UNITED STATES COURT OF APPEALS FOR THE SEVENTH CIRCUIT.
April 19, 1963
THE NUARC COMPANY
FEDERAL TRADE COMMISSION.
Before SCHNACKENBERG, KILEY and SWYGERT, Circuit Judges.
SWYGERT, Circuit Judge. We are asked to review a cease and desist order issued by the Federal Trade Commission, in a proceeding charging petitioner, The Nuarc Company, with having violated Section 2(d) of the Clayton Act, as amended by the Robinson-Patman Act.*fn1 15 U.S.C. § 13(d).
The question is: Does Section 2(d) prohibit a supplier of products and commodities from advertising in an advertising medium which is owned, controlled, and operated by one who also owns, controls and operates a business that is a customer of the supplier if the advertising medium prints advertising on equal terms for competitors of the supplier and also the customer, and neither indicia in the publication nor method of its distribution suggests to the public the nexus between the publication and the customer, and further if there is no evidence that fair, non-discriminatory advertising rates paid the publication by the supplier were intended to, or did, benefit the customer qua customer, or that the advertising benefited the customer more than it did the customers' competitors?
The basic facts are not in dispute. They may be summarized as follows.
Petitioner, The Nuarc Company, an Illinois corporation, is engaged in the manufacture and distribution of equipment used in printing, offset printing, and lithography. Its products include carbon arc lamps, light tables, dark room lights, and many similar items. Total sales for its 1959 fiscal year exceeded $1,200,000.Petitioner markets its products nationwide through approximately four hundred dealers on a non-exclusive basis.
Foster Type and Equipment Company, Inc., a Pennsylvania corporation, is located in Philadelphia. Since 1955, it has engaged in retailing printing equipment and supplies. It is a Nuarc dealer, reselling petitioner's products in the Philadelphia-New Jersey trade area. It purchased over $11,000 of such products from petitioner in 1958, and almost $9,000 in 1959. Nuarc's total sales in that area approximated $80,000 and $220,000 for those years respectively.
Foster Publishing Company, Inc., is also a Pennsylvania corporation located in Philadelphia. It was organized in April, 1958, and is engaged in publishing a monthly trade paper called "Printing Impressions." There is a national edition of this paper as well as a separate edition called "Printing Impressions-Delaware Valley Edition" intended only for local circulation in the Delaware Valley area. Nuarc advertised only in the national edition.In August, 1959, Foster Publishing Company changed its corporate name to "North American Publishing Company."*fn2
Until May 1, 1959, Irvin J. Borowsky was president and sole stockholder of Foster Type. His wife and brother were secretary and vice-president respectively. On or about May 1, 1959, Hans Weiss became vicepresident and secretary and Stephen Mucha became a vice-president. On August 1, 1959, Weiss was assigned 10% of the stock, Borowsky retaining 90%. Borowsky has always been president, treasurer, and sole stockholder of Foster Publishing. His wife is the secretary of that company.
In May, 1958, Borowsky circulated letters to suppliers, including Foster Type, soliciting advertising in "Printing Impressions."*fn3 The evidence shows that the recipients of these letters, including Nuarc, were disturbed by their contents and that Nuarc refused to place any advertising in "Printing Impressions" until the policies enunciated in the letters had been changed by Foster Publishing Company.
It is undisputed that since June, 1958, commencing with the first national edition of "Printing Impressions," and in each edition published monthly thereafter, "Printing Impressions" accepted advertisements from all competitors of Foster Type as well as all suppliers of competitors of Foster Type, charged standard advertising rates to Foster Type, and received full payment from Foster Type for all such advertisements. "Printing Impressions" did not identify itself anywhere in the publication as being in any way associated with Foster Type. In fact, the name of Foster Type appeared in "Printing Impressions" only in paid advertisements of Foster Type and never appeared in the ads placed by Nuarc. Foster Type and Equipment Company, Inc., and North-American Publishing Co., filed separate tax returns, maintained separate payrolls, books, and records, leased separate space, and loaned no funds or employees to each other.
In January, 1959, six months after "Printing Impressions" commenced publication and some seven months after the above mentioned letters were sent, Nuarc placed its first advertisement in the national edition of "Printing Impressions." From January, 1959, through February, 1960, Nuarc placed fourteen monthly advertisements of its products in "Printing Impressions" at standard advertising rates and paid North American for said advertisements a total of $3,290. In 1959, Nuarc advertised in seventeen different trade publications at a total cost of more than $32,000.
