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SCOVILL MANUFACTURING COMPANY HAMILTON BEACH DIVISION v. SKAGGS PAY LESS DRUG STORES

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District Court of Appeal, First District, Division 2, California.

SCOVILL MANUFACTURING COMPANY, HAMILTON BEACH DIVISION, a corporation, Plaintiff and Respondent, v. SKAGGS PAY LESS DRUG STORES, a corporation, doing business under the fictitious firm name of Pay Less Drug Store, Defendant and Appellant.

SCOVILL MANUFACTURING COMPANY, HAMILTON BEACH DIVISION, a corporation, Plaintiff and Respondent, v. SKAGGS PAY LESS DRUG STORES, a corporation, doing business under the fictitious firm name of Pay Less Drug Store, Defendant and Appellant.

Civ. 15797, 16278.

Decided: October 26, 1954

Fitzgerald, Abbott & Beardsley, Oakland, for appellant. Kean & Ingram, Los Angeles, for respondent. Landels & Weigel, Stanley A. Weigel, San Francisco, Herman T. Van Mell, Chicago, Ill., of counsel, for Sunbeam Corporation as amicus curiae in support of position taken by respondent.

Two appeals are here consolidated. In the first (15797) defendant appeals from a temporary restraining order and a preliminary injunction granted in an action under section 16904, Bus. & Prof. Code,1 Fair Trade Act, enjoining defendant, a nonsigner of plaintiff's Fair Trade contract, from selling, offering for sale or advertising for sale certain of plaintiff's fair traded products, small electric appliances bearing plaintiff's trade-mark ‘Hamilton Beach,’ at prices less than those stipulated in plaintiff's Fair Trade Contract Schedule attached to the order. In this action it was assumed by the parties on appeal, including the amicus curiae acting in support of respondent, that the complaint and affidavits of plaintiff state acts of defendant actionable under section 16904, supra, and that defendant's affidavit sufficiently showed the relation of plaintiff's goods to interstate commerce to cause the Sherman Anti-Trust Act, 15 U.S.C.A §§ 1–7, 15 note, and the McGuire Act, 15 U.S.C.A. § 45(a)(2) to be applicable. The only matters in dispute on this appeal are the constitutionality or unconstitutionality of the California Fair Trade Act and the federal McGuire Act. The second appeal (16278) is from the final judgment granting a permanent injunction to the same effect as the preliminary one. The goods were found to be in, or to affect interstate commerce. Damages were denied. In this second appeal the briefs of the first appeal are adopted by the parties and the same grounds of unconstitutionality treated therein enlarged upon. Moreover, appellant presents as an additional ground for unconstitutionality of the California Fair Trade Act and the McGuire Act that they violate due process because of the alleged uncertainty of the expressions ‘fair and open’ and ‘free and open’ competition with commodities of the same general class produced by others, expressions used in those statutes in stating requirements for the validity of fair trade contracts. It is further contended that if these expressions are not fatally uncertain, the evidence establishes as a matter of law that as to plaintiff's fair traded goods this requirement is not fulfilled.

The California Fair Trade Act was enacted in 1931 and section 1 1/2, the nonsigner provision, now section 16904 Bus. and Prof.Code, supra, was added to it in 1933. It was the first legislation of its kind. Its constitutionality was upheld by our Supreme Court in 1936 in Max Factor & Co. v. Kunsman, 5 Cal.2d 446, 55 P.2d 177, and Pyroil Sales Co. Inc. v. Pep Boys, 5 Cal.2d 784, 55 P.2d 194, 1186. Both decisions were affirmed unanimously by the United States Supreme Court in Pep Boys v. Pyroil Sales Co., 299 U.S. 198, 57 S.Ct. 147, 81 L.Ed. 122, on the authority of Old Dearborn Dist. Co. v. Seagram Distillers Corp., 299 U.S. 183, 57 S.Ct. 139, 81 L.Ed. 109, which decision upheld the validity of the Illinois Fair Trade Act, S.H.A. ch. 121 1/2, § 188 et seq., substantially indentical with the California act. The decisions mentioned expressly upheld the nonsigner provisions. Fair Trade legislation has been enacted in 45 states. In only three of them, Florida, Georgia and Michigan has the act been held unconstitutional by the state Supreme Court. (In Nebraska and Arkansas there are very recent decisions of trial courts to the same effect, not yet reviewed on appeal.)

