In the Matter of
American Cyanamid Company

Docket No. C-3739

I respectfully dissent from the Commission's decision to issue a consent order against American Cyanamid Company ("AmCy"), a producer of agricultural chemicals. The complaint claims that certain aspects of AmCy's compensation arrangement with its dealers constitute per se illegal resale price maintenance ("RPM"), in violation of Section 5 of the Federal Trade Commission Act, 15 U.S.C.  45. I do not agree that AmCy's dealer rebate policies constitute the functional and legal equivalent of RPM agreements. Consequently, I conclude that the decision to challenge AmCy's distribution policies would expand substantially the range of activities condemned by the Commission as illegal per se. This policy is ill-advised and runs contrary to twenty years of case law in which the scope of vertical arrangements subject to per se condemnation has been steadily narrowed. This case is an especially poor vehicle for expanding the scope of the per se rule, for it would be difficult to find conduct that better exemplifies the economic deficiencies of that standard.

Condemning certain conduct as illegal per se normally is rationalized by the belief that the conduct in question is so frequently pernicious that one cannot justify the cost of attempting to identify the few instances in which it is not. Whether RPM warrants characterization as per se illegal conduct has increasingly been called into question by antitrust scholars;(1) indeed, it would be difficult to find an antitrust economist who would defend this enforcement standard.(2) RPM remains illegal per se, however, and, consistent with this standard, I have voted to support enforcement actions against RPM agreements when I have been convinced that (1) the conduct in question plainly constituted an illegal agreement on price (as construed by contemporary case law), and (2) the relief was appropriately tailored to deter future illegal conduct.

Notwithstanding the continued per se treatment of RPM -- and my willingness to support RPM cases in the limited circumstances identified above -- I cannot ignore the persistent accumulation of economic evidence demonstrating the potentially procompetitive (or, at worst, economically neutral) nature of RPM agreements. At minimum, this evidence counsels against expanding the boundaries of per se illegal conduct to envelop activities that (at best) only weakly satisfy the legal criteria for finding the existence of an "agreement" and, more important, appear to be procompetitive in both purpose and effect. Under these evaluative criteria, the present matter is a poor candidate for an enforcement action.

The Supreme Court set forth the legal standard for finding an illegal RPM "agreement" in Monsanto Co. v. Spray-Rite Service Corporation:(3)

The correct standard is that there must be evidence that tends to exclude the possibility of independent action by the manufacturer and distributor. That is, there must be direct or circumstantial evidence that reasonably tends to prove that the manufacturer and others had a conscious commitment to a common scheme designed to achieve an unlawful objective.

Monsanto, 465 U.S. at 768. The Court stated further that the "concept of `a meeting of the minds' or `a common scheme' . . . includes more than a showing that the distributor conformed to the suggested price. It means as well that evidence must be presented both that the distributor communicated its acquiescence or agreement, and that this was sought by the manufacturer." Id. at 764 n. 9 (emphasis added).

While it is true that AmCy entered into contracts with its distributors providing for compensation for sales at or above the wholesale purchase price, it is clear that there was no "meeting of the minds" or "common scheme," and thus no illegal agreement, to maintain resale prices. At no time did AmCy tell its distributors that they must sell agricultural chemicals at specific prices or risk losing supplies; AmCy did not attempt to coerce or intimidate its distributors into selling at specific price levels; distributors did not communicate an agreement to sell at specific prices; no distributors were ever terminated for selling at prices below the wholesale price; and distributors remained free (as explicitly provided by contract) to resell products at any price of their choosing. That distributors sometimes sold at prices below the wholesale level without loss of supply or termination is testament to the unilateral nature of the distributors' pricing decisions and to the absence of any agreement to maintain resale prices.(4) In this instance, all of the hallmarks of a per se illegal RPM agreement are lacking.

