BOSTON PUBLIC LIBRARY RESTRICTION OF RETAIL PRICE CUTTING WITH EMPHASIS ON THE DRUG INDUSTRY By Mark Merrell and E. T. Grether Summer S. Kittalle WORK MATERIALS NO. 57 TRADE PRACTICE STUDIES SECTION March, 1936 3 9999 06317 389 0 OFFICE OF NATIONAL RECOVERY ADMINISTRATION i DIVISION OF REVIEW OFFICE OF NATIONAL RECOVERY ADM INI STRATI 01! ' DIVISION OF REVIEW RESTRICTION OF RETAII PrICE CUTTING ■7ITH BHPHASIS ON THE DRUG INDUSTRY By Mark Merrell and E. T. Grether Sumner S. Kittelle > Acknowledgement is rap.de to Mr. George Feldman for his report on the legal aspects of resale price maintenance; to Mr. harry S. Kant or and kiss Anne Golden for their preparation of the summary, the general discussion of state fair trade laws, the appendix on techniques for the study of prices in newsoaoer advertising, and for detailed suggestions at all stages of the work; to I r. 'iroe Alderson for com ient and criticism; and to kiss Anna Vina for her efficient co- ordination of the secretarial and clerical details involved in the preparation o^ the reoort. TRADE PRACTICE STUDIES SECTION I arch, 1936 9726 FOESUOHD This study of restrictive price control devices in retail trades was oreorred by Mark lierrell of the Trade Practice Studies Section, Corwin D. Edwards in charge. This re ort presents orincipally a history of the inception and development of the resale price maintenance movement in the drug in- dustry. The industry forces at work are jortrayed/ in detail. The effects of the restricting devices .are presented, 'insofar as evident, there having been inadequate tine for a field and' questionnaire sur- vey. However, the forms to be usee, in such a survey have been developed and are presented in an appendix, together with a technique for collect- ing retail prices. The experience in California, which state has had permissive restrictive price control since 1951, is dea.lt with in greater detail, on the oasis of surveys which one of the authors had instigated prior to the beginning of this report. Sources of information were correspondence, documents and trans- cripts of hearings in NBA files; correspondence and conversations with trade leaders; articles in trade journals; reports of court decisions; and, for so le of the purely historical matter, the personal knowledge of members of the Loss Limitation Unit gained through contact with the drug industry before and daring i'RA. At the back of the report will be found a briei the studies undertaken by the Division of Review. statement of L= C Marshall Director, Division of Review March 3, 19S6 / 972S TABLE OP COITTE1TTS Faze Summary. Introduction: Issues in the Re rulation of Hetail Prices ... PAST OITE I1TTEZPLAY Of EITEE2STS I' TIC DRUG IIBDUSTRY 3SPQHE a:,d dupjiig :i. P. A. Chapter One Before If. P. Ac 7 I. Introduction 7 II. Developments in the Drug Industry from 1911 to 1933 8 III. The Original Drug Manufacturing Codes 12 A. The Original Pharmaceutical Code 2.o P. The Original Cosmetic raid Toiletry Codes 12 1. Proposed Code of the Associated Manufac- turers of Toilet Articles 13 2. The Proposed Code of the Perfumery and Cosmetic Institute 14 C. The Original Package iiodicine Code ' H5 D. The Proposed Drug Institute Code 18 IV. The Proposed Wholos-le Drue Code 19 A. National Wholesale Druarists' Association Proposals 19 lc An Informal Code 19 2. The Original national Wholesale Druggists ' Association Code Piled with IT. P.. A. . . . • 23 B. The Federal Wholesale Druggists' Association Code 24 C. Other Wholesale Drua; Codes 27 V. Summary * 29 9726 -ii~ Page Chapter T\?o: Duri:y: 2~o R. A 3Q I. Attempts at Drag Code Consolidation 3Q II. The Pharmaceutical and Biological Code 32 III. The Perfume, Cosnetic pad Other Toilet Preparations Code 32 IV. The Package Medicine Code 34 V. The Wholesale Drug Code 37 VI. Summary '41 ****** PART two LOSS LIMITATION PROVISION 01' TIE: RETAIL DRUG- CODE Chapter Ore: Introduction 42 I. The Code's Place in the Entire Pricu Stabilisation Picture 42 II. Fundamental Pricing Structure of the Drug Industry. ... '' 42 Chapter Tvo: Alignment 01' 0 i ,osiny Threes 45 I. Proponents of Price Stabilization 45 II. Opponents of Price Stabilization 46 Chapter Three: Historical Pevolo pnent of the Loss Limitation Provision to the Amendment of M' rch 1934. .... 50 I. Trade Activities in Summer of 1~:33 50 II. Presentation of Code: Public Hearing; Subsequent Drafts 50 III. Reaction of Individuals; Mass Pressure 55 IV. The Loss Limitation Provision as Approved by the President 58 V. Objections of Tro.de to Approved Provision 60 VI. Efforts for a New Loss Limitation Provision; Attitude of 1I.R.A. 61 VII. The March Amendment to the Loss Limitation Provision and Its Interpretation 65 9726 -iii- t Page Chapter Four: Histo;.-ical_ Develo Tvnt of the Loss Limitation Provision irom ti\<:; Larch A i^ndae-nt to the Ex- piration of the Code 69 I. Administrative Problem Raised by "Last Proviso" of March Amendment 69 II. Order 60-54 and the Minimum Price Lists 71 III. Proposed Solutions of the Problem 72 IV. The Amendment of September 21 , 1934 74 V. Tlie Public Hearing of June 7 and 0, 1934 75 VI. The Movement lor a. Mark-up 76 VII. Interpretation of the September Amendment 77 Chapter Five: Issues Scon by Ooposin.. Forces. 80 I . Fo reward 80 II. Issues Seen by the Proponents of Price Stabilization. 80 A. -Issues Upon Price Stabilization in General 80 1. Bad Business Conditions in the Trade 80 2. Price Demoralization as the Cause of Bad Business Conditions 83 3. Incidental Bad Effects of Price Demoraliza- tion 83 4. Causes of Price Demoralization 85 5. Failure of Previously Tried Remedies . 86 6. Right of the Drag Trade to Special Consideration 87 7. Predicted Effects of Price Control 88 B. Issues with Respect to the Manufacturer's Wholesale List Price Provision 89 1. The Soundness of the Manufacturer's Wholesale List Price Per Dozen as a Code Price 89 2. The Effects of the March Amendment after 60 days of operation 93 III. Issues S^en as the Opponents of Price Stabilization.. 