Indiana Law Journal Indiana Law Journal

Volume 16 Issue 2 Article 4

12-1940

Trade Barriers Created by Business Trade Barriers Created by Business

Corwin D. Edwards United States Department of Justice

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Recommended Citation Recommended Citation Edwards, Corwin D. (1940) "Trade Barriers Created by Business," Indiana Law Journal: Vol. 16 : Iss. 2 , Article 4. Available at: https://www.repository.law.indiana.edu/ilj/vol16/iss2/4

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TRADE BARRIERS CREATED BY BUSINESS

CORWIN D. EDWARDS*

The trade barrier legislation which has received so muchattention in the last few years has often been discussed asthough it were a peculiar infirmity of state governmentswhich has suddenly broken out after lying dormant sincethe days of the Articles of Confederation. Although therapid spread of certain kinds of state trade barrier legisla-tion affords an excuse for this view, trade barriers are nei-their new nor peculiar to state governments. Such laws havebeen enacted by federal, state, and municipal authoritiesalike, the restrictions by the federal government beingamong the oldest and those by municipal authorities themost numerous. Moreover, the discriminatory hindrancesto trade which have been given statutory form in such lawsare often indistinguishable economically from the barriers totrade established and maintained by private groups for theirown advantage. The distinguishing feature of governmentaltrade barriers is public sanction, not economic effect. Thedistinguishing feature of state trade barriers is merely thefact that they are now in the public eye.

Trade barrier laws do not grow like weeds in a vacantlot, without planting or tending. They are drafted, proposed,advocated by cajolery, pressure, and inducement, and sup-ported against counter attack. The driving force for theirenactment and administration is supplied by groups whichfind them serviceable. Although it is a truism to say thatdiscriminatory legislation expresses the power of special in-terests, there is a tendency to regard each law as an isolatedpolitical fact rather than as a part of the coordinated strate-gy of an interest group. To deal with trade barrier lawsstatute by statute is somewhat like trying to cure the measlesspot by spot. Such therapy ignores the power and purposeof those who procured the laws' enactment and who willdevise a dozen alternate plans to accomplish the same dis-criminatory purposes.

Trade barrier laws appear in truer perspective if theyare regarded as among the devices, both public and private,

* United States Department of Justice, Washington, D.C.

(169)

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available to groups which seek favored positions. Suchgroups may pursue a strategic advantage in many ways-by patents, trademarks, advertising, long-term contracts,integration, mergers, reciprocal buying, commercial bribery,and other private devices of varying repute and effect. Ifthey are large enough they may seek legal favors of assortedkinds from city, state, and national governments, a greatersize being usually requisite for a successful appeal to thelarger governmental units. The available devices, both po-litical and private, may be used in combination. Indeed, thesecurity of the group tends to increase as it comes to dependless upon any single source of advantage.

The activities of private groups designed to establish andmaintain trade barriers may be roughly distinguished fromthe other activities of such groups by their general purposeand effect. Ordinary competitive behavior of the sort exhaus-tively analyzed by generations of economists centers uponmaking, pricing, and selling goods under the pressure ofsimilar activities of competitors which provide incentives tobe efficient and to hold profits to a minimum. But suchcompetitive behavior is accompanied by a struggle for posi-tions of advantage which will shelter those who attain themfrom the ordinary competitive pressures. The object of sucha struggle is to place obstacles between one's rivals andcertain opportunities to sell which they might otherwise en-joy. It is a struggle toward relative advantage rather thanabsolute gain-toward the power to restrain the trade ofothers rather than toward maximum immediate trade foroneself. Once achieved, the advantageous position affordsthose who hold it a limited monopoly; but the effort to at-tain such a position may be fiercely competitive. Thougheconomic theorists have begun to describe the varieties ofmonopolistic competition in the market which may takeplace among concerns with various degrees and kinds ofspecial advantage, they have said relatively little about thecompetitive tactics by which such special advantages are es-tablished, nor about the trade practices in which such advan-tages are institutionalized. Hence, though much is knownabout these tactics and practices, it remains scattered inreports of investigations and records of legal proceedings.1

'Though the two categories "trade barrier" and "unlawful restraint'overlap, they are not identical. Federally sanctioned trade bar-

TRADE BARRIERS CREATD BY BusINEss

In the following summary of privately erected trade bar-riers no sharp distinction will be made between those whichdepend partly upon the machinery of public laws and thosewhose machinery is entirely private. A principal point tobe illustrated is the fact that public and private means areused interchangeably to accomplish the same private end.

Among the most ancient and effective forms of inter-ference with trade is the limitation upon the right to en-gage in a particular type of enterprise. Indeed, the commonlaw of restraint of trade had its origin in a series of casesinvolving private contracts in which the right to engage inspecified trades was surrendered. Today public authority andprivate control over indispensable facilities may both be usedto prevent certain competitors from entering a line of business.

Illustrations of the use of public authority abound inthe occupations which are regarded as affected with a publicinterest to such an extent as to require a public license. Manybuilding codes require, for example, that plumbing be doneonly by licensed plumbers, the ground for the requirementbeing the danger that incompetent plumbing installations willinvolve hazards to public health. The actual administrationof the machinery for examining plumbers and granting li-censes is frequently placed in the hands of local officials whoare or have been licensed plumbers and who are keenly awareof the private interests of the plumbing trade. From timeto time there are complaints that tricky examinations de-signed to limit the number of successful applicants have beenused in an effort to protect established plumbers from com-petition. In some jurisdictions an effort is made to interpretthe license requirements in such a way as to protect themaster plumbers' lucrative trade in plumbing equipment fromthe competition of mail order houses. A Pennsylvania plumb-ing code, for example, forbids persons who are not registered

riers are exempt from the antitrust laws and barriers establishedentirely through state and local legislation are difficult to at-tack under these laws. Even trade barriers which have no publicsanction may be unlawful only if they are established or maintainedby joint action or if they contribute to unlawful joint action orif they tend to establish a monopoly position for a single enter-prise. When several rival enterprises individually restrain tradein such a way that each enjoys a relatively sheltered positionagainst newcomers, there may be private restraint of trade with-out violation of federal laws.