The Commission found that during the period January 1, 1959, to February 1, 1960, Nuarc did not offer or otherwise make available any advertising or promotional payments to any of its other customers in the same trade area who were reselling Nuarc Products in competition with Foster Type. The Commission found as a fact that Borowsky so dominated Foster Type and Foster Publishing that neither was able to formulate policy independently, and that in practical effect the entire operation constituted but a single Borowsky enterprise. It found that Nuarc was put on notice of this fact by Borowsky's letters of May, 1958, and that Nuarc could not in good faith have believed that these two corporations had attained separate and distinct identities prior to the commencement of Nuarc's advertising payments. The Commission further found that Nuarc's payments to Foster Publishing were payments to Borowsky's business as a whole, including the Foster Type segment thereof which purchased and resold Nuarc products.*fn4
The Commission's contentions may be summarized as follows: (1) Section 2(d) absolutely forbids payments "to" a customer for advertising services unless similar payments, on proportionally equal terms, are made available to other customers competing in the distribution of the supplier's products or commodities. Viewed in this manner, the Commission urges that the question of "benefit" to the customer is immaterial. (2) Realizing that in order to support their first contention it is necessary that a showing be made that the payment was made directly or indirectly to a customer, the Commission equates and merges the identity of Foster Type and Foster Publishing in the person of Borowsky, the controlling stockholder of both enterprises.*fn5
We believe that the finding of the Commission relating to the identity of Foster Type and Equipment Company and Foster Publishing Company (North American Publishing Co.) is not substantiated by the record as a whole and, if permitted to stand, would lead to a result which is neither supported by case law nor consistent with the Congressional intent underlying the enactment of Section 2(d).
In P. Lorillard Company v. F.T.C., 267 F.2d 439 (3rd Cir. 1959), the court, while analyzing a violation of Section 2(d) said:
"The purpose of the section here involved was to eliminate all discriminations under the guise of payments for advertising or promotional services, and Congress employed language that would cover any evasive methods. This is made clear by the statement of Congressman Utterback, chairman of the House conferees, in explaining Section 2(d) and (e), as follows:
'The existing evil at which this part of the bill is aimed is, of course, the grant of discriminations under the guise of payments for advertising and promotional services which, whether or not the services are actually rendered as agreed, results in an advantage to the customer so favored as compared with others who have to bear the cost of such services themselves. The prohibitions of the bill, however, are made intentionally broader than this one sphere, in order to prevent evasion in resort to others by which the same purpose might be accomplished, and it prohibits payment for such services or facilities, whether furnished "in connection with the processing, handling, sale, or offering for sale" of the products concerned.'" 80 Cong. Rec. 9418.
The record here demonstrates that Borowsky's initial plan, if carried out, without question would have violated Section 2(d). But this plan was frustrated immediately by potential advertisers, including Nuarc, who apparently recognized its inherent illegality. This initial illegal but aborted proposal did not forever cast Borowsky into the role of an incorrigible transgressor of the law. While subsequent arrangements similar to those with which we are presently concerned might be viewed with suspicion because of Borowsky's original illegal proposals, they are not necessarily illegal if the objective surrounding circumstances show them to be otherwise.*fn6 Nuarc did not begin advertising in a successful trade publication until the illegal plan had been abandoned in fact. There is no evidence in the record that supports a finding that the illegal proposals outlined in the letters mailed in May, 1958, were ever executed.*fn7
Nuarc paid standard advertising rates - the same rates paid by its competitors and the competitors of its customer, Foster Type. The disjunction between Foster Type and Foster Publishing was sufficient to require Foster Type to pay the standard rates for any advertising it placed in "Printing Impressions."
We believe that Section 2(d) requires a showing that some benefit accrued to, or was intended to accrue to, the customer. All analogous cases have found this benefit to a customer qua customer either directly, or indirectly as an attempt to circumvent the policy underlying Section 2(d). See Swanee Paper Corporation v. Federal Trade Commission, 291 F.2d 833 (2nd Cir. 1961), cert. den. 368 U.S. 987 (1962); P. Lorillard Co. v. F.T.C., 267 F.2d 439 (3rd Cir. 1959), cert. den. 361 U.S. 927 (1960); State Wholesale Grocers v. Great Atlantic and Pacific Tea Co., 258 F.2d 831 (7th Cir. 1958), cert. den. 358 U.S. 947 (1959).
The only benefit that could have possibly accrued to Foster Type was through the indirect route of profits from the printing business accruing to Borowsky - the owner of both enterprises. This, without more, cannot be the basis of a Section 2(d) violation. A contrary decision would operate as a compulsory divestiture for any owner of an advertising medium that also engaged in a separate enterprise selling products advertised in his publication. The evidence contradicts any inference that other indirect benefits were intended, or that Foster Type was permitted to shift some of its advertising cost to Nuarc. The nexus between Foster Type and "Printing Impressions" was not apparent to the buying public. Advertising in "Printing Impressions" benefited competitors of Foster Type that handled the advertised products just as much as it did Foster Type.
The record as a whole does not support a finding that Nuarc made a payment to or for the benefit of its customer, either directly or indirectly in the sense proscribed by Section 2(d). The Commission itself has recognized that a merchandising corporation may control an advertising medium through a subsidiary corporation; and that the advertising medium may sell advertising "to other persons, corporations or firms, including suppliers of the parent corporation . . . on television or radio programs which are not sponsored by the parent corporation and which do not advertise or promote the parent corporation." (Bracketed material supplied.) United Cigar-Whelan Stores Corp., 53 F.T.C. 102, 1956 CCH Trade Reg. 26,137 (Consent Order).
While we do not believe the Commission can render legal that which is illegal in fact, United Cigar demonstrates an inconsistency in the Commission's standards. The domination of a parent corporation over its whollyowned subsidiary is at least equal to that of Borowsky over his two corporations.
The order is set aside.