96 A. Issues with Respect to Price Stabilization in General 96 B. Issues with Respect to the Manufacturer's Wholesale List Price per dozen as a Code Minimum 100 972G -IV- Pa-e Chapter Six: AcJEiiiistrative Problems and Inherent Difficulties in the Loss Limitation Provision I . Manipulation of Prices by Manufacturers 107 II. Clearance Sales HO III. Premiums, Prize Contests and Outright Gifts 112 IV. Discontinued Lines of Merchandise 117 V. Complete Final Liquidations 118 VI. Determination of the Code Price in Unused Cases 120 VII . Manufacturers ' Price Change s 121 VIII. Retailers1 Price Advertising 122 IX. Federal and State Taxes 122 X. Difficulties Inherant in Code Authority Administration. . . 123 XI. Compliance and Litigation 124 A. Foreword. I24 B. Outstanding Litigation Cases 127 1 . The Standard Drug Co . , Richmond , Va 127 2. We is star d Bros., Newark, IT. J 1< 3. The Johnson Wholesale Perfume Conroany (Allen Cut Rate Stores), Massachusetts, Rhode I sland and Connecticut 4. The Thrifty Drug Company, Los Angeles, California. -6C 130 5. Court Cases of the Few York City Code Authority.. 131 Chapter Seven: Effects of the Loss Limitation Frovision 133 I . Foreword 133 II. Study of 12 Drug Items in 108 Manhattan Drug Stores 134 III. Study of 50 Items in 30 Stores in Four Cities 150 IV. Miscellaneous Data; Material from N.R.A. Files 154 Chaoter Sight: Description of Loss Limitation Provisions in Other Retail Codes. 161 I. The Retail Tobacco Code.,, 161 II . The Retail Bookseller ' s Code 165 Q70f, i K C hr.pt er EiAt (Cont'd ) Pa-;e III . The Retail Food and Grocery Code 169 IV. The Retail Trade Code 172 * * * * * * ?A3T THREE A 174 STATE RESALE PRICE UAIKTEEAIJCS LAWS Chapter One: The Fair Trade Laws I?4 I . Contracts 174 II. Types of Resale Price Maintenance Contract 179 III . Administration of the Fair Tra.de Laws 181 IV. The Oregon Fair Trade Lav of 1933 181 V. The Fitch Plan 182 / Chapter Two: Other Legislation on Resale Price I . Hew Jersey, II . Connecticut, III. Idaho ****** i Chapter One: The Legal History of Resale Price Maintenance in California . 133 184 184 p.iRT ~::r?e jj HE EXPERIENCE IV. THE STATS OF CALIFORNIA 187 187 187 I. The Period Prior to the 1931 Fair Trade Statute II. The 1931 Fair Trade Law and Its Amendment in 1933 190 III. Review of Cases Arising Under the Law Chapter Two: The Prohibition of Discrimination in Pricing I . The Act of 1913 II. The 1933 Below Cost Act. III. The Unfair Practices Act of 1935 9726 vi • 207 207 207 208 ( Pa^ro IV. The Politic,"! Forces Behind the Legislative Price — ~~ Stabilization Device s 217 Chapter JThree: Developments in the C-rocery. .Trade 218 I . The Official Attitude 218 II. The Experience With and Attitude Toward Contractual and Non-contractual Price '. aintenance 219 A. Retail Experience and Attitudes 219 3. Experience and Attitudes of ilanufacturers and Di s tri but ors 220 C. Experience and Attitudes of Selected Pirns 221 Chapter _Pour: Developments Under the Unfair Practices Act 230 I . The Period Prior to 193 ■ 230 II. The Peri:,d Following the Pass:, e ox the 193.3 Act 231 Chapter Eive: Developments _ir the Bru£ .Trade 233 I. The Period Prior tc 1933 233 II.. . The 1933 Amend lent 234 III. Trade Conditions in 1933 235 IV. The Period of the PEA Code 241 Tr rn' She Attitudes Towards and Experience with Resale Price Control on the part of embers h the Trade 242 A. Retailers 242 3 . . • ,n if acturers and "Tho looaler s 248 .Qfe%"9Jie.1l._Six: The Pressure from Organized Retailers 254 Chapter Seven: Snf or cement 262 I . The Procedure of Enforcement 262 II. The Elf ectiveness of Enforcement 267 Chapter Eifftit; The _"f feet s. Upon Prices and Kargins 269 Chapter Nine: 'The Economic Effects of ?.es< le Price Co ntroJL Under the California Pair Trade Law 280 972^ -vi i~ I p_art it pur iiitehplat or forcbs if trbi brut- uroysTHY sihcr km and i ? posed : bd ;ral statutes p*a4ef Chapter One: The, Interplay of forces in the Drw, Industry 285 Sines BRA I. The Drive to Pass Pair Trade .-jaws 285 II. Pressure on Manufacturers to Utilize the Acts 286 288 III. The Extent of Contracts Issued IV. first State High Court Decisi ui 288 V. Drug Biscrioutors Attack on anufacturers 290 A. The Retailers' Revolt 290 B. The Wholesalers' Revolt 291 VI . Summary 293 Chap_ter_Twq_: Propp sed Federal Statutes 294 I . The Tydings 'Mill 294 II . The Rat;.ian-Robinson Bill 294 III. Cther federal Proposals Before Conrress 296 972fl -viii- I Pa/ve &^-DlA 297 Legal Aspects Of Resale Price Maintenance 298 Section One: Su raarjr Sta.te_._ent of Iiroqr tajit jP_ric_e ! laint enance Decisions by. United States Suorene Court 29g I. Restrictive Agreements 301 II. Restrictive Agreements and Anti-Trust Laws 302 III. Restrictive Agreements and the Law of Restraint of Trade 302 Section Two : Clas_sifi cation of Ijroo_rtant Resale .Price Maijii_e.nar_ce Becis.ions. .Into ^Related .Classes 312 I. Decisions by Federal Courts 312 A. Decisions Concerning Patented Articles 312 3. Decisions Concerning Proprietary Medicines and so-called Secret Process C-oods 322 C. Decisions Concerning Trade - Marlced and Copy-righted Articles 328 D. Decisions Concerning Other Identified Products 328 P. Federal Trade Commission Decisions 330 II . Decisions by State Courts 340 III. English Decisions 342 IV. Canadian Decisions 342 Federal Trade Commission Drug Industry Cases 343 Pjro;oos_ed.Drug Manufacturing Codes. 343 Certain Provisions in the Original Code Filed by the Associated Manufacturers 3f Toilet Articles 343 Certain Provisions in the Original Code Filed "oy the Perfumery and Cosmetic Institute 344 Certain Provisions in the Cri inal Code Filed by the Package Medicine Industry 346 Pi'.ojo __. sed _whol.esn.le Drug Code.s 348 Certain Provisions of an Informal Wholesale Drug Code 348 -1 x € Certain Provisions of the Original Code Presented by the national Wholesale Dn^lsis1 Association. Certain Provisions of the Original Code Presented by the Independent Wholesale Dm. gists' Associa- tion Proposed Zxecutive Order Establishing Drug In- dustry Coordinating Council Open Price Provision of the Perfume, Cosmetic and Other Toilet Preparations Code as present- ed at the Public Hearing on January 17, 1934.. Pare 353 Certain Provisions of the Original Code Presented by the Federal Wholesale Drug.'