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plumbers to advertise or display plumbing equipment forsale at retail.2

Other groups engaged in building have also sought theprotection of licenses. Electricians are widely licensed onthe theory that incompetent electrical work creates a firehazard. In at least one major city the electrical license isso rigidly interpreted that only a licensed electrician is al-lowed to plug the cord from a welding machine into an elec-trical connection, although the operation is no more diffi-cult than the plugging of an electric percolator cord into awall outlet. One state has gone so far as to require that alltile setting be done by licensed contractors. This statutestrengthened the efforts of organized tile contractors toprevent the purchase of unset tile by the consumer and byso-called jobbers who distribute it to small tile setters.

Similar efforts to extend the scope of a licensing re-quirement and thereby to exclude inconvenient competitionare to be found among pharmacies and in the legal profes-sion itself. There have been attempts to prevent the dis-tribution of packaged drugs by concerns which did not em-ploy a registered pharmacist and to define the practice oflaw so that it includes filling in the blanks upon standardlegal forms for the making of a lease or the adjustment of aninsurance claim.

More subtle devices to exclude certain types of concernfrom the market consist in the imposition of requirementsas to equipment or performance which can be easily met bysome concerns but are prohibitive to others. It is allegedthat the campaign of ice cream manufacturers against theuse of the counter freezer has included efforts to secure theenactment of sanitary legislation for ice cream manufacturewhich will require the sterilization of all equipment with livesteam and the use of a cement floor which slopes toward acentral drain.3 Neither requirement is burdensome to afactory, but a soda fountain which could obtain a counterfreezer only by installing a sloping cement floor, a centraldrain, and a steam boiler would be unlikely to make its ownice cream. Similarly, the building ordinances of many citiesare so designed as to exclude new types of building material2 Newcastle, Pennsylvania, Plumbing Code, Act of 1937, §2.3 United States v. National Dairy Products Corporation, et al, Indict-

ment, Nov. 1, 1938.

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and new methods of building construction. In some casesthe restrictive features of these ordinances are the accidentalresult of excessively detailed specifications and infrequentrevision. Some of the newest codes, however, contain sim-ilar restrictive features which were inserted after pressurefrom local building trades groups. The Chicago building code,for example, has been so written that it systematically favorsthe use of lath and plaster rather than plasterboard, insula-tion board, or hard fibre board; and this result was achievedin spite of the recommendations of a technical committee andin conformity to the recommendations of representatives oflocal plaster contractors and unions. Builders who erect pre-fabricated houses are often unable to meet the requirementsof a local building code because dealers, contractors, andunions who do not wish to see construction operations shiftedfrom a jobsite to a factory are able to prevent the liberaliza-tion of building codes and even to introduce new restrictivefeatures into the codes.

In a few cities the exclusion of concerns from the marketis accomplished by burdensome requirements for a reportrather than by specifications as to the product. The city ofDayton, Ohio, for example, requires that the seller of plumb-ing equipment affix a sticker which is to be obtained fromthe municipality and that he make weekly reports whichinclude the place of installation of each piece of equipment.Ostensibly this legislation is intended to handicap the saleof used plumbing equipment which may not be in soundcondition and to make it difficult to sell plumbing equipmentstolen from unfinished houses. Sears Roebuck has contendedin a suit against the city that the actual effect of the or-dinance is to make it difficult to sell plumbing equipment bymail, both because of the difficulty in obtaining and affixingstickers and because a mail order house seldom knows theexact point of installation of the products it sells.4

Exclusion of concerns from certain markets may be ac-4 In its first form the Dayton sticker ordinance was designed to make

unlawful both the purchase and the sale of equipment withoutstickers and to make the possession of a piece of equipmentwithout a sticker prima facie evidence of violation. After thisordinance was held unconstitutional the city enacted the revisedordinance described above. On November 26th the case of DirectPlumbing Co., et al, v. the City of Dayton, challenging the secondordinance, was pending on appeal before the Supreme Court ofOhio.

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complished even more indirectly by a public requirementthat sellers use a privately owned grademark which is notreadily available. Within the last year the Antitrust Divi-sion has found such practices in the sale of Southern pine,Western pine, and Douglas fir lumber. The lumber manu-facturing industry had persuaded the Department of Com-merce to include in American Lumber Standards, promul-gated by the Department, a provision that conformity tosuch standards should be indicated by the grademark of thelumber trade association covering the particular species. Ithad also persuaded Federal purchasing authorities to include-a requirement for an association grademark in certain Fed-eral lumber specifications. In some parts of the country theuse of grademarked lumber is a condition for the approval ofloans by the Federal Housing Administraiton. In the farWest regional lumber associations induced a considerablenumber of local building authorities to require associationgrademarking in the local building code. As a result of theserequirements a lucrative part of the market for lumber wasopen only to those whose product bore the grademark of alumber trade association. The grademarking plan adoptedby some of the most important regional associations author-ized approved employees of member mills to grade and grade-mark the output of those mills under the supervision of in-spectors provided by the association to check the accuracy ofthe grading. No such right to grade was granted to inde-pendent mills. The association's inspectors were likewiseempowered to grade lumber and issue an inspection certificateupon payment of a fee, but the certificate plan was neces-sarily more costly than mill grading. Moreover, when thecertificates were made available to nofi-members of the asso-ciation a higher fee was charged, with the effect that thenon-member was placed at a disadvantage in competitivebidding upon graded lumber. In one regional association,inspectors promoted the products of members of the associa-tion as against independents by means which included maxi-mum publicity for substandard independent lumber and min-imum publicity for substandard lumber from association mem-bers. Another regional association granted to certain retaillumber yards the right to affix grademarks, and by denyingthis right to other competing yards limited the number ofretailers which could compete for business in grademarked

