the franchisee, to make him more secure, or to guarantee him a profit. This bill seeks to prevent anticompetitive practices that can be expected to have increasingly adverse effects upon consumer welfare, unless corrective action is taken.

Viewed in this light, it is not really relevant whether the franchisee "went into business with his eyes wide open," or whether "he should have known better than to have made a substantial investment without an equitable contract."

Admittedly, some franchisees should have known better. They are only getting what they asked for. But the fact remains: unless even foolish franchisees are given some protection against the harmful consequences of termination, the American public will eventually find itself under the heels of monopolists in many industries where such concentration can still be avoided.

Now, permit me to make a few observations pertaining to the provisions of S. 2321. I shall do this from the viewpoint of one troubled by the excessive control which giant suppliers are often able to exert over their independent customers in direct contradiction to the judgment of the U.S. Supreme Court. I shall not attempt to suggest any legal language for any of the recommendations I shall offer, as others are more qualified for such a task.

Continuing commercial relationship (sec. 2(b)): We recommend that the term, "continuing commercial relationship" be interpreted in a liberal manner to prevent franchisors from engaging in legal gymnastics to escape coverage by the act.

For example, it is customary for brewers to declare on their various documents with customers that their relationship with each wholesaler is strictly that of buyer and seller and on an order-to-order basis, while in fact, the circumstances surrounding the relationship indicate that it is one of a continuous and long-term nature.

Failure to close such a loophole would clearly render the legislation impotent.

Twelve-month proviso (sec. 2(b)): As the bill now reads, only relationships in effect for 12 months or more would be covered. Since, in our opinion, such a provision is intended to prevent franchisors from contending that a relationship should be longer, in order to qualify as "continuous," we believe the time period to qualify should be reduced from 12 months to a shorter period.

If it is desirable to prevent anticompetitive practices after 12 months, it is desirable to prevent them from the outset, in our belief. Twenty-five percent of sales provision (sec. 2(b)): It has been called to our attention that a beer wholesaler who is terminated by a brewer who accounts for even 25 percent of his total sales, may be put out of business unless protection against financial loss is available. Therefore, we recommend that relationships involving more than 15 percent of the franchisee's total sales be covered by the act.

Commerce definition (sec. 2(d)): It is our understanding that "commerce" under the antitrust laws can refer to "in commerce" or "affecting commerce." Since "affecting commerce" is a broader term applying to more situations, we urge that this definition of the term "commerce" be inserted in the bill.

Fair market value and goodwill (sec. 3(c)): When determining the fair market value or goodwill value of a business or a customer's account, it is our understanding that there is a variety of formulas used by accountants and the Internal Revenue Service. Our hope is that expert testimony will guide the courts in determining which formula will provide a franchisee with compensation adequate enough to assure his independence without placing an unreasonable burden upon the franchisor.

Arbitration exemption (sec. 5): Some individuals have construed section 5 of the bill as exempting franchisors who set up a procedure whereby a person selected by the franchisor determines the fair market value and the goodwill value of a dealer's business.

Obviously, if section 5 is interpreted in such a fashion, the franchisor is still in the position of being judge, jury, and prosecutor, insofar as determining how much compensation is due a terminated dealer.

Such a provision is totally unacceptable to us. We ask that either section 5 be eliminated or that it be made fully clear that any arbitration procedure shall enable the franchisee to refuse the services of an arbitrator up until the time that the actual arbitration hearing com

mences.

It is essential that the arbitrator presiding in such a dispute be completely free of franchisor influence, and be acceptable to both parties at the time of arbitration.

Franchisor defense (sec. 6): We ask that the provision relating to permitting a defense for a franchisor, against a claim by a franchisee, should apply only to fraudulent conduct on the part of the franchisee, whereby he deliberately attempts to undermine the position of the franchisor in his market, or to violate a valid contract.

We do not feel that a franchisee who does his best to live up to the contract, but fails, should be deprived of the benefit of the law. A franchisor can always find a way to induce a contract violation by the franchisee, in one manner or another.

Furthermore, we ask that only reasonable and equitable duties, imposed in writing by contract, be binding upon the franchisee.

Effective date (sec. 10): We see no reason why S. 2321 should not become effective immediately upon enactment. Why permit anticompetitive practices to continue and perhaps be accelerated during an additional 6 months?

Longevity of relationship: We suggest that the effective date of the legislation have no bearing on the length of the franchiseefranchisor relationship, for the purposes of determining "fair market value," "goodwill," or for qualifying as a "continuous commercial relationship."

Right to assign: If a franchisee deserves compensation for his market development efforts upon termination in the form of a goodwill payment, we affirm that he should also be entitled to sell his goodwill to a third party acquiring his business. Otherwise, a fran

chisee may find himself in a position wherein he will be better off financially if he is terminated than he would be if he sold out to a responsible buyer.

We recommend, accordingly, that a franchisee be permitted to sell his business to anyone of his choosing without the permission of the franchisor, and that goodwill value of the business which the franchisor would be obligated to pay upon termination would be figured from the beginning of the relationship with the original party, rather than at the time of acquisition by a new owner.

Franchisors have customarily reserved the right to disapprove any sale of the "franchise" by the franchisee. As long as such veto power exists, the franchisee really has no right to sell his own business. If the franchisor does not want to do business with the new owner, he is free to terminate him after a minimum period of time which could be specified in the law. But the new owner should be entitled to proper compensation, including the value of the goodwill which has accumulated over the years.

So much for our comments on the provisions of S. 2321 itself. We would now like to comment briefly on a few objections invariably raised to such protective legislation. Please bear in mind that we refer to the brewing industry situation only, since that is where our familiarity lies.

1. The question has been raised whether brewers would switch from using independent distributors to their own branches if protective legislation were enacted. We believe that such a switch is extremely unlikely, merely because such legislation is put into effect. Brewers use independent distributors because they provide the most economical and effective way of marketing their products, not just because they like distributors or are interested in preserving the small businessman. When the brewers feel they can do better without independent distributors, they will do so whether or not S. 2321 is enacted. However, such a trend toward vertical integration would be more expensive under S. 2321, since the past contribution by the distributor in developing a market for the brewers' products would have to be taken into consideration.

A more likely effect of such legislation is that brewers now unable to get good distributorships will be able to find them, and thus increase their own opportunities for survival. But, even if franchisees who are now classified as "independent," but are in fact "captive," are replaced by franchisor branches, nobody will suffer because a "captive" franchisee is virtually indistinguishable from a company employee. Actually, such a captive franchisee is in an inferior position to an employee. It is worthy of note that since restrictive State laws applying to the brewing industry were passed in North Carolina and Virginia, in 1965 and 1964, respectively, there has been no tendency for brewers to replace their wholesalers with branch operations.

Despite claims that restrictive legislation might hamper brewery sales efforts, beer sales in North Carolina, where a restrictive law was enacted in 1965, jumped by 16 percent during the first full year following its enactment. So far this year, North Carolina sales are up 28 percent over last year. Such a rate of increase is several times above the national average.