GENERAL ELECTRIC COMPANY v. Affiliated Government Employees Distributing Co., Inc., et al., Real Party in Interest.

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District Court of Appeal, First District, Division 1, California.

GENERAL ELECTRIC COMPANY, Petitioner, v. The SUPERIOR COURT of the State of California, in and for the COUNTY OF ALAMEDA, Respondent, Affiliated Government Employees Distributing Co., Inc., et al., Real Party in Interest.

No. 16622.

Decided: April 22, 1955

Cooley, Crowley, Gaither, Godward, Castro & Huddleson, San Francisco, for petitioner. Butterworth & Smith, Los Angeles, for Real Parties in Interest.

Petitioner seeks a writ of prohibition (or other appropriate writ) to prevent enforcement of the superior court's order requiring petitioner to produce certain of its books and records for the inspection of the real party in interest, defendant Affiliated Government Employees Distributing Co., Inc.

Question Presented.

The propriety of the inspection order depends upon whether in an action by a manufacturer against a retailer to enjoin the sale of the former's products below the fair trade prices established by the manufacturer, the question of the latter's profits is material.

Record.

Petitioner is plaintiff in an action for injunction under the California Fair Trade Act, Business and Professions Code, sections 16900–16905, brought against defendant to restrain defendant from selling petitioner's fair traded electrical appliances below the fair trade prices established by petitioner pursuant to said act. Defendant answered, setting up a number of alleged defenses to the action. In this proceeding we are concerned only with the fifth affirmative defense, as it is conceded that the order, the enforcement of which is here sought to be prevented, is based upon that alleged defense.1 In that defense it is alleged, upon information and belief, that plaintiff ‘has arbitrarily and capriciously fixed the Fair Trade prices of its commodities far in excess of the cost of manufacturing and distributing the commodities and has unlawfully and inequitably used the Fair Trade Act to provide an arbitrary and unreasonable margin of profit on the sale to the public of its Fair Traded articles * * * [B]y virtue of the aforesaid conduct, plaintiff has used the Fair Trade Act in a manner detrimental and injurious to the public good and welfare, and has engaged in inequitable conduct which precludes it from seeking relief from a court of equity.’

It will be observed that the entire defense contains no statement of facts, no estimate of profits, and no statement of the difference between the costs of manufacture and the fair trade price established.2 The allegations of the entire defense are bald conclusions on information and belief. Upon that defense and the affidavit of defendant's attorney in which he stated that a the trial defendant would attempt to prove that petitioner had arbitrarily and unreasonably fixed the fair trade prices of its commodities far in excess of the cost of manufacturing and distribution, and therefore it was necessary for defendant to inspect petitioner's books and records insofar as they reveal said cost of manufacture and distribution, defendant moved under section 1000, Code of Civil Procedure, for an order requiring defendant to produce its cost accounting records necessary to compute the unit cost of manufacturing each of its products as to which it had listed Fair Trade Minimum Retail Prices, including certain specified records. The superior court made an ‘Order Allowing Defendant to Inspect Certain Documents and Records of Plaintiff’ which requires plaintiff to produce for defendant's inspection the requested books and records dealing with the cost of certain specified electrical products.

Is the Manufacturer's Profit Material?

Petitioner attacks the order on many grounds. However, as our decision of the above mentioned question is determinative of this proceeding, we deem it unnecessary to discuss the other grounds. If the manufacturer's profits cannot be an issue in a proceeding brought by it to enforce the prices fixed by it under the Fair Trade Act, obviously the court had no power to issue the order requiring it to produce its records to show its profits.

There is nothing in the California Fair Trade Act which in any wise limits the price the producer under the act may fix for his product, nor is his profit limited in any way.3

A case directly in point is Sunbeam Corp. v. Central Housekeeping Mart, 1954, 2 Ill.App.2d 543, 120 N.E.2d 362, 369. There in an action brought to restrain a retailer from selling the plaintiff's products under the fair trade prices fixed by plaintiff under the Illinois Fair Trade Act, S.H.A. ch. 121 1/2, § 188 et seq., the defendant, as did defendant here, pleaded the defense of ‘arbitrarily and unreasonably high prices', alleging that the plaintiff's margin of profit between manufacturer's cost and the retail price was “more than 200%.” In holding that the Illinois Fair Trade Act did not provide for an inquiry into prices, the court stated, 120 N.E.2d at page 369: ‘Here we have a general defensive averment relied upon as a base from which to force an inquiry into a large national manufacturing concern, its cost of doing business, its cost accounting records, and supporting data. We think it unreasonable to make an inquiry of this scope upon such a general charge.