In 1951 the United States Supreme Court in the first Schwegmann case, Schwegmann Bros. v. Calvert Distillers Corp., 341 U.S. 384, 71 S.Ct. 745, 95 L.Ed. 1035, held that fair trade arrangements constituted price fixing which in interstate commerce was illegal under the Sherman Anti-Trust Act in the absence of a federal statutory exemption and that the Miller-Tydings Act, 15 U.S.C.A. § 1, provided such an exemption only for voluntary arrangements by ‘contracts or agreements' permitted by state law not for coercive imposition on nonsigners. The invalidity of the nonsigner provisions in interstate commerce was based on the Sherman Anti-Trust Act only, not on constitutional grounds. In 1952 Congress passed the McGuire Act which expressly extended the exemption from the federal Anti-Trust Acts to nonsigner provisions contained in state laws.2 This federal statute was considered by our Supreme Court in Cal-Dak Co. v. Sav-on Drugs, Inc., 1953, 40 Cal.2d 492, at page 496, 254 P.2d 497, and it was there said that it in effect nullified the Schwegmann case and that under it a preliminary injunction could properly be granted against a nonsigner in accordance with the Fair Trade Act regardless of whether or not interstate commerce was involved. In that case the constitutionality of the McGuire Act was not disputed. However in the second Schwegmann case, Schwegmann Bros. Giant Super Markets v. Eli Lilly & Co., 5 Cir., 1953, 205 F.2d 788, certiorari denied 346 U.S. 856, 74 S.Ct. 71, rehearing denied 346 U.S. 905, 74 S.Ct. 217, the constitutionality of the McGuire Act (and of the Louisiana Fair Trade Act, LSA–R.S. 51:391 et seq.), was squarely challenged and the circuit court upheld the validity of both acts under the Federal Constitution.

Appellant contends that the California Fair Trade Act and especially its nonsigner provision violates the due process clauses of the state and federal Constitutions and is not a reasonable exercise of the police power on the same grounds as those on which our Supreme Court declared invalid the price fixing provision of the Dry Cleaners Act of 1945, Bus. & Prof.Code, §§ 9560–9567, in State Board of Dry Cleaners v. Thrift-D-Lux Cleaners, 40 Cal.2d 436, 254 P.2d 29. The validity of the Fair Trade Act under the due process clauses and the police power is treated extensively in the Max Factor opinion, 5 Cal.2d at pages 450–463, 55 P.2d 178–185. It is there held that the Fair Trade principle is mainly a matter of economic policy the wisdom of which is for the legislature to decide, that under the police power the state legislature may restrict the right of free bargaining as well as promote it and that moreover the statute is not mainly a price fixing statute but is intended to protect the rights of manufacturer or producer in the trade-mark, brand or trade name, the reputation of which he has built up. 5 Cal.2d at pages 463–464, 55 P.2d 185. It is expressly held that the statute is neither arbitrary nor discriminatory, 5 Cal.2d at page 464, 55 P.2d at page 185. The Dry Cleaners case, supra, did not overrule the Max Factor case either expressly or by implication. It may be that the opinion of the majority in the Dry Cleaners case assumes a tighter control of the reasonableness of the Act involved and is more critical of price fixing legislation than Chief Justice Waste in the Max Factor opinion, but the Dry Cleaners opinion expressly mentions the Max Factor case and distinguishes it as not concerned with price regulations alone but with the protection of the validly acquired rights of others. 40 Cal.2d at page 447, 254 P.2d at page 35. The minority opinion bearing three signatures cites the Max Factor case as authority for upholding the Dry Cleaners Act. Under these circumstances the Dry Cleaners opinion reaffirms rather than overrules the Max Factor decision. The Cal-Dak case, supra, as recent as the Dry Cleaners case, can also be considered to reaffirm the validity of the Fair Trade legislation. Whatever question there may be of the reasonableness of the Fair Trade Act as an original proposition, the holding of the Max Factor case that the statute is a valid exercise of the police power and not arbitrary is binding on this court. Therefore it would serve no good purpose for this court to follow the parties in the analysis of more recent trends as to substantive due process in economic matters and in the evaluation of the character and advantages and disadvantages of fair trade legislation.

