On Petition to Review an Order of the Federal Trade Commission.
Cummings, Stevens and Sprecher, Circuit Judges.
The Sherman Act condemns vertical, as well as horizontal, agreements in restraint of trade. However, by virtue of § 2 of the McGuire Act, two types of vertical agreements -- those requiring a vendee to resell at prices fixed by his vendor, and those requiring the vendee to require his customers to resell only at fixed prices -- are exempt from the antitrust laws if such agreements are lawful under applicable state law.*fn1 The question presented by this case is whether the state law which governs the legality of the latter type of agreement between a vendor and a vendee is that of the state where the vendee is located or that of the state or states where the vendee's customers are located. We have no doubt that the vendee's location is determinative for the latter, as well as the former, type of agreement.
Corning Glass Works manufactures and distributes various trademarked products used in food preparation and service.*fn2 Corning sells to wholesalers located in 45 states and the District of Columbia; those wholesalers, in turn, sell to retailers who resell to consumers in all 50 states and the District.
Corning's form contract with its distributors contains a fair trade agreement obligating the wholesalers (a) to sell only at prices set by Corning, and (b) not to sell to any reseller unless such reseller has agreed with Corning to maintain Corning's fair trade prices.*fn3 These agreements are only effective "as to each state and as to such sales where it is lawful so to agree." Since the legal effect of fair trade agreements varies from state to state, the Corning form contract has a varying impact on its wholesalers.
There are currently 14 states and Puerto Rico and the District of Columbia in which fair trade agreements are illegal as a matter of state, as well as federal, law; they are described as "free trade" states.*fn4 The remaining 36 "fair trade" states comprise two principal types. In each of the "non-signer" states the legislature has authorized judicial enforcement of fair trade prices even against sellers who have not signed a fair trade contract and has permitted the use of customer restriction clauses; there are currently 14 such "non-signer" states.*fn5 In the "signer-only" states -- of which there are currently 22 -- either the courts have refused, usually on state constitutional grounds,*fn6 to enforce the statutory remedy against non-signers, or, in some instances, no remedy against non-signers has been provided by the state legislature. In either event, in such a state a fair trade agreement is lawful although it is enforceable against the "signer only." With the exception of Maine, each of these "signer-only" states also authorizes the use of customer restriction clauses.*fn7
The problem presented by this case has assumed significance as the number of "free trade" and "signeronly" states has increased. For it principally involves the validity of Corning's customer restriction clause as applied to wholesalers in free trade states who sell to retailers in signer-only states. Does § 2 of the McGuire Act legalize Corning's attempt to require those wholesalers to refuse to sell to retailers in fair trade states who have not agreed to maintain Corning's fair trade prices?
In Count II of its five-count complaint against Corning,*fn8 the Commission took the position that this requirement is a non-exempt restraint of trade forbidden by § 1 of the Sherman Act, and therefore unlawful under § 5(a)(1) of the Federal Trade Commission Act. Based on a stipulated record, the Administrative Law Judge dismissed all counts of the complaint, but on appeal the Commission unanimously reversed as to Count II and issued its cease and desist order.*fn9 The case is here on Corning's petition for review, claiming that the Commission misconstrued the McGuire Act and that, in all events, the Commission's order was "unnecessarily punitive." We find no merit in Corning's position.
The decision of this case depends upon the proper construction of the words "such resale" as used in the socalled "when lawful" clause in paragraph (2) of § 2 of the McGuire Act. Before quoting the relevant language, it is appropriate to note that the "when lawful" clause was originally enacted as part of the antitrust exemption contained in the Miller-Tydings Act*fn10 in 1937 and was retained verbatim when Congress broadened the vertical price-fixing exemption in 1952.
The principal ways in which the McGuire Act broadened the exemption were (1) by including the non-signer aspects of state fair trade legislation;*fn11 (2) by making the exemption applicable to stipulated, as well as minimum prices;*fn12 and (3) by adding an exemption for agreements requiring a vendee to limit his resales to persons who agree to maintain fair trade prices.*fn13 This last provision -- the so-called "vendee clause" -- is relevant to our problem.
To facilitate our explanation of our understanding of the second paragraph of § 2 of the McGuire Act, we italicize the portions of the paragraph which were not a part of the Miller-Tydings Act, we underline the "vendee clause" and the "when lawful" clause, and we print in bold face the word "resale" which appears once ...