-'ists1 Association 354 355 Certain Provisions of the Original Code Presented by the Allied Wholesale Druggists' Associa- tion 355 Manufacturers "die Adopted Refusal- tc- Sell Policies in 192^ 355 356 360 Certain Approved Provisions in the Perfume Cosraetic and ' ther Toilet Preparations Industry 361 Certain Approved Provisions in the Package lledicine Code 363 Certain Provisions in the Proposed Wholesale Drag Code as drafted for Public hearing', March 15 , 1934 366 Pair Trade Practice Rules as Adopted by the Federal Trade Commission - Wholesale Drug Conference 367 Proposed Federal Price Control Legislation from 1914 to 193L; 371 The Connecticut Retail Drug Control Act 373 Status of Fair Trade Legislation 375 The Hew Jersey Unfair Competition Lav/ 378 The Fitch Plan 379 The Tydings Bill 380 The Patnian-Robinson Bill 381 Her/ "J. A. R.D. Model State Fair Act 383 972« ~x~ Page Manufacturers (forking Under Fair Trade Lavs 385 Techniques: Price Information Availaole from Newspaper Advertisements 388 Shortcomings of the Method 399 Analysis of Liargins under Contracts Issued under the Fair Trade Lavs 401 Questionnaire Forms Developed for use in collection of Data 406 Summary Tables for Charts in Part II 426 -XI- f -- i - SUMMARY OF FINDINGS Economists, legislators and business non to day have a vital interest in the problem of retail price cutting and current efforts to restrict it. Little retailers, by mass action, are securing price maintenance in the form of state laws and manufacturers' price policies, and are now -forking toward Federal legislation to further their cause. All this is happening with little analysis of the economic and social considerations involved. The focus of this re-oort is on the drug industry "because that industz-y has advocated restraint of price cutting more consistently than any other group, and ha.s long ^oeen in the van of the price maintenance movement. As early as the "beginning of this century, drug manufacturers, seeking to curb the growth of crice cutting, attempted to stabilize resale prices bv contracts or notices affixed to their products, fthen, in 1911, the United Strtes Supreme Court, in the Miles' decision, declared such contracts in restraint of trade and void; and in another case, declared that notices on goods were not binding on distributors, many manufacturers became discouraged, but a few continued their efforts to maintain prices by other means. The two remaining methods of resale price maintenance were refusal- to-sell and consignment selling but both were expensive and ineffec- tive; so, while a. few manufacturers experimented with these devices, the drug industry appealed to Congress for a law validating resale price contracts. Between the 63rd and 73rd Congress, thirty-three such bills came up for consideration, but none massed. In 1933, Congress passed the national Industrial Recovery Act, and the drug industry saw a new chance for Federal price control. Manufacturers, wholesalers ana retailers submitted codes, containing provisions to stop retail price cutting; bi.it after months of negotia- tions, only the retailers achieved pny success in their efforts; and the provision they received established a minimum orice lower than they had requested. The manufacturers secui ed omen orice filing provisions in their codes but no direct price maintenance devices. The whole- salers could not devise a satisfactory price clause; and because of disputes over the labor sections of their -orooosed code, ended with no code at all. The loss limitation provision in the Retail Drug Code prohibited druggist from selling below the "manufacturer's wholesale list price per dozen", a price practically equal to the small dealer's merchandise cost. Because it '"as easy to ascertain and fairly stable, this code price proved one of the most workable and effective in NRA; but it had its share of administrative difficulties and inherent defects. Though evidence on the effects of the loss limitation provision is meager, it points to the probability that a larger number of prices were reduced than were raised. Trp factors account for this phenomenon; first, reduction of prices ~oy manufacturers to prevent the code from raising their consumer prices; and second, a tendency of competition to draw "orices down toward the code minimum on a large number of products counterbalancing the price increases on the items previously sold as 9726 - 2 - loss leaders. The net effect of these price movements upon consumers and small retailers cannot be stated, however, since there is no evidence of the relative volume of sale of items whose prices fell and items whose prices increased. When compliance with the loss limitation provision began to crumble (largely because of litigation difficulties) in the fall of 1934, the drug trade turned to the State legislatures for price stabilization. This movement derived inspiration from the California act permitting manufacturers and distributors to contract for the maintenance of resale prices, and requiring all retailers, whether parties to contracts or not, to abide by contract prices. This Act was the model for other state legislation; and drug groups secured its passage in Oregon, Washington, Illinois, Wisconsin, Iowa, Hew York, Pennsylvania, New Jersey and Maryland. Druggists in Connecticut obtained a statute indent ical with the loss limitation orovision of the Retail Drug Code. The leadership of the price maintenance effort, by this time, had shifted from manufacturers to retailers. Previously, price maintenance had been a scheme of manufacturers to achieve retailer goodwill. Grad- ually it changed to a militant retailers' movement to force manufacturers into satisfactory nrice 'oolicies under threat of losing all goodwill. Except for the California, law, state price maintenance laws have been in operation for too snort a time to reveal their effects. Data from California indicate that retail margins under contracts average about 31$, and that contractual prices on loss leaders have advanced ahout 254. Prices in small drug stores, on the other hand, seem to have decreased slightly. The drug industry has issued more contracts than any other. Many retail grocers are ignorant of the law's existence, and grocery manufa.cturers have exhibited little desire to maintain prices under it. In the present session of Congress, retail druggists have commenced a new move for Federal -orice maintenance legislation. One proposed bill would lift the anti-trust law ban on manufacturers' price con- tracts in states with r;rice contract laws, thus obviating the necessity for manufacturers to establish a domicile in these states. Another bill would strike at manufacturers' discriminatory discoimts and place the small and large dealer unon a more even competitive basis. Because of the extent of the price maintenance problem, the present study is little more than an indication of the need for a larger work; for which work, it is hoped, the information and pro- cedure of this report may provide useful suggestions. 