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lumber. To prevent the use of the association grademarksby other grading agencies these marks were registered astrademarks. In some cases strenuous efforts were made toprevent the grademark of an independent lumber associationfrom being recognized as conforming to the requirements setforth in American Lumber Standards. The effect of the en-tire plan was to reserve for member mills most of the busi-ness of the Federal government and of private builders incertain parts of the country.,

Private concerns frequently are able to exclude othersfrom a line of business by virtue of their exclusive controlover an indispensable product, process, or facility. The sim-plest case of this kind is refusal by the holder of a patentto license its use or arbitrary restriction of the number oflicensees. Corning Glass Works and General Electric Com-pany, for example, are the only concerns which have theright to make the tubing for neon lights. Only the DowChemical Company has obtained an American license for themanufacture of pig magnesium. Often the power conveyedby a patent has been supplemented and extended by a busi-ness strategy in which various patents are conceived asweapons to be used together. The glass container industry,for example, has followed a consistent policy of developingpatents it does not intend to use in order to "fence in" con-cerns which might otherwise be able to limit the effect ofa patent monopoly by patenting alternative ways to accom-plish the same result.6 In the radio field a patent pool closedto outsiders gave the members of the pool freedom to useall the important technical methods while it exposed new-comers to the necessity of devising unpatented substitutemethods at all points simultaneously.7

Exclusive ownership or lease of scarce facilities may beas effective as a patent. The position of Western Union

United States v. Western Pine Association, et al, Indictment, Sept.18, 1940; United States v. West Coast Lumbermen's Association,et al, Indictment, Sept. 25, 1940; United States v. Southern PineAssociation, et al, Indictment, Feb. 19, 1940. In the latter casepleas of nolle contendere were entered on Feb. 21, 1940 and South-ern Pine Association was fined $10,000 and each of remaining de-fendants fined $1,000 on same date. Consent decree was enteredFeb. 21, 1940.

6 Hearings before the Temporary National Economic Committee, Part2 (U.S. Gov. Printing Office, 1939) 776.

7United States v. Radio Corporation of America, Consent Decree,Nov. 21, 1932.

175

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Telegraph Company is partly due to a system of contractswith railroads which gave the company exclusive use ofrailroad rights of way for the erection of its poles and linesand use of railroad terminals for Western Union offices.,The development of new sulphur companies is prevented inspite of the high profits which such companies enjoy becausethe existing companies own or lease substantially all theworkable deposits of brimstone.0 The Government's suitagainst the Aluminum Company alleges that the companyhas sought to prevent the rise of competition by acquiringall the commercially available bauxite and the most accessiblesources of cheap water power. 10 The United Fruit Company'sdominance of the trade in bananas is at least partially dueto the fact that it controls the banana railroads and the onlytelegraph line between Honduras and the United States.1

Exclusion from the market need not be based upon legalrights or private monopolies so absolute as those describedin the foregoing paragraphs. Any restriction upon the ac-cess by rival concerns to credit, raw materials, means oftransportation, productive equipment, or labor may suffi-ciently handicap the independent concern. In some cases themembers of an industry may refuse to make available to newconcerns certain costly services which they cooperatively main-tain or may provide these services in a less efficient way athigher cost. In some cases an organized group may use boycott,threat, or bribe to force suppliers to refuse to serve concernsoutside the organization. In some cases the organized groupcannot cut off such service but obtains differential treatmentwhich gives it so great an advantage that the independentcannot survive.

The Department of Justice has charged the AmericanMedical Association with attempting to destroy a cooperativeplan for the provision of medical service by depriving thecooperative of access to hospitals and of the opportunityto obtain consultation upon difficult cases, and by excluding

sUnited States v. Western Union Telegraph Company, Petition, Dec.1, 1937.

9Hearings before the Temporary National Economic Committee, op.cit. supra note 6, part 5, 1987-2008.

10 United States v. Aluminum Company of America, et al, Petition, Apr.23, 1937.

] Kepner and Scothill, The Banana Empire (1935) 26, 178, 182;Fortune (Mar. 1933) 26ff.