Appellant further urges that the Fair Trade Act, because according to appellant it delegates legislative power to fix prices to the producer, violates both the federal and state due process clauses and the provision of the state Constitution which vests the legislative power in the legislature only. Art. IV, Sec. 1. The question of unconstitutional delegation of legislative power is not expressly treated in the majority opinion in the Max Factor case. Nevertheless, the majority when upholding the constitutionality of the statute must have been aware of this argument as it is mentioned in the dissenting opinion of Justice Thompson, 5 Cal.2d at page 476, 55 P.2d 177. When the Max Factor opinion declares the nonsigner clause neither arbitrary nor discriminatory this includes a rejection of delegation unconstitutional under the due process clause. The Old Dearborn case, on the authority of which the United States Supreme Court affirmed the Max Factor decision, expressly rejects the contention that in the Fair Trade Act ‘there is an unlawful delegation of power to private persons to control the deposition of the property of others'. 299 U.S. at page 194, 57 S.Ct. at page 144. For rejection of the same contention in sate courts see Annotation 3 A.L.R.2d 188, 201 (and see 11 Am.Jur.Const.Law, § 221, p. 933).

The alleged delegation as a violation of the constitutional provisions which vest legislative power in the legislature only is expressly considered by at least two Supreme Courts of other states. Joseph Triner Corp. v. McNeil, 1936, 363 Ill. 559, 2 N.E.2d 929, 939, 104 A.L.R. 1435, 1451, states that it is contended that the nonsigner provision of the Illinois Fair Trade Act contravenes the section of the state Constitution ‘which provides that the legislative power shall be vested in the General Assembly’; it rejects the contention saying, among other things: ‘When the Fair Trade Act was passed by the General Assembly, it was a complete statute, in no manner dependent for approval or disapproval by any person or group of persons. The defendant's contention that the statute unlawfully delegates legislative power is without merit.’ Veco Products Co. v. Reed Drug Co., 1937, 225 Wis. 474, 274 N.W. 426, 429, 430 et seq., after extensive discussion, held that the Wisconsin Fair Trade Act did not involve legislative action by anyone except the legislature. ‘The acts of private parties in entering into such a contract and stipulating a price therein constituted but facts in contemplation of which [the Fair Trade Act] was enacted, and upon the existence of which the terms of [the nonsigner provision of said act] were to be applicable. Under these circumstances, those acts were no more legislative in character than are any other acts or conduct of private parties, which afford the basis and occasion for the application of a statute under the terms thereof. In neither instance are the consequences that the statute has become applicable, and conduct in violation thereof has become actionable, due to the exercise of any legislative power on the part of a private party.’ See also to this effect the very recent case General Electric Co. v. S. Klein-on-the-Square, Sup., 121 N.Y.S.2d 37. The language quoted above correctly states the law. We hold that the Fair Trade Act does not violate Art. IV, Sec. 1 of the California Constitution.

The Dry Cleaners case, supra, in which the Supreme Court questioned the delegation has no similarity whatever to our case. The Dry Cleaners Act delegated the power to establish minimum price schedules binding upon all persons transacting any of the business regulated within the area for which the minimum price schedules were established to an administrative Board made up of interested members of the industry, the majority of which could initiate regulatory action by the Board. No action of such governmental character is involved where the producer makes price regulatory agreements relating to his own products and their purchasers only.

With respect to the validity of our Fair Trade Act under the Federal Constitution, the federal Pep Boys and Old Dearborn cases, supra, are controlling. They have not been overruled. The second Schwegmann case, 205 F.2d at pages 791–792 discusses the relation of the Old Dearborn case and the first Schwegmann case and points out that in the latter case constitutionality was not involved, but that there is an implication of constitutionality of the state nonsigner clauses in the statement that they do not give immunity from the Sherman Anti-Trust Act “absent approval by Congress.” 205 F.2d at page 791 Note 4. The court states that the first Schwegmann case does not weaken the Old Dearborn case and that at any rate the Old Dearborn case remains binding until overruled by the Supreme Court. It holds expressly that there is in the Louisiana Fair Trade Law nothing violative of the Constitution of the United States.

Appellant develops against the McGuire Act similar grounds of unconstitutionality as stated above with respect to our Fair Trade Act and moreover that it constitutes an unlawful delegation of legislative power over interstate commerce from Congress to the state legislatures. Appellant's contentions are rejected in the second Schwegmann case, which concludes that there is in the act nothing violative of the Constitution of the United States. Among other things, it is said, 205 F.2d at page 793: ‘As to interstate commerce, it is now settled that the power of Congress is so plenary that it may exercise that power by permitting the states to regulate phases of interstate commerce.’ As stated before, the United States Supreme Court twice denied review. It may be conceded that the denial of certiorari does not give the second Schwegmann case the same authority as if it were a decision by the United States Supreme Court itself, but as there is no contrary federal authority we accept it as stating the federal law as to the constitutionality of the McGuire Act, as to which subject the federal law is binding on us.

