accounting standards by which the cost justification defense was to be measured, but the committee's final report and recommendation were never acted upon by the FTC. 28/ While the report was never endorsed by the Commission, one of its suggested approaches to cost justification, the approval of broad customer groupings for cost data accumulation, has been accepted by the Supreme Court. In United States v. Borden Co. 29/, the Court recognized that it would be impossible for a seller to prepare cost data showing its justification for each price granted to every individual purchaser. The Court held that purchasers having similar characteristics with respect to the cost of delivering goods to them might be grouped together for purposes of cost justification.

Ironically, neither respondent involved in the Borden case was able to take advantage of the supposedly liberalized requirements, since each was found to have made faulty customer groupings. Borden, for example, grouped together all independents for purposes of comparing cost differences between sales to them and sales to chains. The Court held that, since some independents had sales volumes higher than some of the individual chain outlets, such grouping was fatally defective. The result in Borden exemplifies one difficulty with the cost justification defense; a seller may, in good faith, prepare an elaborate cost justification defense only to find that, by the erroneous inclusion of one or more purchasers in the same class, he has unwittingly violated the Act.

A second deficiency with the cost justification defense is that no seller can be sure exactly what costs will be deemed material to the

28/

ADVISORY COMMITTEE TO THE FEDERAL TRADE COMMISSION, REPORT ON COST JUSTIFICATION (1956).

granting of a discount to a particular purchaser. It has been held, for

example, that the cost savings associated with billing large sales to

mass purchasers may not be significant enough to justify a reduced price to

any such purchaser. 30/

Similarly, the desire of a seller to grant a large purchaser a discount representing advertising expense assumed by the large purchaser is often thwarted by the difficulty of proving such a cost justification defense. As with the Borden-type problem of customer grouping, the seller may find that he has made incorrect groupings for purposes of allocating the advertising expense savings. Furthermore, he may find that the savings involved are not significant enough, in the Commission's view, to justify the discount granted. 31/

Finally, the Federal Trade Commission has determined that return on
dedicated to selling to one class of customers but

capital facilities

not to another may not be taken into account in justifying a price cut

to a purchaser in the latter class. In Thompson Products, Inc., 32/ the manufacturer sold auto parts both to wholesalers in the replacement parts industry and directly to the major auto manufacturers for use as original equipment. The respondent maintained a separate facility for storage and

30/ Alhambra Motor Parts, 68 F.T.C. 1039, 1080 (1965); National Parts Warehouse, 63 F.T.C. 1692 (1963), aff'd sub nom. General Auto Supplies, Inc. v. FTC, 346 F.2d 311 (7th Cir.), cert. denied, 382 U.S. 923 (1965). 31/ C. E. Niehoff & Co., 51 F.T.C. 1114 (1955), aff'd, 241 F.2d 37 (7th Cir. 1957), vacated and remanded per curiam, 355 U.S. 411 (1958). 32/ 55 F.T.C. 1252 (1959).

distribution of those parts which were sold to the after market industry; no such facilities were needed with respect to sales to the original equipment market. The Commission held that a reasonable rate of return on those capital facilities could not be taken into account to justify a discount on sales in the original equipment markets, noting that some of the parts sold in both lines of business were the same, even though they passed through different channels of distribution.

Even if the seller has cost savings cognizable under the Act, he must compute them with unrealistic accuracy. While the standards applied to accounting studies for the purpose of cost justification have become somewhat more reasonable, the Commission still insists upon studies based upon actual, historical cost rather than estimated future cost, and will allow but a small margin of error in the computations. In Beatrice Foods Co., 33/, the seller of dairy products performed an elaborate study to justify price cuts given to a large purchaser, the Kroger Company. A key part of the study involved computation of time savings involved in delivering large orders to large purchasers. The study was rejected, however, on the grounds that the estimates of time involved in selling were made too long after the actual period of discrimination, that employees reporting stop times were likely to exaggerate to their employer the amount of time spent on each call, and that conditions had changed substantially over the routes to which the time study applied.

Not only must a cost justification defense meet the high standards of methodology imposed by the FTC, but the result of such study must prove

33/ 76 F.T.C. 719 (1969), aff'd sub nom. Kroger Co. v. FTC, 438 F.2d 1372 (6th Cir.) cert. denied 404 U.S. 871 (1971).

that the cost savings associated with dealing with a particular customer account for nearly all of the discount granted the customer. The FTC purports to apply a de minimis rule, which holds that if the cost justified differential and the actual differential contested are so close that the difference is insignificant, the cost justification defense will have

been established. The precise limits of the rule have not been established, but it appears that if even a small portion of the actual price differential is non-cost-justified, the entire defense may fail. In American Metal Products Co. 34/ it was held that where a seller makes a bona-fide effort to demonstrate the cost justification for a price differential, the fact

that less than one percent of the total price cut is not cost justified does not operate to deny the defense to the seller. But in Thompson Products, Inc. 35/ the Commission held that where the seller's discounts to large auto manufacturers were between three and seven percent greater than what

a perfect cost justification study would show, the cost justification defense was inapplicable.

The difficulty of complying with the FTC's rigid cost justification requirements, plus the expense of collecting data through methods foreign to most accountants and businessmen, 36/ make the barriers to practical utilization of the defense almost insurmountable.

34/ 60 F.T.C. 1667 (1962) (initial decision).

35/ 55 F.T.C. 1252 (1959).

36/

See testimony of Paul H. La Rue, discussed in Section B. (1)(a), infra at page 42.

The other major defense to a charge of price discrimination, the

meeting competition defense, arises out of the proviso to Section 2(b) of the Clayton Act which provides: 37/

That nothing herein contained shall prevent a seller
rebutting the prima-facie case thus made by showing
that his lower price or the furnishing of services or
facilities to any purchaser or purchasers was made in
good faith to meet an equally low price of a competitor,
or the services or facilities furnished by a competitor.

Not until 1963 did the FTC rule that a price cut was justified under
Section 2(b). 38/ Thereafter, the Commission's interpretation of the
defense has tended to restrict its application. Indeed, it took an appeal
to the First Circuit, Forster Mfg. Co. v. FTC, 39/ to overturn the
Commission's rule that a seller seeking to rely on the meeting competi-
tion defense must have "proof positive" of the exact competitor and
price whose competition the respondent was seeking to meet. Even after
the First Circuit's ruling in Forster Mfg. Co., the seller may not
safely rely upon oral representations by purchasers that a competing
seller is offering a lower price. The Act requires that a seller be a
judge of his customer's credibility, and that the seller "investigate
or verify" the lower offer which it is seeking to meet. 40/

To avail himself of the meeting competition defense, a seller must consider whether the price that he is seeking to meet is "lawful" or

37 15 U.S.C. §13(b).

38/ SECTION OF ANTITRUST LAW AMERICAN BAR ASS'N., ANTITRUST LAW DEVELOPMENTS 144 (1975).

39 335 F.2d 47 (1st Cir. 1964), cert. denied, 380 U.S. 906 (1965). 40/ Viviano Macaroni Co. v. FTC, 411 F.2d 255 (3rd Cir. 1969).