9726 IITTHODUCTIOH (*) Issues in the gem'-latio". of gotoi! ""rices A strong effort tc change the nature and ertent of retail price regulation is binder way in this country. A lumber of states have enacted lavs permitting resale price maintenance ?.nd loss leader selling during the past year. Sinilar legislation is "before legislatures in other states, and before Congress. Proponents of restraints on price cutting urge that regulation is necessary not only for the preservation of snail, individual enter- prise, hut also to eliminate practices injurious to the consumer. They charge that the monopolistic power of huge distributing corporations is oppressing sr.all retailers; that the groat chains and department stores are exacting unearned discounts and allowances from their suppliers and are using the margin thus gained to destroy small competitors; and that manufacturers often build up consumer demand by advertising and then of- fer special discounts to price cutters, thereby making small retailers distribute the product at a loss. The proponents also charge that pres- sure on snail non-cut-rate retailers comes from certain types of rela- tively smal] , aggressive cut— rate establishments. The""social usefulness of the types of price control already established or now under consideration has not ^oeen. precisely evaluated. It is not hnomr, with even approximate accuracy whether a. given t^noe of price control mill contract the area rd.th.in vhich competition operates, or shift the brunt of competition to s new area, or merely change the form of the competitive practices; no estimate has been made of whether it will result in the overpayment of those engaged in performing dis- tributive functions, or whether it will tend to oiirta.il the total output of goods. Political pressure and rule-of-thumb judgments have decided the course of events. The problems involved are complex, but some of the more out- standing questions are ar> follows: .1. T.'ould the proposed controls eliminate conditions inimical to the public interest? a. TTould they prevent the growth of monopoly and the unsocial use of corporate power? 7/hat shifts have been apparent in volume of business on nationally-advertised goods from large to small distributive enterprise? TJliat, if any, trends appear toward a. monopoly for large distributive enterprise -through -the use of private brands? b. Would the controls favor the continuance of small enter- prise? TTnat shifts in volume of business done by small enter- have appeared? Plow have the various forms of existing con- trol altered, favorably or unfavorably, the margins of small enterprise? Of large enterprise? (*) By Harry S. Kant or 9726 - 4- - TTould tlie proposed controls bring about other conditions inimical to the public interest? c. TTould the consumer o y higher prices for goods? TThat has been the effect of existing controls on consuner trices on nationally-advertised brands? On private brands? b. T7or.ll the consuner have to pay for unwanted services? TThat ^rice differential has been maintained between ser- vice and. non-service outlets under free competition and how have existing controls altered this differential? c. Would price regulation protect inefficient enterprises? What political and social reasons for such protection exist? That would bo the public cost? TTould. snail re- tail enterprise absorb an undue share of the social in- cone? TThat gains and losses woul 6 the proposed controls bring to industry? a. "hat have been the effects of existing and. nast nrice controls on manufacturers? Has the manufacturer's volume of business increased or decreased? Has his margin in- creased or decreased? b. TThat have been the effects of existing and past controls on wholesalers? h""re wholesalers' margins and volumes increased or decreased-? c. What nave been the effects of existing and uast controls on. retailers? That a.s been the effect on the relative margins and- volumes r>f retail enterprises of different sizes, price policies, and service policies? Is there a point below which cm established minimum price becomes more of a detriment than a benefit to small retail enterprise? If there is to be an extension of retail price control, in what manner and to what extent should prices be controlled.? a. Is new legislation necessary to-, secure the desired results? Can they be secured by the repeal of existing legislation? TTould. previous court decisions outlawing resale price maintenance be followed today if the courts had adequate evidence about the tactics ased in retail nrice cutting, and the effect of these tactics? TThat are the limitations on refusal-to— sell and. consignment selling as price main- tenance devices? Does the solution lie merely in the education of small retail enterprises in sound business proced.nre? TTould government-fostered voluntary chains achieve the protection of small enterprises through en- hancing their power to compete? TTould complete cartel- liza-tion result from the growth of voluntary chains and. is such an outcome desirable? 97 26 - O — b. If price control legislation is necessary, should all retail prices be regulated? What is the suscep- tibility of various commodities to price cutting? Upon what commodities v'ould price regulation be in the public interest, and upon what commodities inim- ical to the public interest? . ' c. Should regulation be in the form of a fixed minimum price or a formula for establishing a minimum? What was the relative effectiveness of these two types of regulation as illustrated, on the one hand, by the Retail Drug,, Retail Tobacco pad Retail Booksellers' Codes; and on the other, by the Retail Food and Grocery and Retail Trade •Codes? how did the two types compare in enforceability, difficulty of administration, and protection to small enterprise? d. -Should regulation be in the form of mandators'- or permis- sive legislation? If the legislation is permissive, what types of enterprise, and what proportion of each, may be expected to take advantage of it? TJliat has been the experience in this respect under the California Fair Trade Lav;? What are the relative effects on prices, volumes, and margins of the two types of law, represented v by the California law and the Connecticut Retail Drug Act (which follows the provisions of the Reta.il Drug Code)? What is the relative enforceability of each type? How does the constitutionality bear on the last-mentioned question? 