Federal Trade Commission v. Texaco Inc.
Opinion of the Court
delivered the opinion of the Court.
The question presented by this case is whether the FTC was warranted in finding that it was an unfair method of competition in violation of § 5 of the Federal Trade Commission Act, 38 Stat. 719, as amended, 15 U. S. C. § 45, for respondent Texaco to undertake to induce its service station dealers to purchase Goodrich tires, batteries, and accessories (hereafter referred to as TBA) in return for a commission paid by Goodrich to Texaco. In three related proceedings instituted in 1961, the Commission challenged the sales-commission method of distributing TBA and in each case named as a respondent a major oil company and a major tire manufacturer. After extensive hearings, the Commission concluded that each of the arrangements constituted an unfair method of competition and ordered each tire company and each oil company to refrain from entering into any such commission arrangements. In one of these cases, Atlantic Refining Co. v. FTC, 381 U. S. 357 (1965), this Court affirmed the decision of the Court of Appeals for the Seventh Circuit sustaining the Commission's order against Atlantic Refining Company and the Goodyear Tire & Rubber Company. In a second case, Shell Oil Co. v. FTC, 360 F. 2d 470, cert. denied, 385 U. S. 1002, the Court of Appeals for the Fifth Circuit, following this Court’s decision in Atlantic, sustained the Commission’s order against the Shell Oil Company and the Firestone Tire & Rubber
Congress enacted § 5 of the Federal Trade Commission Act to combat in their incipiency trade practices that exhibit a strong potential for stifling competition. In large measure the task of defining “unfair methods of competition” was left to the Commission. The legislative history shows that Congress concluded that the best check on unfair competition would be “an administrative
The Commission and the respondents agree that the Texaco-Goodrich arrangement for marketing TBA will fall under the rationale of our Atlantic decision if the Commission was correct in its three ultimate conclusions (1) that Texaco has dominant economic power over its dealers; (2) that Texaco exercises that power over its dealers in fulfilling its agreement to promote and sponsor Goodrich products; and (3) that anticompetitive effects result from the exercise of that power.
That Texaco holds dominant economic power over its dealers is clearly shown by the record in this case. In fact, respondents do not contest the conclusion of the Court of Appeals below and the Court of Appeals for the Fifth Circuit in Shell that such power is “inherent in the structure and economics of the petroleum distribution system.” 127 U. S. App. D. C. 349, 353, 383 F. 2d 942, 946; 360 F. 2d 470, 481 (C. A. 5th Cir.). Nearly 40% of the Texaco dealers lease their stations from Texaco.
It is against the background of this dominant economic power over the dealers that the sales-commission arrangement must be viewed. The Texaco-Goodrich agreement provides that Goodrich will pay Texaco a commission of 10% on all purchases by Texaco retail service station dealers of Goodrich TBA. In return, Texaco agrees to “promote the sale of Goodrich products” to Texaco dealers. During the five-year period studied by the Commission (1952-1956) $245,000,000 of the Goodrich and Firestone TBA sponsored by Texaco was purchased by Texaco dealers, for which Texaco received almost $22,000,000 in retail and wholesale commissions. Evidence before the Commission showed that Texaco carried out its agreement to promote Goodrich products through constantly reminding its dealers of Texaco’s desire that they stock and sell the sponsored Goodrich TBA. Texaco emphasizes the importance of TBA and the recommended brands as early as its initial interview
Respondents urge that the facts of this case are fundamentally different from those involved in Atlantic because of the presence there, and the absence here, of “overt coercive practices” designed to force the dealers to purchase the sponsored brand of TBA. We agree, as the Government concedes, that the evidence in this case regarding coercive practices is considerably less substantial than the evidence presented in Atlantic. The Atlantic record contained direct evidence of dealers threatened with cancellation of their leases, the setting of dealer quotas for purchase of certain amounts of sponsored TBA, the requirement that dealers purchase TBA from single assigned supply points, refusals by Atlantic to honor credit card charges for nonsponsored TBA, and policing of Atlantic dealers by “phantom inspectors.” While the evidence in the present case fails to establish the kind of overt coercive acts shown in Atlantic, we think it clear nonetheless that Texaco’s dominant eco
We are similarly convinced that the Commission was correct in determining that this arrangement has an adverse effect on competition in the marketing of TBA. Service stations play an increasingly important role in the marketing of tires, batteries, and other automotive accessories. With five major companies supplying virtually all of the tires that come with new cars, only in the replacement market can the smaller companies hope to compete. Ideally, each service station dealer would stock the brands of TBA that in his judgment were most favored by customers for price and quality. To the extent that dealers are induced to select the sponsored brand in order to maintain the good favor of the oil
The Commission was justified in concluding that more than an insubstantial amount of commerce was involved.
For the reasons stated above, we reverse the judgment below and remand to the Court of Appeals for enforcement of the Commission’s order with the exception of paragraphs five and six of the order against Texaco, the setting aside of which by the Court of Appeals the Government does not contest.
Reversed and remanded.
The sales-commission arrangement between Texaco and the Firestone Tire & Rubber Company was also the subject of Commission action. Firestone is not a respondent in this action, however, since it is already subject to a final order of the Commission prohibiting its use of a sales-commission plan with any oil company. See Shell Oil Co. v. FTC, 360 F. 2d 470, 474 (C. A. 5th Cir.), cert. denied, 385 U. S. 1002.
The Commission’s conclusion that under a sales-commission plan, a dealer would not make his choice solely on the basis of competitive merit was bolstered by the testimony of 31 sellers of competing, nonsponsored TBA that they were unable to sell to particular Texaco stations because of the dealers’ concern that Texaco would disapprove of their purchase of nonsponsored products.
Concurring Opinion
concurring.
I join the Court’s opinion, with the following statement. To the extent that my action in joining today’s opinion is inconsistent with my action in joining my Brother Stewart’s dissent in Atlantic Refining Co. v. FTC, 381 U. S. 357, 377 (1965), candor compels me to say that further reflection has convinced me that the portions of the Commission’s order which the Court today sustains were within the authority granted to the Commission under § 5 of the Federal Trade Commission Act.
Dissenting Opinion
dissenting.
We are told today that “[t]he sales-commission system for marketing TBA is inherently coercive.” If that is so, then the Court went to a good deal of unnecessary trouble in Atlantic Refining Co. v. FTC, 381 U. S. 357, 368, to establish that Atlantic “not only exerted the persuasion that is a natural incident of its economic power, but coupled with it direct and overt threats of reprisal . . . .”
For the reasons set out at some length in my separate opinion in Atlantic, supra, at 377, I cannot agree to any such per se rule. Accordingly, I would affirm the judgment of the Court of Appeals.
Reference
- Full Case Name
- FEDERAL TRADE COMMISSION v. TEXACO INC. Et Al.
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- 60 cases
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- Published