With respect to appellant's further contention that the term ‘fair and open competition’ used in sec. 16903, Bus. & Prof. Code, is fatally indefinite it is conceded, that the same contention as to the Illinois Fair Trade Act was expressly rejected in the Old Dearborn case, 299 U.S. at page 196, 57 S.Ct. 139. Evidently in so far as the Federal Constitution is concerned that decision is binding on this court. We also consider it binding as to the similar expression ‘free and open competition’ in the exceptions to the Sherman Anti-Trust Act contained in 15 U.S.C.A. § 1 and 15 U.S.C.A. § 45(a)(2). Although with respect to the sufficient definiteness of the expression ‘fair and open competition’ in the California Fair Trade Act under our state Constitution—a question not expressly considered in the Max Factor case—the authority of the Old Dearborn case may not be binding, we consider it as highly persuasive, the more so as appellant does not cite any case, from any federal or state court, which holds such expression as used in fair trade legislation fatally uncertain, although in all such legislation such expressions are used.

Appellant bases his contention on cases like Cline v. Frink Dairy Co., 274 U.S. 445, 453–455, 47 S.Ct. 681, 71 L.Ed. 1146 and People v. Building Maintenance etc. Association, 41 Cal.2d 719, 723–726, 264 P.2d 31, 35 which hold invalid for uncertainty exceptions to the anti-trust legislation for agreements or combinations the object of which is “to conduct operations at a reasonable profit or to market at a reasonable profit those products which can not otherwise be so marketed.” As is stated very clearly in the Building Maintenance case this exception was condemned because its applicability wholly depended on the reasonable or unreasonable character of the profits to be obtained, and it was impossible to decide when profits should be considered reasonable and for what economic necessities the exception was intended. The clear purpose of the exception before us is to permit vertical price fixing agreements with respect to branded goods of one producer or distributor if there remains of the principle of free competitive enterprise protected by the anti-trust legislation the competition with similar goods of other producers. If we apply the rule “that the objective sought to be achieved by a statute as well as the evil to be prevented is of prime consideration in its interpretation”, Wotton v. Bush, 41 Cal.2d 460, 467, 261 P.2d 256, 260, the clause in question must require that there are in the market goods produced by others which are so similar to the fair traded goods that they compete with them and that the competition of the producers or distributors of those goods is not hampered by prohibited horizontal restrains. Whether that is the case as to certain fair traded goods the parties engaged in the production or distribution of these or similar goods can decide without encountering difficulties like those presented by the reasonableness of profits. It does not present more or different problems than the question what restraints are unlawful under the anti-trust legislation. This situation is not analogous to that in the Cline and Building Maintenance cases supra.

Appellant contends that the meaning of ‘fair and open competition’ is uncertain because it is open to the construction that there is no such competition when the fair trade results in unreasonable high resale prices or in general when prices are unreasonably high, or when price leadership is prevalent or with respect to a product whose good will is so strong that demand for it is relatively inflexible or with respect to a product in short supply. The fact that a statute is susceptible of different interpretations will not render it invalid for uncertainty, County of Tulare v. City of Dinuba, 188 Cal. 664, 677–678, 206 P. 983, but moreover, the language of the statute cannot bear such construction. It would be acceptable if ‘fair and open competition’ was synonymous with ‘competition effective to lower prices', but that is not so. Fair and open relates to the manner of the competition as free from unreasonable restraint, not to its result. Our text does not contain a requirement of a reasonable price level, possibly as fatally uncertain as ‘reasonable profit’ in the Building Maintenance case. If conceivably an abnormally high mark up or price level might justify an inference of forbidden horizontal restraint such would be a matter of proof only, which does not affect the certainty of the terms used. The same applied to prevalent price leadership. Uniformity in price movement may, but need not, prove such horizontal restraints. The unassailable strength of a good will or the short supply of the fair traded goods are circumstances which affect the price lowering effect of the competition not its fair and open character.

Appellant does not cite any cases in which it was held that the absence of any of the above circumstances was required for fair and open competition, except that with respect to short supply he quotes from the concurring opinion of one justice in Liquor Store v. Continental Distilling Corp., Fla., 40 So.2d 371. (The majority opinion holds the Florida Fair Trade Act, F.S.A. § 541.01 et seq., unconstitutional on other grounds stating that the decision is contrary to the weight of authority.) We do not think that authority persuasive. A contrary interpretation of our language is given in General Electric Co. v. S. Klein-on-the-Square supra, 121 N.Y.S.2d 37, 50. We reject the proposed invalidity on the ground of indefiniteness.