5. To what extent is the depression responsible for the present movement for -price control? Would recovery correct the problems complained of by proponents of the movement? What would be the effect of the proposed price controls on in- dustry and society during periods of good business condi- tions? Would these controls, designed to prevent high mortality of enterprise during the depression, discougate the birth of new merchandising methods in other periods? Would they en- courage the entrance of inefficient units during times of good business? The solution of many of the above questions is impracticable; and the present report encompasses on]y a small part of the material necessary to answer the questions whether resale price maintenance should be permitted, and whether loss leader selling should cease. Some in- sight into the gain or loss to parties affected appears by close scrutiny of the nature of enterprises in the groups advocating and opposing the various forms of price regulation, and from analysis of their public statements. The fact that experiments in price regulation have preceded 9726 -■ 6.- analytical decisions on the propriety of such regulation offers an op- portunity for a studj;1 of the 'effects in actual practice. Insofar as the physical limitations of this study have made it possible, this report presents the data on the effects of the loss limitation provisions of the Retail Drug Code and on the effects of the resale orice maintenance legislation in California. Limitations upon this study have required it to focus principally upon one industry. The drug industry was chosen "because of its susceptibility to price cutting, and its long— continued advocacy of retail price maintenance. This industry's experiences under 1THA are more readily available for study than those of other groups under codes, the loss limitation pro- vision of the Retail Drug Code being an interesting example of nation- wide mandatory retail orice maintenance. Prior to ItHAi the drug industry had been the principal sponsor of retail price maintenance bills before Congress and an active group in the struggle for price stabilization "by manufacturers. Since HEA the drug industry has sponsored retail price main- tenance legislation in a number of states and is currently attempting to secure Federal legislation on the problem. Thus this industry has experienced, perhaps, a wider range of retail price cutting and price maintenance problems than most in- dustries, and offers a fruitful field for research. ■ ?726 - 7 ~ PAST I - INTERPLAY 07 IHTSIIESTS I IT TEE DRUG INDUSTRY (*) CI3APTEH I - BEAKS MA I. IKflSDOC-IIOH Maneuvers for power in t'he Drug Industry during the I7RA period gave the key to what had gone before. Hew business strategies were but projections of the old and had the same motivations. Developments since the cede collapse seem to fall into the familiar patterns. Price maintenance did not make its first appearance in I-JRA codes. Various trade elements had demanded it ever since large scale business operations appeared. It had taken various forms and its compelling forces had shifted about. An examination of the drug industry during 1IRA and the price provisions which appeared in the original drafts of the codes may clarify the movements and attitudes toward price stabilization. Al- though none of the price provisions appearing in the original proposed dru_, codes were a^oroved by the Administration, they are of interest and should be carefully examined as they are indicative of the temper of the trade groups at the tine. The fight to convince the Adminis- tration of the necessity for such provisions, the compromises offered by the trade, and the subsequent clauses approved by the Administration all shed light on what can be expected in any future attempt the in- dustry may make to obtain price stabilization by legislative means. The Administration's experience with the industry under the approved, compromised price provisions probably indicates possibilities under other types of price devices that may be established in the future. This part of the report intends to describe first the major de- velopments in the field of price maintenance from the Miles' decision in 1911 'to the passage of the National Industrial Recovery Act. A discussion, of the original proposed codes for the manufacturing and wholesale branches of the drug industry follows. The proposed retail drug code receives only brief treatment here since Part II of this report covers it in detail. After the discussion of the proposed codes comes an investigation of changes in the drafts durii\; preliminary negotiations, and a dis- cussion of the approved codes. Again the retail drug code receives only cursory reference because of its treatment in Part II. Considerable material presented in this Part is written from first-hand knowledge acquired by certain members of the Unit through administering the several drug codes and from previous experience in the industry. (*) By Mark Merrell 9726 ~ S - II. DEVELOP? PITTS' I'.l THT, DRUG INDUSTRY '-!