Evidence that dealers did in fact resell AmCy products at or above the wholesale purchase price does not relieve the Commission of its obligation to demonstrate the existence of an illegal agreement. As made clear by Colgate,(5) a unilateral, self-motivated decision by a distributor to accept a manufacturer's pricing policies, and thus sell products at a suggested retail price, does not constitute an illegal RPM agreement. In Monsanto, the Supreme Court stated: "Under Colgate, the manufacturer can announce its resale prices in advance and refuse to deal with those who fail to comply. And a distributor is free to acquiesce in the manufacturer's demand in order to avoid termination." 465 U.S. at 761. As Monsanto and Colgate make clear, something more than mere acquiescence by a distributor in a manufacturer's pricing policies is necessary to convert a unilateral decision by a distributor into an agreement to maintain resale prices.

I am therefore puzzled why the majority is so quick to infer the existence of a per se illegal RPM agreement from evidence that many distributors found it in their self-interest unilaterally to sell at or above the wholesale price and thereby receive rebates from AmCy. To infer the existence of a per se illegal RPM agreement in this context, when AmCy never announced minimum resale prices nor sought a commitment from distributors to sell at or above certain price levels, violates the fundamental principle of RPM law announced in Colgate. How can the majority find a per se illegal agreement here -- under arguably weaker factual circumstances than existed in Colgate -- and believe that it still seeks to enforce the rule announced in Colgate, and reiterated in Monsanto, that mere acquiescence by a distributor in the pricing policies of a manufacturer is insufficient as a matter of law to warrant inference of the existence of a per se illegal RPM agreement?(6)

The majority's finding that AmCy entered into illegal RPM agreements with its distributors is nothing less than a retreat from the principles of vertical restraints analysis laid down by the Supreme Court in Colgate, Monsanto, Sylvania,(7) and Sharp. (8) In cases involving allegations of concerted price fixing, "the antitrust plaintiff must present evidence sufficient to carry its burden of proving that there was such an agreement. If an inference of such an agreement may be drawn from highly ambiguous evidence, there is a considerable danger that the doctrines enunciated in Sylvania and Colgate will be seriously eroded." Monsanto, 465 U.S. at 763. I conclude that the standard set forth by Supreme Court for the finding of a price-fixing agreement has not been met. That the majority is willing to infer the existence of an agreement in this instance on the basis of such ambiguous evidence, and to rely primarily on pre-Sharp case law and post-Sharp dicta and one case not on point(9) to justify its conclusion, represents an effort to circumvent the law of RPM (and of vertical restraints in general) laid down by the Supreme Court over the last twenty years.(10)

The majority's decision to issue a consent order here also cannot be supported on economic grounds. The per se treatment of RPM usually is justified by the assertion that such agreements almost invariably are used to support collusion, either among manufacturers or among distributors.(11) RPM could support manufacturer collusion for two reasons.(12) First, RPM may make it easier to detect cheating on a cartel agreement, because resale prices (presumably) are easier to observe than wholesale prices, and successful monitoring of prices is necessary for any successful collusive price agreement to work.(13) Second, RPM may reduce the incentive to cheat on a cartel because a manufacturer cutting its wholesale price will not increase sales by very much if the corresponding resale price cannot fall.(14) If RPM is being used to facilitate manufacturer collusion, we would expect to see other manufacturers adopting similar price restrictions; collectively, these manufacturers would have to account for sufficient total output to give them power over price.(15)

As far as I can tell, the "manufacturer cartel" theory is not relevant to the present case. The Commission's complaint does not allege, let alone provide supporting evidence, that AmCy attempted to collude with other agricultural chemical makers, such as DuPont, Monsanto, Ciba-Geigy, or BASF. There is also no evidence that these other firms used RPM, as is required for the theory to work. But even putting aside the absence of such evidence, it is difficult to imagine an arrangement less suited to cartel stability than that which existed between AmCy and its distributors. Specifically, under the terms of AmCy's C.R.O.P. and A.P.E.X. programs, a dealer's compensation was tied explicitly to the share of chemical sales accounted for by AmCy's products. Given that a crucial element of cartel enforcement is the discovery of some means by which each member can commit credibly to maintaining -- but not increasing -- its market share,(16) how could a program that explicitly rewards market share expansion plausibly be characterized as a cartel enforcement tool?

Furthermore, the available evidence suggests that the C.R.O.P. and A.P.E.X. programs were extraordinarily successful in expanding AmCy's sales and market share, which grew substantially while the program was in use. Certainly, other factors (e.g., the successful introduction of several new product lines) may have accounted for a portion of this increase;(17) nevertheless, it is difficult (if not impossible) to reconcile the behavior of AmCy's output -- or of total market output -- during this period with any coherent theory of competitive harm involving collusion with other chemical makers.