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the cooperative's doctors from the association. 12 In a Chi-cago milk case the Department charged the large milk dis-tributors with refusal to let independents use the bottle ex-change and with conspiring with the unions to prevent thedelivery of independent milk."s A recent indictment of pro-ducers of military optical equipment included a charge thatthe American and German companies had agreed not to supplyinformation or equipment to any competitor.1 4 In the Alum-inum case witnesses testified that a power company whichhas officials of the Aluminum Company upon its board ofdirectors lost interest in a large power contract as soon asit became clear that the buyer of the power intended to be-gin the manufacture of aluminum. In a case against theAssociation of American Railroads the Department chargesthat the railroads agreed not to establish combination throughrates for shipment by rail and motor carrier similar to thecombination rates which are established among railroads andthat they thus sought to exclude motor carriers from partici-pation in a large part of the long-haul business."s A proceed-ing against potash manufacturers charged that they hadagreed not to sell potash directly to cooperatives, individualfarmers, or fertilizer mixers which were not recognized byall manufacturers.- 6 Indictments covering tile contractors,:7

plaster contractors, 8 electrical contractors,19 glass contrac-

'1 United States v. American Medical Association, et al, Indictment,Dec. 20, 1938.

13United States v. The Borden Company, et al, Indictment, Nov. 1,1938. Complaint filed Sept. 14, 1940, consent decree entered Sept.16, 1940, and nolle prosequi entered in criminal case.

'14United States v. Bausch & Lomb Optical Company, et al, Indictment,Mar. 26, 1940. Pleas of nolo contendere entered and four defend-ants fined $10,000 each on May 27, 1940.

15United States v. The Association of American Railroads, et al, Com-plaint, Oct. 25, 1939.1GUnited States v. American Potash & Chemical Corporation, et al,Indictment, May 26, 1939. Complaint filed May 15, 1940 and con-sent decree entered May 21, 1940.

:7 United States v. Wheeling Tile Company, et al, Indictment, Dec. 5,1939; United States v. Mosaic Tile Company, et al, Indictment, Jan.15, 1939; United States v. St. Louis Tile Contractors Association,et al, Indictment, May 17, 1940. All three of these cases were dis-posed of by pleas of nolo contendere. Consent decrees were enteredin connection with nationwide consent decrees against the TileContractors Association of America, Inc., et al, on June 10, 1940.

1sUnited States v. Contracting Plasterers' Ass'n of Long Beach, Inc.,et al, Indictment, Feb. 2, 1940.

IgUnited States v. Santa Barbara County Chapter, National ElectricalContractors Association, et al, Indictment, Feb. 28, 1940. UnitedStates v. Harbor District Chapter, National Electrical ContractorsAssociation, et al, Indictment, Feb. 16, 1940.

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tors,20 lumber dealers,21 plumbing contractors, 22 hardwoodflooring contractors, 2 excavating contractors, 24 and haulagecompanies2 5 charge various conspiracies to deprive independ-ent concerns of union labor and to induce manufacturers andjobbers not to supply materials to such concerns. In mostcases the pressure upon manufacturers and jobbers took theform of a threatened boycott and the inducement to unionleaders was an offer of a more favorable labor contract.

The exclusion of independent concerns by discriminatoryprices may take various forms. A striking early illustrationis found in the rebates which the Standard Oil Company ob-tained from the railroads prior to the enactment of the Inter-state Commerce Commission Act. Not only was Standard'sproduct carried more cheaply, but Standard actually receiveda portion of the transportation charge paid to the railroadby its rivals. More recently, price discrimination in favorof large distributors was thought to involve such a threatto the existence of their smaller rivals that the Congresspassed the Robinson-Patman Act as a remedy. This Actgreatly reduced overt discriminations in price but did notdestroy the opportunity to accomplish a discrimination infact while keeping prices uniform. Integrated companieswhich sell a portion of their semi-manufactured products areoften in competition with their own customers. In such acase a relatively high price upon the products they sell totheir rivals will not impair their own profits but will soreduce the margin available for the final processes of man-ufacture as to threaten the existence of the rival concern.Government testimony in the aluminum case alleges that theAluminum Company sought to monopolize the manufactureof duralumin and of fabricated aluminum products by charg-ing a high price for aluminum ingot, which is monopolized,2 0 United States v. W. P. Fuller & Company, et al, Indictment, Mar. 15,

1940.21 United States v. Harbor District Lumber Dealers Association, et al,

Indictment, Mar. 15, 1940.22 United States v. The Central Supply Association, et al, Indictment,Mar. 29, 1940.

23 United States v. San Francisco Hardwood Floor Contractors' Associ-ation, et al, Indictment, Dec. 20, 1939.

24 United States v. Arthur Morgan Trucking Co., et al, Indictment, Jan.23, 1940.

25 United States v. Nat Hoffman, et al, Indictment, Apr. 8, 1940;United States v. International Longshoremen's Ass'n., et al, In-dictment, Jan. 23, 1940.

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and a relatively low price for products made from the ingotwhich were likewise sold by competitors.

Devices like those just described may be effective evenwhen they do not exclude from the market the concernsagainst which they are directed. So long as they createdifficulties for the independent concern, they tend to raiseits cost, expose its customers to delays, impair the qualityof its service, and restrict the amount of business it cando. Thus the proportion of the total business done by theindependent is reduced and he is made more vulnerable toordinary competition. A private trade barrier, like a publiclaw, may serve its purpose even though it is only partiallyeffective.

Other devices are intended to deprive rivals of accessto an adequate system of distribution for their products.Many of these seek to bind distributors to a single producer,either by the producer's direct ownership of distributivechannels or by contracts which exclude the products of com-petitors. Such arrangements afford a ready market for theproducts of one concern and may force competitors eitherto find new distributors or to go to the expense of creatingtheir own distributive outlets. Major producers of movingpictures, for example, control affiliated chains of movingpicture theatres through which they may be sure of a widedistribution of their product. Until the recent consent de-cree in the case of United States v. Paramount Pictures, Inc.,et al, it was customary to offer a fifty-two weeks' supplyof films in a single contract, so that independent the-atres wishing to deal with the major companies were re-quired to contract for a block of pictures so large as to leavethem without demand for films from other studios. Themajors gave preference to their theatres and to certain pow-erful independent chains by permitting them to show newpictures first and sometimes by supplying them with betterfilms and charging them lower rentals. The independenttheatre was at a disadvantage in competing with the con-trolled theatre and with the independent theatre chain. Theindependent producer was likewise at a disadvantage in mar-keting his product.