%ROM 1911 TO -1933 Prom 1911, when the United Stater- Supreme Court handed down the Miles' decision prohibiting manufacturers from issuing resale price contracts, to the passage of 1TRA, there was a growing pressure on Congress and the state legislatures for various types of price main- tenance laws. After the World War the advertising of trade-marked products was greater in the drug and toiletry field than in any other group of over-the-counter merchandise. The resultant growth of power- ful consumer demand for branded drug' products greatly influenced not only the extent of the price-cutting problem and the extension of these products into- new distribution channels but also the character of the trade groups demanding legislative relief. Before the advent of this great consumer demand, manufacturers were dependent to a large degree <=>n the support of wholesalers and re- tailers for the sale of their product. They confined their sales primarily to drug channels and prior to the Miles' decision and for a few years after, -were- sincere in their efforts to obtain stablized prices. The horizontal competition between' manufacturers •■' products was not very great and each had a semi-monopoly on his goods. The ■ sale of private brand substitute products by distributors was not large enough to cause worry. It was during this period before the war and the advent of great national advertising that any attempt on the part of a manufacturer to stabilize his resale price wis considered. a scheme to :ouge the public by reaping undeserved profits and courts considered restraints on price-fixing in the interest of public wel- fare. It was good business from the points of view of both profit and distributor's good-will for the manufacturer to control the resale price and to confine his distribution to the so-called legitimate drug channels. The Miles' decision' was a great blow to this large group of drug manufacturers who had- endeavored to' maintain! their resale price. Many dropped any idea of price maintenance. Some, however, endeavored to obtain stabilized prices by other means remaining after this sweep- ing decision. A great deal of confusion existed as to just what was legally possible. This confusion was somewhat clarified by the Col- gate decision handed down in June 1919 upholding the right of the manufacturer to refuse to sell to price cutters. The Eeech Hot case, in June 1922 clarified the -situation still more by. prohibiting con- tracts and agreements and certain other techniques employed in connec- tion with refusal- to-sell>.' '.'. Suo sequent decisions have not further re- stricted the technique available to the manufacturers using refusal- to-sell for price stabilization. Whereas a great many manufacturers were maintaining resale prices prior to the Miles' decision, this number dwindled to the point where at NRA's inception only a few manufacturers were voluntarily making an effort to stabilize their resale prices. During these intervening years, the Federal Trade Commission conducted investigations and held formal hearings on the activities of fifteen drug manufacturers.* In addition to the formal (*) See list of Federal Trade Commission hearings on page 343 in Appendix to this Report 9726 hearings held, the Federal Trr.de Commission caused a number of stipu- lations to be signed by manufacturers in place of issuing' a formal complaint. Unquestionable, this pressure from the Federal Trade Commis- sion held c'.ovm the number of drug manufacturers who uivocrted price maintenance. In 1914, the Stevens' Sill and the Petz' bill were introduced into Congress. These bills were designee to nullify the Miles' decision and give manufacturers the permissive right to contract for resale prices. Since that time ,°t least one bill with that intent has been introduced in each Congress up to the 73rd Congress (1233).* The two bills intro- duced in 1914 had a gre?t deal of support from the manufacturing branches of the arug industry but Dy the time the Capper-Kelly bill was introduced into Congress in 1931, the number of manufacturers supporting this measure had dwindled. Among the small group of manu- facturers vao spoke in favor of the Caaper-I'elly measiue were some who, as judged by subsequent developments , appeared less from sustained con- viction than from desire to make a gesture to win support of the trade. In the latter part of 1935, Sir William C-win-Jones vent to Canada,, at the request of certain drng interests, to establish there an organi- zation similar to the Proprietary Articles Trade Association which he had successfully operated for' about thirty years in England.** This Association, by means of boycott in England, had been b'le to stabil- ize prices in the drug ind\istry. Although the English' law allowed con- tracts for resale price, very few resale price cases ever went to court, as the blacklist methop. established by the Proprietary Articles Trade Association was more successful. The Proprietary Articles Trade Association was a vertical association, issuing a list of drug prod- ucts sold \>j member manufacturers. If " '"istributor cut the price be- low the price est'-blisned 't the Association he was denied the right to purchase -.ny of the products Listed, Sir Will-Iran Gwin-Jones estab- lished a similar system in Cana; . hut, after his death, when one or two adverse court decisions. w- re rendered, the C nadian movement col- lapsed. Early in 1926, Sir William appeared before drug .groups in the United States, Although it was clear that a similar price mainten?nce system would not be legal in this country, his visit inspired certain members of the National Wholesale Druggists Association to start a drive to nersuade manufacturers to adopt a selective distribution policy. There was much enthusiasm over this movement; a committee of four wholesalers called on practically every large drug manufacturer, requesting that the manufacturer adopt a selective distribution (re- fi\sal-to-sell) policy. The wholesalers , in turn, promised support to (*) See Appendix Page 380 for an analysis of Federal Price Main- tenance Legislation which was considered by Congress between the Miles' Decision, 1911 up to the uassage of the Ifetional Industrial hecovpry Act, June, 1933 (**) See "Retail Price Maintenance in Great Britain" by E . T. Grether, University of California Press 9726 - 10 - such a manufacturer through wholesalers' salesmen. Many wholesale com- panies tabulated the sales of the manufacturers who adopted this policy, paid -their salesmen extra commissions and gave them other incentives for pushing this merchandise. This development marked the first con- certed pressure oy distribution groups in this country since the Miles' decision to force manufacturers to '.opt = price maintenance policy. According to Drug Trade Hews some sixty-four manufacturers adopted a refusal-to-sell policy- hut the number was "-small in contrast to the many who had price maintenance policies prior to the Miles' decision.