In the alternative, per se treatment sometimes is predicated on the characterization of RPM as an aid to dealer collusion. Under such a scenario, a group of dealers pressures the supplier to adopt RPM to achieve and maintain a collusive resale price arrangement among the dealers. When RPM is used for this purpose, we would expect to see coordinated pressure on the manufacturer to adopt RPM from a group of dealers with sufficient market power to credibly threaten the manufacturer. Moreover, to be effective, the dealer cartel must enter into similar arrangements with enough manufacturers to be able to affect market price; otherwise, the collusive retail price of price-maintained products would be undermined by competition from products not subject to RPM agreements. Under such conditions, we would expect the manufacturer to be a reluctant participant in the scheme, though it would enforce the RPM agreement if the dealer threats were credible. Finally, it is unlikely that the colluding dealers would carry competing products not subject to RPM agreements, as that would be equivalent to cheating on the collusively-determined resale margin.

This second anticompetitive theory fits the facts of this case no better than the first. The Commission's complaint does not allege that AmCy is the victim of a dealer cartel. As I already have noted, it does not appear that other manufacturers had similar arrangements with the members of any putative "dealer cartel," or that this "cartel" eschewed the products of rival manufacturers. (18) Had AmCy been the victim of a cartel, its attitude toward the Commission and numerous state investigations should have been one of grateful acquiescence, because the enforcement agencies would be rescuing it from the clutches of its rapacious dealers. In fact, of course, AmCy unilaterally terminated the challenged provisions of the C.R.O.P. and A.P.E.X. programs several years ago. So much for "dealer coercion."(19)

Given that neither of the two traditional anticompetitive theories can be reconciled with the terms of the AmCy program, could the Commission's action be justified on some other basis? The Commission might attempt to seek refuge in some unilateral theory of market power, under which a manufacturer with substantial pre-existing market power is hypothesized to use vertical restraints because, for some reason, it cannot extract the full value of its market power simply by raising its wholesale price. The economics literature certainly acknowledges such possibilities, but these theories provide a fragile basis for antitrust enforcement.(20) As such models show, vertical restraints often can improve consumer welfare even when adopted by firms with substantial market power;(21) the models fail, however, to provide empirical criteria by which enforcers can distinguish anticompetitive from procompetitive effects.(22) Thus, the practical utility of these theories is questionable even for conduct judged under the rule of reason; their inability to justify a policy of per se illegality appears self-evident.

On several grounds, therefore, issuance of the complaint and consent order in this matter represents a poor policy choice by the Commission. From a legal perspective, AmCy's conduct does not constitute an illegal agreement to maintain resale prices; from an economic perspective, the evidence points to the conclusion that AmCy's conduct was procompetitive; and from a policy perspective, the Commission's decision hardly delineates a clearer distinction (and in fact seriously blurs the line) between conduct likely to be subject to per se condemnation and conduct that is not. Instead of reaching for ways to expand the application of the per se rule to conduct that is plainly procompetitive, enforcers should reserve their heavy hand for conduct that falls within standards for per se illegality clearly enunciated by the Supreme Court.

1. There is a substantial body of economic literature demonstrating that RPM frequently can be socially beneficial. See, e.g., Michael L. Katz, "Vertical Contractual Relations," in Richard Schmalensee and Robert D. Willig, 1 Handbook of Industrial Organization 655 (1989). The existing empirical literature fails to find evidence supporting an anticompetitive characterization of RPM. See, e.g., Pauline M. Ippolito & Thomas R. Overstreet, Jr., "Resale Price Maintenance: An Economic Assessment of the Federal Trade Commission's Case Against the Corning Glass Works," 39 J. L. & Econ. 285 (1996) (evidence convincingly rejects anticompetitive theories and suggests instead that RPM increased sales of Corning's products); Pauline M. Ippolito, "Resale Price Maintenance: Empirical Evidence from Litigation," 34 J. L. & Econ. 263 (1991) (empirical evidence cannot support a collusive explanation for the use of RPM).