A similar illustration is found in the contracts of the

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National Broadcasting Company.26 Local independent sta-tions which join a network are forbidden to broadcast pro-grams of another network company and are required to re-serve for national broadcasts whatever time is optioned bythe National Broadcasting Company. About two-thirds ofthe optioned time is never used. The local stations are for-bidden to accept advertisements from national advertisersat rates below those charged by the network. NationalBroadcasting Company may assign any local station eitherto the red network, which is profitable, or to the blue net-work, which carries a larger proportion of sustaining pro-grams and is relatively unprofitable. The control of optionedtime makes it difficult for any company outside the networkto obtain the use of desirable local radio time, while thecontrol over advertising rates prevents the locals from find-ing a by-pass to large clients. The power to transfer sta-tions from one network to another is an effective means ofdiscipline in any controveries between the national and thelocals.

Less complicated arrangements for exclusive dealing arerelatively frequent. In an antitrust suit the Governmentcharges that the Masonite Corporation has induced its po-tential competitors to agree that they will neither make hardfibre board nor buy it from any other company, and that inconsequence practically all of such board is produced by theMasonite Corporation.2

7 The Federal Trade Commission re-ported recently that manufacturers of agricultural imple-ments require their dealers to agree not to handle competingproducts.2 8 Since such products are sold in sparsely settledcommunities, many of which will not support more than onedealer, each manufacturer thereby acquires a series of localmonopolies. In the distribution of gasoline many producerscharge one-half cent less per gallon to filling stations whichwill agree to handle only one product, and thereby compelother producers to build up their own system of filling sta-tion outlets. An interesting variation of this type of control

26 Federal Communications Commission, Report of the Committee ap-pointed by the Commission to supervise the investigation of chainbroadcasting (mimeographed, 1940) 52-72.

27 United States v. Masonite Corporation, et al, Complaint, Mar. 11, 1940.28 Federal Trade C6mmission, Report on the Agricultural Implements

and Machinery Industry. H. R. DOC. No. 702, 75th Cong., 3d Sess.,(1) (1938) 268-288.

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over a market is alleged in an antitrust suit against a South-ern newspaper which is charged with having excluded rivalpapers from its city by binding its advertisers not to pur-chase space in any other paper.2 9

Control of distributors is often limited to devices in-tended to make the distributor handle a product he does notwant in order to obtain a product which he does want. Mon-opoly, reputation, or quality may have established a domi-nant position for a product while other goods from the sameproducer are exposed to severe competition. Contracts whichprevent the various articles from being handled separatelyare used to stretch the control of the major product into acontrol over the minor products also. An example is afford-ed by the United Shoe Machinery Company's leasecontracts, which formerly provided that the leased machinescould not be used in conjunction with other machines fromrival producers.30 The Pullman Company is charged in anantitrust suit with refusal to operate sleeping cars whichit does not build.31 In other antitrust proceedings automo-bile companies were required to discontinue their insistancethat installment purchases of their cars be financed throughtheir own financial subsidiaries.3 ? Automobile dealers arestill required to buy parts and accessories from the companieswhich produce their cars. Similarly, lease contracts for ac-counting machinery formerly provided for a higher rentalif the lessee did not buy his punch cards from the manu-facturer from whom he leased the machine.3 3 In 1937 theFederal Trade Commission ordered the California PackingCompany and the Alaska Packing Company to cease requir-ing that commodities they purchase be routed through aterminal which they control.34

29United States v. Chattanooga News-Free Press Co., Information,June 13, 1940.

30 United States v. United Shoe Machinery Corp., 258 U.S.451 (1922).31 United States v. The Pullman Company, et al, Complaint, July 12,

1940.S2 United States v. Chrysler Corporation, et al, United States v. Ford

Motor Company, et al. Indictments, May 27, 1938 (Complaintsfiled Nov. 7, 1938 and consent decree entered Nov. 15, 1938);United States v. General Motors Corp., et al, Indictment, May 27,1938 (Corporation defendants convicted on Nov. 16, 1939 and fineof $5,000 imposed on each of four corporations Nov. 17, 1939).

33United States v. International Business Machine Corp., Decree, Dec.26, 1935.

34 In the Matter of California Packing Corporation, et als, F.T.C.Order, Dock. No. 2786 (June 30, 1937).

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For the most part, the controls of distribution whichhave been discussed above were intended to give certainproducers an advantage over others. Controls designed toprovide an advantage for certain types of distributors arealso prevalent. Products may be distributed directly by man-ufacturers, by mail order houses and chain stores which buyfrom manufacturers, by cooperatives, or by the traditionalchannels through wholesalers and retailers. Within eachtype of distributive channel there are competing sub-types.Wholesalers, for example, may carry stocks and attempt tocover the whole market, may take orders but depend upondirect shipment from the manufacturer, may specialize inserving certain types of customers, or may specialize in salesat auction. Thus there may be a wide variety in the servicesprovided by a wholesale distributor.