‘We need not decide whether there is no case in which equity could not inquire in the public interest whether an excessive margin of profit had resulted in an extortionate retail price to the consumer. It is enough to say that this charge does not here make an issue which would justify such an inquiry. The charge is not supported by any allegations of fact from which the chancellor could determine what even the net profit was.’

Defendant contends in effect that it alleged that petitioner in asking the aid of a court of equity to restrain the defendant from charging less than the fair trade price, was coming into court with ‘unclean hands' because of the alleged unreasonably high prices fixed and that under general principles of equity such an allegation, if proved, would constitute a defense to the action. There are two answers to this: First, as stated in effect in Sunbeam Corp. v. Central Housekeeping Mart, supra, 2 Ill.App.2d 543, 120 N.E.2d 362,—upon such a general charge as appears in the answer, unsupported as it is by any allegation of fact from which the court could determine what the claimed net profits were, it would be unreasonable for the court to assume that plaintiff's profit was arbitrary or unreasonable or that plaintiff's hands were unclean in this action. Secondly, where the Legislature has refused to make the amount of the producer's profit an element in the fixing of fair trade prices, the courts should not attempt to do so by the device of applying the unclean hands doctrine to the question of profits.

No case is cited holding that an investigation into the producer's profits may be made in an action under the Fair Trade Acts. The defendant refers to Julius Schmid v. McKay, dba Public Drug Co. (Okla.Dist.Ct.1949; 1948–1949 Trade Cases, paragraph 62,509), which denied an injunction to restrain a retailer from selling below the fair trade price, although the court found that the price fixed provided for ‘an arbitrary and unreasonable margin of profit to the retail dealer.’ (Emphasis added.) That question is not before us. On appeal to the Oklahoma Supreme Court, 203 Okl. 502, 223 P.2d 529, the defendant filed no brief and the Supreme Court ordered the injunction to issue without consideration of the merits of the case, but solely because of the defendant's failure to file a brief. Obviously, the decision of that Supreme Court in no wise supports defendant's position here.

Defendant also refers to the statement in Sunbeam Corp. v. Marcus, D.C., 1952, 105 F.Supp. 39, giving as one of the matters to be established by a manufacturer to obtain relief under the New York Fair Trade Laws, 105 F.Supp. at page 41: ‘(4) Under equitable principles the plaintiff has not indulged in practices offensive to the conscience of the Court—that he comes into equity with clean hands.’ This statement, however, is not sufficient to support defendant's contentions here. It refers to such matters as are required by all Fair Trade Acts including ours—that the particular commodity be in ‘fair and open competition with commodities of the same general class produced by others * * *’, Bus. and Prof.Code, § 16902, and that the manufacturer treat all retailers alike. In addition to the above requirement numbered (4), the Marcus case lists the three other requirements of such an action, 105 F.Supp. at page 41: ‘[1] The proof is convincing that the enforcement has been prompt, vigorous and impartial and that all reasonable steps have been taken to secure compliance. [2] The manufacturer is entitled to relief under the New York Fair Trade Law when he establishes: (1) That there is a genuine fair trade price structure; (2) That there is reasonable and diligent enforcement—that plaintiff has not by act or conduct waived the violation or abandoned its policy through all effective means; (3) That the relief sought against the violator is for the sole purpose of enforcement and not for any ulterior purpose; * * *.’ It will be noted that nowhere is reasonableness of price made a requirement of right to relief.

It should be pointed out that to require a manufacturer to produce his costs of doing business (thereby opening to his competitors one of the closest guarded secrets of a manufacturer) upon a general charge that his profits are arbitrary and unreasonable would completely emasculate the Fair Trade Act. In every case involving that act brought by a manufacturer he would be forced by such a procedure to choose between disclosing an important trade secret and enforcing the prices fixed under an act which the state has declared is in the public interest.

Let the peremptory writ of prohibition issue.

FOOTNOTES

1.  While section 1000, Code of Civil Procedure, the discovery section, vests a discretion in the trial court, Milton Kauffman, Inc. v. Superior Court, 94 Cal.App.2d 8, 16, 210 P.2d 88, it is obvious that if the evidence for which discovery is sought could not be admitted at the trial, the trial court would have no power to order its production.

2.  It should be noted, too, that the fair trade price is not the price the manufacturer receives for its product, but the price the retailer receives. In that price the profit of the distributor and the retailer is included.

3.  See Max Factor & Co. v. Kunsman, 5 Cal.2d 446, 55 P.2d 177, for a discussion of the act, its validity, its purposes, including the statement that the act is not solely a price fixing statute but is also to protect the good will in connection with the products themselves, and the property and contract rights of the producer.

BRAY, Justice.

PETERS, P. J., and PATTERSON, J. pro tem.

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