2. I also emphasize that in none of the RPM actions brought by the Commission during my tenure could one have plausibly characterized the condemned conduct as having an anticompetitive effect (indeed, in several instances, procompetitive rationales for the restrictions were plainly evident). In only one instance, Nintendo of America Inc., 114 F.T.C. 702 (1991), could one have plausibly ascribed market power to the manufacturer that was party to the agreement. Without manufacturer market power, RPM agreements between a single manufacturer and its dealers cannot harm consumers. Of course, it cannot be overemphasized that market power is only a necessary, but not a sufficient, condition for vertical restraints to reduce consumer welfare; by itself, market power does not establish that the conduct is anticompetitive. Even when a manufacturer possesses substantial market power, all of the procompetitive rationales for vertical restraints remain potentially valid.

3. 465 U.S. 752 (1984).

4. Evidence suggests that distributors in fact sold specific products covered by the AmCy program at retail prices both above and below the wholesale transfer price. Wide variation in distributor resale prices runs contrary to usual evidence of a minimum resale price fixing agreement. As Chairman Pitofsky has stated: "The one point that emerges clearly in any debate concerning the per se rule is that minimum vertical price agreements lead to higher, and usually uniform, resale prices." Robert Pitofsky, "In Defense of Discounters: The No-Frills Case for a Per Se Rule Against Vertical Price Fixing," 71 Geo. L. J. 1487, 1488 (1983). The Commission's complaint does not allege, nor does it provide supporting evidence, that the rebate program resulted in higher retail prices for AmCy's products. Moreover, the wide dispersion in resale prices demonstrates the absence of the type of uniformity believed to be an indicator of a minimum resale price agreement. This dispersion in retail prices suggests that distributors were engaging in loss-leader programs out of a desire to increase future sales of AmCy products. In addition to encouraging distributors to provide valuable pre-sale services, AmCy's rebate program may have encouraged distributors to engage in loss-leader programs as a means of persuading customers to switch to AmCy products.

5. United States v. Colgate & Co., 250 U.S. 300 (1919).

6. Although the majority's reply emphasizes "written agreements" pursuant to which dealers were offered compensation for sales at prices above the wholesale transfer price (Statement of Chairman Robert Pitofsky and Commissioners Janet D. Steiger and Christine A. Varney in the Matter of American Cyanamid, at 2), the complaint in this case indicates that the Commission is willing -- despite the clear warnings of Colgate and Monsanto to the contrary -- to infer the existence of per se illegal RPM "agreements" solely from the dealers' unilateral response to AmCy's "offer." Complaint, at  6 ("The dealers overwhelmingly accepted AmCy's offer by selling at or above the specified minimum prices.").

7. Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977).

8. Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717 (1988).

9. The majority relies heavily on Judge Posner's opinion in Khan v. State Oil Co., 93 F. 3d 1358 (7th Cir. 1996), cert. granted, 117 S. Ct. 941 (1997). Besides the obvious difference that Khan deals with maximum rather than minimum RPM, the facts of Khan are fundamentally different. The contract between State Oil (the supplier) and Khan (the dealer) provided that State Oil would announce a suggested retail price for gasoline and sell it to Khan for 3.25 cents per gallon less. The contract further required Khan to rebate to State Oil any profit received for sales above the suggested retail price. As Judge Posner noted, the contract eliminated any incentive for Khan to charge above the suggested retail price. Since absolute compliance was thus guaranteed under the facts of Khan, it is not surprising that a dealer challenged the program. AmCy, on the other hand, never announced suggested retail prices to its dealers, never established an explicit mark-up, and never required dealers to seek permission before lowering their price. The fact that AmCy's dealers frequently lowered retail prices below the wholesale purchase price indicates that AmCy did not implement its rebate program in order to eliminate dealers' incentives to reduce prices (e.g., to develop new customers, to increase business with existing customers, or to encourage switching by customers from other manufacturers' agricultural products to AmCy's products). The majority's reliance on Khan is therefore of doubtful relevance to this case, particularly in light of the Supreme Court's recent decision to review Khan and the Commission's decision to join with the Antitrust Division of the Justice Department in the filing of an amicus brief in that Court that seeks to overrule the precedent on which Khan relies, Albrecht v. Herald Co., 390 U.S. 145 (1968), and bring an end to the per se rule against maximum RPM. See Brief for the United States and the Federal Trade Commission as Amici Curiae Supporting Reversal, State Oil v. Khan, No. 96-871 (April 1997).