Appellant's final contention that the evidence proves as a matter of law, contrary to the findings of the trial court, that plaintiff's commodities are not in the required ‘fair and open’ or ‘free and open’ competition is without merit. It is not based on the absence of similar products of others from the market. A great number of such products and producers are listed by the parties. It is based on the following allegedly proved circumstances:

(a) The ‘relative uniformity’ and ‘high level’ of mark ups of the fair traded commodities of the general class involved and plaintiff's alleged ‘exorbitant profits'. Those are evidentiary matters of most uncertain interpretation as to which it is solely for the trier of facts to decide whether an inference that they are inconsistent with a free and open character of the competition should be made. We doubt whether data as to the percentage of mark ups without any data as to the costs and overhead that have to be paid from them, or percentages of profit on separate articles, when it is conceded that there is no measure for reasonableness of profits, can support such inference, but at any rate the rule is too well settled to require citation of authority that when the facts are open to different inferences the inference drawn by the trier of facts is binding on appeal.

(b) Demand exceeded supply during most of the time in question. As we stated before we do not consider such circumstance, even if it were proved without conflict, as inconsistent with fair and open competition in the meaning of the statute. There is moreover substantial evidence to the contrary, to wit, that the short supply of several of the appliances similar to those of plaintiff ended before 1952, whereas only the period after the McGuire Act of July 14, 1952 is relevant.

(c) Plaintiff and other fair traders pursued a ‘follow the leader’ practice. The evidence as to this point was limited to the following: The defendant's witness Tucker testified that when the price of one brand of the fair traded goods involved was raised ‘within a short time they all seem to follow the same price ranges', but on cross-examination he testified that he did not know of any price increase of others connected with stated price increases of plaintiff. Another of defendant's witnesses, Wallace, testified that when there had been a price increase in one line the other lines usually followed in a short period of time. He could only give one example in which one firm raised the price of a mixer, and one other firm thereafter also raised the price of its mixer. Certainly in a period of generally rising prices as here involved such evidence cannot be said to prove as a matter of law the existence of horizontal restrictions inconsistent with a fair and open or free and open competition. Its evaluation was for the trial court.

The burden of proof, discussed by the parties, does not seem decisive, as there is no contention of error in that respect and evaluation of the evidence by the trial court is binding in this case whatever the burden of proof. However, it may be said in passing, that after the plaintiff has made a prima facie case by showing that there were in the market competing goods of others the defendant should go forward to show the existence of undue horizontal restraints hampering said competition, there being a presumption that private transactions, here with regard to horizontal competition, have been fair and regular, Code Civ.Proc. § 1963, subd. 19. The plaintiff has then the burden to rebut such evidence.

We conclude that the finding of the trial court that defendant's allegations as to an absence of free and open or fair and open competition and as to horizontal price fixing by plaintiff were not true must stand.

As the preliminary injunction is considered merged in the permanent injunction, Sherward v. Citizens' Water Co., 90 Cal. 635, 638, 27 P. 439, the appeal with respect to it will have to be dismissed, particularly since the permanent injunction will be affirmed. Southern California Railway Co. v. Workman, 146 Cal. 80, 86, 79 P. 586, 82 P. 79.

The first appeal is dismissed, the final judgment is affirmed.

FOOTNOTES

1.  Section 16904, Bus. & Prof.Code reads: ‘Wilfully and knowingly advertising, offering for sale or selling any commodity at less than the price stipulated in any contract entered into pursuant to this chapter, whether the person so advertising, offering for sale or selling is or is not a party to such contract, is unfair competition and is actionable at the suit of any person damaged thereby.’The chapter mentioned is entitled ‘Fair Trade Contracts'.

2.  The revelant provision of said act reads: ‘(3) Nothing contained in this section or in any of the Antitrust Acts shall render unlawful the exercise or the enforcement of any right or right of action created by any statute, law, or public policy now or hereafter in effect in any State, Territory, or the District of Columbia, which in substance provides that willfully and knowingly advertising, offering for sale, or selling any commodity at less than the price or prices prescribed in such contracts or agreements whether the person so advertising, offering for sale, or selling is or is not a party to such a contract or agreement, is unfair competition and is actionable at the suit of any person damaged thereby.’ Tit. 15, U.S.C.A. § 45.

NOURSE, Presiding Justice.

DOOLING and KAUFMAN, JJ., concur.

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