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Norman M. Morris Corp. v. Hess Brothers Inc.

March 26, 1957


Author: Staley

Before BIGGS Chief Judge, and MCLAUGHLIN and STALEY, Circuit Judges.

Opinion of the Court

By STALEY, Circuit Judge: Defendant has appealed from the issuance of a preliminary injunction restraining it from selling trade-marked "Omega" watch products at prices below those stipulated by plaintiff such course of conduct being made actionable by the Pennsylvania Fair Trade Act.

The facts are virtually without dispute. Plaintiff, a New York corporation, is the exclusive distributor in the United States of "Omega" watches. It neither produces the watches nor owns the trade-mark. Defendant, a Pennsylvania corporation, is the owner of a department store in Allentown, Pennsylvania. Plaintiff entered into a number of resale price contracts with various retail dealers in which it stipulated the minimum prices at which "Omega" watches might be sold. It appears that the price stipulation was initiated by the plaintiff alone, and not by the producer or owner of the mark. Defendant did not sign any contract with plaintiff but was fully aware of the minimum prices. Defendant also knowingly advertised for sale and sold "Omega" watches at prices lower than the resale prices stipulated by plaintiff.

Appellant makes three salient contentions. First, it argues that the Pennsylvania Fair Trade Act authorizes only the producer or owner of the trade-mark to stipulate fair trade prices, and not an exclusive distributor.Next, it argues that if a distributor is authorized to stipulate the resale price, then the Act contravenes both the Constitution of the Commonwealth of Pennsylvania and that of the United States. Third, it contends that the McGuire Act, which exempts nonsigner provisions from the effect of the Sherman Antitrust Act, is unconstitutional.

Brief allusion to the historical development of Fair Trade Acts is expedient at the threshhold of this discussion. In 1911, the United States Supreme Court in Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373, 407-408, struck down an agreement to maintain resale prices as an unlawful restraint of trade violative of the Sherman Antitrust Act, 15 U.S.C. § 1 et seq. (1952 ed.). It was decided that vertical price fixing between manufacturer and retailer is equivalent in effect to horizontal price fixing among the retailers themselves, and therefore against public policy. It was intimated in the opinion that vertical price fixing might be valid if authorized by statute.*fn1

The economic depression of the thirties, with its attendant price cutting and "loss-leader" practices at the retail level, prompted state legislatures to enact Fair Trade statutes for the avowed purpose of maintaining resale prices and rescuing small business from failure which it was thought would otherwise inevitably follow. The early statutes purported to bind only signers of resale price maintenance contracts. Underselling by those who did not sign such contracts threatened to frustrate the purpose of the Fair Trade Acts, so that today every operative state statute contains a nonsigner clause. This clause binds every vendee to sell at the minimum price or more whether or not he has signed a contract with the supplier, provided only that he have knowledge that the supplier has entered into a price stipulation contract with any vendee. This concept, alien to the law, whereby a person may be bound by a contract to which he did not give assent, indicates the desperation which impelled state legislatures in their struggle to combat a disastrous depression.

In Old Dearborn Distributing Co. v. Seagram-Distillers Corp., 299 U.S. 183, 198 (1936), the Supreme Court upheld the Illinois Fair Trade Act,*fn2 including its nonsigner provision, as affording "a legitimate remedy for an injury to the good will which results from the use of trade-marks, brands or names * * *." As an appropriate exercise of state police power in protecting the supplier's continuing property interest from price-cutting and "loss-leader" practices, the Court held that the act violated neither the due process nor the equal protection clauses of the Fourteenth Amendment.

The Sherman Act was changed by the Miller-Tydings Amendment, 15 U.S.C. § 1 (1952 ed.), which validated resale price maintenance contracts in interstate commerce, thus placing them beyond the sanctions of the Sherman Antitrust Act. It was thought that the amendment affected nonsigners as well as signers; however, the Supreme Court in Schwegmann Bros. v. Calvert Distillers Corp., 341 U.S. 384 (1951), decided that the Miller-Tydings Amendment applied only to consensual contracts and not to nonsigner provisions. In 1952, the McGuire Act, 15 U.S.C. § 45(a)(3) (1952 ed.), specifically exempted nonsigner provisions from the Sherman Act.

We proceed now the discuss the question of whether an exclusive distributor for the entire United States may stipulate fair-trade prices in Pennsylvania, or whether the pricing program may be initiated only by a producer or owner of the identifying mark or brand. The Pennsylvania Fair Trade Act has been characterized as an "old-type" statute in that it does not specify who may stipulate the resale price beyond the word "vendor." The pertinent provisions of the Pennsylvania Act follow:

" § 1. Sale of goods bearing, or vending equipment of which bears trade-mark, etc.; permissible provisions

"No contract relating to the sale or resale of a commodity which bears, or the label or content of which bears, or the vending equipment from which said commodity is sold to the consumer bears the trade-mark, brand or the name of the producer or owner of such commodity, and which is in fair and open competition with commodities of the same general class produced by others, shall be deemed in violation of any law of the State of Pennsylvania by reason of any of the following provisions which may be contained in such contract:

"(a) That the buyer will not resell such commodity, except at the price ...

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