10. Today's action by the Commission has by no means established a clearer and more certain legal rule for RPM cases than exists under the rule of Colgate and other Supreme Court decisions. Whereas a supplier before today's order might know with certainty that mere voluntary adherence by a distributor to a unilaterally announced resale price policy does not constitute illegal RPM, this same supplier must now worry that the Commission may henceforth use such voluntary adherence as evidence of a per se illegal agreement to maintain resale prices. Moreover, as a result of today's decision, the business community may be left wondering how the Commission can -- and whether it will -- maintain the functional distinction it currently draws between, on the one hand, rebate-pass-through provisions and cooperative advertising programs -- programs that the Commission generally does not consider to be per se illegal -- and, on the other hand, other types of rebate programs that similarly impose restrictive conditions on the buyer.

11. Of course, much of the empirical literature on the actual uses of RPM (see note 1, supra) casts serious doubt upon the validity of this proposition.

12. See Lester G. Telser, "Why Should Manufacturers Want Fair Trade?," 3 J. L. & Econ. 86 (1960).

13. See George J. Stigler, "A Theory of Oligopoly," in The Organization of Industry 39, 43 (1968) ("In general the policing of a price agreement involves an audit of the transactions prices.").

14. This argument is subject to the obvious limitation that a manufacturer wishing to cheat on the collusive arrangement would have little incentive to enforce the RPM agreement.

15. Of course, all of the standard factors used to analyze market power and the ability to implement and maintain collusive pricing (e.g., ease of entry, heterogeneity of the products, and so forth) would also be relevant to judging the likelihood of successful supplier collusion.

16. As Stigler (supra note 13, at 42) noted, "[f]ixing market shares is probably the most efficient of all methods of combating secret price reductions."

17. The likelihood of successfully maintaining collusion in the face of product innovation (as was occurring in this instance) is, of course, quite small. Collusion is more likely to be successful, the greater the degree of similarity (e.g., in terms of cost, demand, and product characteristics) among the parties to the agreement.

18. This is unsurprising, because over 2500 dealers participated in the C.R.O.P. and A.P.E.X. programs. It is fanciful to believe that a cartel could have been formed from among such a large number of dealers. If such a cartel exists, one might reasonably ask why the dealers that belong to it are not also named in the Commission's complaint.

19. In its reply, the majority appears to suggest that the existence of a dealer cartel can be inferred from the allegation that "a dealer's advisory council voted to advise American Cyanamid to retain the program in order to protect its margins." Statement of Chairman Robert Pitofsky and Commissioners Janet D. Steiger and Christine A. Varney in the Matter of American Cyanamid, at note 5. Even if an advisory council furnished this advice to AmCy, communications of this nature between dealers and manufacturers do not establish that the dealers acted collusively. Moreover, the fact that dealers may have communicated this advice says nothing about the competitive effects of AmCy's rebate program. One would expect dealers to provide this same "advice" if AmCy's program were designed to prevent discounters from free-riding on the pre-sale services provided by other dealers.

20. See, e.g., Remarks of Commissioner Roscoe B. Starek, III, "Reinventing Antitrust Enforcement? Antitrust at the FTC in 1995 and Beyond," before a conference on "A New Age of Antitrust Enforcement: Antitrust in 1995" (Marina del Rey, California, Feb. 24, 1995).

21. As I noted earlier (supra note 2), market power is a necessary, but not a sufficient, condition for vertical restraints to reduce consumer welfare.

22. As Katz (supra note 1, at 713-14) notes, "[m]uch of the literature on vertical restraints has been conducted with the express aim of deriving policy conclusions. But in many, if not most, instances there is no widespread agreement on whether a particular vertical practice is socially beneficial or harmful. This unhappy state of affairs is due, in part, to the fact that all of the practices can be beneficial in some instances and harmful in others, and it may be extremely difficult to distinguish between the two cases."