In the struggle for survival between different types ofdistributors there is a constant effort to gain a decisive ad-vantage by boycotts or discriminatory discounts. Such ef-forts are sometimes of interest only to the distributors, butfrequently the interests of producers are likewise involvedbecause the triumph of one type of distributor means alsoa victory for the producers who can most effectively usethis type. One orange growers' cooperative, for example,sells a large part of its output through fruit auctions, whereasanother is primarily interested in sales to the wholesale de-partments of chain stores. The fortunes of the conflict be-tween chain store buyers and independent commissionmennecessarily affect the relative prosperity of these two groupsof growers.

Since the price and discount policies of manufacturersoften operate as barriers to effective competition by certaintypes of distributors, it is particularly difficult in the fieldof distribution to distinguish between the ordinary processesof competition and the effort to build up institutions whichgive some group a special advantage. This discussion willnot attempt to deal with the more intricate problems in-volved, but will be limited to cases in which the effort toerect trade barriers is peculiarly obvious.

In 1938 the Federal Trade Commission found that win-dow glass manufacturers had divided their customers intoquantity buyers and others and were allowing quantity buy-ers large discounts which gave them a monopoly of whole-

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saling service.35 Status as a quantity buyer was conditionedupon willingness to accept an assigned sales territory. Thusthe discount system was used to police the establishment ofa closed group of wholesale distributors with allocated sharesof the total market. Similarly, the Department of Justicehas alleged that manufacturers of optical equipment haveagreed to grant wholesale discounts only to certain whole-salers who have been arbitrarily chosen by themselves andthat this agreement serves to prevent other wholesalersfrom doing business.3( From time to time retail distributorsof cement have induced cement manufacturers to grant adealer's discount only to certain recognized dealers and thus,by agreement, to restrict the number of concerns which maysell cement at retail. Manufacturers of gypsum, plasterboard,and wallboard are bound by the terms of patent licenses toobserve uniform systems of distributive discounts availableto designated groups of distributors.3 7

Such limitations upon the availability of distributors'discounts are often coupled with refusals to sell to certaintypes of distributors. In some cases these refusals expressthe interest of the selling group; in others they are due toeffective pressure by organized distributors of other types.In the lumber industry, for example, manufacturing groupshave frequently followed an agreed policy of distributionwhich reserves portions of the lumber market for lumbermanufacturers and provides that lumber shall be sold toother portions of the market only by wholesale or retaildealers.38 Similar division of the market has often prevailedin the cement industry. Jobbers of flat glass have beencharged in antitrust cases with conspiracy to persuade glassmanufacturers not to sell direct to independent dealers.3 9 Inthe tile industry manufacturers and certain local groups ofcontractors and tile setters have repeatedly attempted to ex-clude jobbers and independent contractors from the marketboth by cutting off their supplies of tile and by preventing

35 In the Matter of Pittsburgh Plate Glass Co., et al, F.T.C. Dock. No.3145 (Oct. 30, 1937) (Findings of Facts & Conclusion).

36 United States v. Optical Wholesalers National Association, Inc., etal, Indictment, May 28, 1940.

37United States v. United States Gypsum Co., et al, Indictment, June28, 1940.

s See note 5 supra.3D For example see note 20 supra.

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them from hiring union labor.40 In some localities milkdistributing companies and milk drivers' unions have agreedto prevent the sale of milk by retail stores in order to forcecustomers to use door-to-door systems of delivery.41 In theplumbing industry a systematic effort has been made bymaster plumbers, unions, and jobbers to prevent manufac-turers from selling plumbing equipment direct to the useror through mail order houses as intermediaries.2 In themineral wool industry a system of patent licenses coveringboth product and process is used to require sub-licensees whouse the patented process to buy only the patented productand to buy it from concerns which are licensed to produce it. 43

Although most of the restraints upon distributive chan-nels have been based upon patents, actual or threatened boy-cotts, or simple collusive plans for distribution, the oil in-dustry illustrates the accomplishment of similar ends throughpurchases made by the integrated concerns. The majorcompanies have at times established buying pools designedto purchase the entire output of gasoline by independentcompanies in order that the independent supplies might beplaced upon the market at such a rate and through suchchannels as the majors saw fit.44

Many of the restraints upon access to the market aredirected not against new or small concerns or concerns of acertain type but against any concern outside a specifiedarea. They amount to privately organized protective tariffssurrounding a particular locality. In this field the resem-blance of private purposes achieved by private means tosimilar purposes achieved by public means is particularlystriking. Indeed, it is notorious that the establishment oftariff schedules becomes a battle ground between the specialinterests favorably and adversely affected; and many ofstate trade barriers are frankly designed to protect businesswithin the state from outside competitors.

The building industry contains an unusual number of

40 See note 17 supra.41 See note 13 supra.42 See note 22 supra.43 United States v. Johns-Manville, et al, Complaint, June 24, 1940.44 See for example: United States v. General Petroleum Corporation of

California, et al, Indictment, Nov. 14, 1939. Thirty-three defend-ants pleaded nolo contendere and were fined in July and August,1940.