* The movement subsided within a year or so because of the fear of the Federal Trade Coi mission and the indifference of the manufacturers. The growth of national advertising after the world war, up to its peak in 1929 caused great expansion of the sale of products in the drug and toiletry field. With the flush of expanding volume Manufacturers lost interest in confining the sale of their products to drug channels. As a result, many other types of re toilers became competitors of the drug store. Furthermore, the average drug product with large consumer demand became an ideal loss leader a? it was of small unit value and its su posed value was well known to consumers; a cut price made an attractive bargain which Drought traffic to the stores. Enticed by large profits, many new companies entered the field. This naturally incited competition between manufacturers, and the number of tooth pastes, the number of face powders, and various types of medicines in- creased. In this atmosphere of expanding business the chain drug stores grew by leaps and bounds* In order to establish themselves in the market they became the aggressive price centers, .The advent of prohibition also had its effect. Under prohibition the retail and wholesale drug outlets were the only types of distribu- tors who could handle medicinal liquors. A new type of retail druggist appeared whose main interest was the selling of liquor. The wholesale druggist was limited in his selling of liquor to 15$ of his total volume of business. In certain instances oecause of this, distillers with large stocks entered the wholesale drug business and, in order to build up a sufficient volume of drugs to sell their liquor supplies, began cutting prices to the retail trade on drug' products. They entered new markets beyond the natural trading area in which they were located. For example, a wholesale drug house in Chicago sold by mail in St. Louis and delivered the goods, offering a 10G cut in price below that offered by the St. Louis companies* During this period the so.le of private ' brand substitute products ilso , reatly expanded. One of the basic reasons for this growth was the price-cutting of standard drug products. The chain operator introduced his own line in order to recoup- the losses he encountered .on the standard lines. The small retailer also sold private brand merchandise as substitute products to pet away from sell- ing standard products in competition with cut-price stores. In the years just preceding the depression a new type of drug merchant appeared who usiially handled-' a limited1 number of drug and (**) • See; Drug Trade Hews, August 30,. and Spetember IS, 1926 issues, See page 355,- Appendix for a list of these manufacturers ?726 - 11 - toiletry products.. Me rented a store in the shopping center "but usual - ly in the middle of the bloc1: where rents were cheap". He stayed away from expensive fixtures found in the average store 'end had some plain shelving "built in. From this featured simplicity- these stores "became known as "pine "board" stores 'ana 'ber-'n at once on their chosen careers of undercutting the chains and department stores. During the depres- sion, while the number of other retail drug outlets diminished, the pine hoard type increased. Tae pine hoard, through lower operating expenses and greater flexibility of management, was able to beat the larger chains at their own game. The larger chain stores by this time were well established in their communities and in place of introduc- ing new low prices they adopted the policy of meeting competition. Early in 1933 a second movement was started by members of the National Wholesale Druggists' Association which encouraged manufactur- ers to adopt a selective distribution policy. This time some of the large corporate chains joined the wholesale druggists in this pressure. This was important because the average manufacturer could not afford to alienate the chain groups* Previously, some manufacturers thought it wise to make a gesture to wholesalers by appearing to adopt a price maintenance policy but the threat i nf losing the support of the large chains was serious to all. As a result many more manufacturers than appeared in the 1925 list came out publicly announcing that they would use their legal right to" refuse to sell wholesalers and retailers who did not adhere to their suggested minimum prices. This second refusal- to-sell movement was quite effective. The drug co'des which were initially filed with the SRA sought to put a stop to 'the 'competitive abuses that .-had arisen in the industry during the rrevious two dec- \ s. host of t.\e trouble seemed centered around price-cutting in the wholesale and retail branches of the in- dustry. Therefore, price plans Were evolved to stabilize resale prices, 3726 - 12 - III. THE ORIGINAL D^UG MAITFACT-TRniG CQDBS Three manufacturing, drug codes Fere filed. The Package Medicine and the Cosmetic snd Toilet Preparations Codes "both contained provisions affecting prices "but the Pharmaceutical code had none. With the exception of. a clause in the proposed Package Medicine code prohibiting sales "below manufacturing cost, all of these priae provisions were drafted to fix the resale price for distributors. A. THE ORIGINAL PHARMACEUTICAL CODE The pharmaceutical manufacturers, whose products were primarily sold on doctor's prescription, were not suffering from the use of tneir mer- chandise as loss leaders, and, therefore, felt no urge to. ask for a pro- vision in their code to peg resale prices.: Pharmacists respect the pro- fessional standing of ethical pharmaceutical houses who contribute to the professional, not the commercial, strength of the drug store. The pharma- ceutical manufacturers regretted to see the druggists suffer from cut price competition, but the problem was not close to them. Many cut-rate stores had no prescription departments and those having them seldom featured cut prices on prescriptions. Furthermore, the consumer purchasing a prescription had little basis for comparing prices. Even the so-called "Specialties" of the pharmaceutical manufacturers were not readily susceptible to use as loss leaders. These specialties were pre-packaged medicines, but they were in- tended for sale in r>n unidentified form on doctor's prescription and not for direct sale to the public under their brand names. As a group the manufactu- ring pharmaceutical industry had stayed clear of supporting the Drug Insti- tute. This was a vertical trade association formed a few months before NRA. It had a membership classification for every branch of the industry