TRADE BARRIERS CREATED BY BusINEss

restraints designed to protect local business. Two indict-ments secured in the recent housing investigation by theAntitrust Division charge that local enterprises and unionshandling millwork have conspired to prevent the installationof millwork made outside the state.45 Two indictments chargesimilar conspiracies to prevent the purchase or installationof electrical fixtures from other states.46 One indictment in-volves a similar charge concerning sheet metal. 47 Three in-dictments charge the existence of similar conspiracies againstthe use of metal strips, metal rods, and similar building ac-cessories which were bent or shaped in another state ratherthan on the jobsite.48 One indictment charges an effort toforce the use of local marble.49 Two others charge conspir-acies to prevent the installation of factory-glazed windows.5 0

An indictment in Chicago charges a conspiracy by local con-tractors and the building trades council to require the useof limestone fabricated in Chicago rather than in Indiana,in spite of the fact that the workers in Indiana receive ahigher wage than in Chicago.51 A peculiarly significant caseis one in Illinois in which it is charged that local dealers,contractors, and labor conspired to prevent the erection ofa prefabricated house, first by withholding the services ofcontractors and workmen and later by physical violenceagainst people brought in to do the work.r2 Indictment ofthis conspiracy was followed by a series of difficulties insecuring approval of the house by local building inspectors.

'5 United States v. Lumber Institute of Allegheny County, et al, In-dictment, Feb. 23, 1940; United States v. Lumber Products Associ-ation, Inc., et al, Indictment, June 26, 1940.

46 United States v. Local No. 3 of the International Brotherhood ofElectrical Workers, et al (No.107-176), Indictment, Mar. 28, 1940;United States v. Beardslee Chandelier Manufacturing Co., et al,Indictment, Feb. 14, 1940.

47United States v. Local Union No.99, Sheet Metal Workers Interna-tional Association, et al, Indictment, Apr. 27, 1940.

As United States v. Wood, Wire, and Metal Lathers' International Union,Local No.46, et al (No.107-385, 107-386, No.107-387), Indictments,May 10, 1940.

ADUnited States v. Associated Marble Companies, et al, Indictment,June 17, 1940.

GO United States v. Glass Contractors' Association, et al, Indictment,May 10, 1940. United States v. Glaze-Rite Co., et al, Indictment,Nov. 10, 1939.

51 United States v. Chicago & Cook County Building and ConstructionTrades Council, et al, Indictment, Feb. 1, 1940.

2United States v. B. Goedde & Company, et al, Indictment, Sept. 21,1940.

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Such efforts to segregate a local market are not con-fined to the building industry,, though they are peculiarlyprevalent there. An indictment secured by the AntitrustDivision alleges a conspiracy to prevent the sale of wine notlocally bottled.53 Several indictments, as well as various in-vestigations not yet completed involve efforts by local groupsof teamsters to require the use of local drivers and unloaders.In a typical case the local union would not permit the uniondriver who brought the truck to the city line to drive itwithin the city unless a local driver was also hired to sitbeside him on the driver's seat. The truck's crew often isnot permitted to unload the truck but instead the owner isforced to employ local men in unloading.

In nearly all of the cases which have been mentioned,the trade barrier was intended to serve one concern or groupat another's expense. In some instances, however, tradebarriers are established by mutual consent, each concern be-ing willing to surrender or limit its access to other parts ofthe market in return for a more sheltered position in someportion of the market reserved for itself. The most obviousillustrations of this type of trade barrier are those in whichenterprises agree upon an allocation of the available busi-ness. Often, however, such agreements are supplemented bymeasures designed to prevent the rise of new enterprises notbound by the agreement.

The simplest agreements are territorial. German andAmerican makers of military optical instruments enteredinto a contract dividing the world market and stipulatingthat if they were asked to bid upon business not assignedto them they would submit a courtesy bid high enough toavoid getting the business.54 A similar division of world tradeoutside the United States was maintained before the presentwar by an agreement between Aluminum, Ltd., of Canadaand the European members of an international aluminumcartel; and the government has charged that the AluminumCompany of America participated in this agreement in orderto reserve the American market for itself.5653 United States v. Wine, Liquor and Distillery Workers Union, Local

No. 20244, et al, Indictment, May 31, 1939.5 See note 14 supra.55 See note 10 supra.

TRADE BARRIERS CREATD BY BUSINESS

In other cases the agreements assign the amount ofbusiness to be done rather than the geographical area tobe covered. Until recently, makers of fibre shipping con-tainers were allotted percentages of the total volume of busi-ness and each concern received frequent statistical reportsto enable it to adjust its sales policy in order to maintain itsproportion of the total business 6 A similar plan has beenused to restrict and allocate the production of Kraft paper. 7

Manufacturers of Western pine, Douglas fir, and Southernpine, according to charges in indictments, agreed amongthemselves to restrict the total quantity of their species oflumber and to apportion shares in the allowable output.,,Manufacturers of print cloth recently undertook a similarscheme so publicly that a statement of their plan was re-leased to the newspapers.5 9 Electric light manufacturerswho operate under patents not only are required by license todivide the American market from the world market but arealso subject to a prohibitive increase of royalty if their salesexceed a stipulated proportion of the total American sales. 0

In a considerable number of marketing agreements ap-proved under the Agricultural Marketing Agreements Act,growers and shippers of various fruits and vegetables haveundertaken to limit the total shipments and to divide theallowable business according to some agreed formula. It isinteresting to note that although the marketing agreementprogram was intended to permit collective action by farmerswho are too numerous and small to bargain effectively asindividuals such farmers have typically failed to work out anagreed marketing program; and the act has been used pri-marily for products which are already partially protectedfrom competition. In some cases this protection is derivedfrom climatic conditions which localize the crop and fromprivate action such as the concentration of acreage in cor-porate farms controlled by food processors and distributors.In other cases the protection springs from other legislation,

GO United States v. National Container Association, et al, Indictment,Aug. 9, 1939. Consent decree entered Apr. 23, 1940.

G7 United States v. Kraft Paper Association, et al, Indictment, July 20,1939. Consent decree entered Sept. 10, 1940.

58 See note 5 sup-ra.50 United States v. Joseph Sirrine, et al, Information, Jan. 2, 1940.Go United States Tariff Commission, Incandescent Electric Lamps, Re-

port No. 133 (2nd series, 1939) 37.

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such as laws establishing a limited milkshed to serve ametropolitan area.

Some plans for the allocation of business attempt toprevent transfer of customers or to restrict each enterpriseto a different type of product which is bought by a differentgroup of customers. Refinishers of textiles at one time as-signed each customer to a particular refinishing concern andforbade others to accept their work. In a small Middle West-ern city local distributors of milk and the organized milkwagon drivers recently decided that to quarantine the com-petition of a distributor who had reduced prices they wouldprevent customers from changing distributors unless in theiropinion there was a reasonable excuse for the change. Build-ing material manufacturers who secure their supplies of hardfibre board from the Masonite Corporation are bound by con-tract not to sell such board for any other use than building,and thereby Masonite is given substantially exclusive controlof various industrial markets for the product.81 In severalcities Federal indictments charge that contractors for glass,62

electrical work,63 and marble64 rotate jobs among themselves,agreeing in advance that each shall be in succession the lowbidder. But perhaps no plan to establish exclusive rightsto groups of customers is more elaborate or complete thanthat involved in the Federal indictment of glass containermanufacturers. 5 The Government charges that each licenseeunder patent processes for the manufacture of glass contain-ers is restricted to making a particular type of containerpurchased by particular kinds of customers and that in con-sequence a series of product monopolies have been establishedbased upon the refusal to grant additional licenses. One re-sult of this plan is said to have been that fruit jars intendedto be used by housewives for canning were sold for twice

61 See note 27 supra.62 See note 50 supra.6S United States v. San Francisco Electrical Contractors Association,

Inc., et al, Indictment, Mar. 2, 1940; United States v. BrookerEngineering Company, et al, Indictment, Mar. 21, 1940; UnitedStates v. Harbor District Chapter, National Electrical ContractorsAssociation, et al, Indictment, Feb. 16, 1940.

64United States v. Southern California Marble Association, et al, In-dictment, Feb. 16, 1940. Consent Decree entered Nov. 12, 1940.

65United States v. Hartford Empire Company, et al, Complaint Dee.11, 1939.

188

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as much as identical jars designed to be used by the canningindustry.

The various barriers to trade which have been describedon previous pages are often only parts of broader conspira-cies to restrain trade. Most efforts to fix prices can beeffective only in a limited industrial area or among a limitednumber of concerns, and therefore a plan to exclude out-siders from the market becomes an indispensable means tothe success of the undertaking. But in addition to the tradebarriers which are established for their own sake and thetrade barriers which define the boundaries of a price fixingconspiracy, there is often an effort to develop trade barriersfor disciplinary purposes. Such barriers are used to punishenterprises which will not participate in some general plandesired by the rest of the industry. Often, for example,local groups of contractors in the building trades wish tomaintain a bid depository with which they file copies oftheir bids which become available for inspection by the group.Indictments by the Antitrust Division in the heating,6 elec-trical, 7 and tile,68 contracting trades of various cities havecharged that union labor was withdrawn from concerns whichfailed to file their bids with such a depository. Similarly,some large enterprises take systematic advantage of theirsize by threatening to make localized price reductions amongthe customers of small concerns unless these small concernsfollow policies which are considered satisfactory. The hear-ings on beryllium before the Temporary National EconomicCommittee illustrate the fact that such threats may be in-herent in a market situation and may be effective eventhough nothing is actually said.69 The ease with which asmall enterprise may be driven from the market by a largeconcern's local price cutting may thus establish a barrier toits effective competition for more business and may accom-

6United States v. Heating, Piping & Air Conditioning Contractors'Association of Southern California, et al, Indictment, Jan. 26, 1940.

67United States v. San Francisco Electrical Contractors' Association,Inc., et al, Indictment, Mar. 2, 1940; United States v. Harbor Dis-trict Chapter, National Electrical Contractors Association, et al,Indictment, Feb. 16, 1940.

Gs United States v. St. Louis Tile Contractors' Association, et al, Indict-ment, May 17, 1940. Complaint and consent decree entered July1, 1940.

OD Hearings before the Temporary National Economic Committee, op.cit. supra note 6, part 5, at 2084-2091.

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plish as much as the more tangible barriers already described.The recent efforts to repeal state trade barriers are

significant because they express a public awareness of theneed for free trade within the boundaries of the UnitedStates and because they seek to deprive those who wouldrestrain trade of certain public endorsements which theyhave secured through legislation. It is to be hoped thatthe activities centering upon state governments will be sup-plemented by similar activities directed at legal trade bar-riers maintained by other governmental bodies. But therepeal of all restrictive legislation which fails to express thepublic interest would not in itself solve the trade bar-rier problem. During nearly fifty years in which theantitrust laws were revered as traditions but were noteffectively administered, much of American industry hasdeveloped private trade barriers which are effective withoutthe affirmative support of any law. If law-making bodiescannot be used to secure special advantage, the pursuit ofadvantage by private means will be intensified. In spite ofthe greatly increased activity of the Antitrust Division dur-ing the last three years, the administration of the ShermanAct is still highly selective for lack of men and money. Itmay be that a systematic enforcement of the antitrust lawswill reveal the need to terminate some private trade barrierswhich are not unlawful and thus will suggest the desirabilityof further legislation; but the logical first step is full enforce-ment of the existing law.