and was designed as a meeting place where the whole drug industry could sit down and work out price stabilization and otner problems. B . THE ORIGINAL COSMETIC AND TOILETRY CODES In the cosmetic and toiletry branch of the drug manufacturing in- dustry, the Associated Manufacturers of Toilet Articles was the largest trade association. Its membership of large and small companies was scattered over the entire country and represented practically every type of business policy. As an association, the Associated Manufacturers of Toilet Articles decided a year or so before the advent of NRA that something should be done about competitive practices such as the giving of PMs (sales commissions to retail clerks*}, the use of demonstrators, and various kindred types of secret and open price concessions that had appeared during the growth in the industry in the previous decade. To this end the Association voted to ask the Federal Trade Commission to conduct a trade practice conference on the subject. The request crystallized a long fight in the association and (*) FMs are sales commissions paid directly or indirectly by manufacturers or proprietors to retail sales clerks. The origin of the initials is un- known. Some say it means "push money" while others say "post-mortem" . The origin of the latter refers to dead stocks at the end of the year which the owner moved off his shelves by giving commissions to his clerks. 9726 -lo- calised five of its largest members to resign. The conference -was never held tut when the NRA. was passed, the five dissenting members formed a new association, the Perfumery and Cosmetic Institute, and presented' a code to the Administration along with the one prepared by the Associated Manufacturers of Toilet Articles. The members of the Perfumery and Cos- metic Institute were against any strict rules for prohibiting FMs and against curbing the use of demonstrators, probably because the prominence of their products in the trade insured a favored position in the depart- ment and chain stores. They had no trouble establishing their demonstra- tors in the larger stores; other stores whose volume of sales or adver-' tising possibilities did not warrant the use of demonstrators found the FM policy acceptable. In open competition members Of the Perfumery and Cosmetic Institute had tne advantage over their smaller competitors. The original codes of these two associations reflected this controversy. 1 . The Proposed Code of the Associated Manufacturs of Toilet Articles Article VII of the original code drnftei by the Associated Manu- facturers of Toilet Articles contained a pledge that every demonstrator was supposed to sign. (*) The demonstrator in this pledge agreed not to "make disparaging or uncomplimentary remarks" about competing mer- chnndise. Furthermore, she would not attempt to substitute the pro- ducts made by the company paying her salary for other products which a customer might request. The pledge ended with the statement that the employment of a demonstrator who indulged in such practices would be "considered an unfair trade practice." The article went on to say "that it is an unfair trade practice for a manufacturer to continue to employ a demonstrator who has been found guilty of violating this pledge." Demonstrators were used cniefly in toiletry departments of depart- ment stores and their use established a price advantage to the depart- ment stores over other types of outlets where demonstrators were not employed. Department store policies varied in their use of demonstrators but, nevertheless, most of them would have resented the use of such a pledge. The last sentence in the Article stated: "Bribes, gratuities, gifts, PMs and all forms of special commissions paid by manufacturers directly or indirectly to influence retail employees to promote the sale of particular merchandise, shall be considered an unfair trade practice." This prohibited FMs and similar price concessions used by both large and small manufacturers where the retail sales in a store did not warrant the wages of a demonstrator or where the retail store already had all the demonstrators it could use.. With the. struggle by manu- facturers to obtain special sales support in. large retail outlets and with the managers of the stores playing both ends against the middle, many competitive abuses had arisen in the industry. Those ranged from a manufacturer's paying PMs to another's demonstrator, to several manu- facturers' paying full wages to a retailer for the employment of the same demonstrator. The purchaser never knew when a manufacturer was paying a PM on a sale and seldom was a demonstrator identified as being in the manufacturer's employ. It can be seen from this that a customer (*) See page 343 of Appendix to this Report. 9726 - 14^ | ... often "bought merchandise which he believed wrs being recommended "by the management wher.ers the sale' was actually motivated by the hidden com- mission "to the clerk.. The next Article in the Co'de made it an unfair trade practice for a manufacturer to discriminate in price among members of the same ciass of distributors except on a basisof Quantity and distance. (*) Certain sales practices were lifted out of the definition of price discrimina- tion in this Article by stating that the wages of demonstrators, the manufacturer's share of cooperative advertising, and the payment for window displays would not be "considered a form of price discrimination". Apparently,, although a number of trade abuses had arisen around coopera- tive advertising and the payment for window displays, this Association did not desire to curb such practices under its Code. Undoubtedly, the small manufacturer would have an equal chance in obtaining cooperative advertising and windovndi splays for his products with his larger com- petitors. At least this 'type of "dealer cooperation was in the open and subject tc ■check. Article IX gave the manufacturer the permissive right to make con- tracts with wholesale and retail distributors about resale- prices.' (**) It also permitted wholesalers to pake contracts with retailers for the resale of products made by cosmetic manufacturers. This clause was based on the principle of the proposed Capper-Kelly Bill which the trade stopped pushing in Congress when the NIRA was passed. The manufacturers of cosmetics and toilet preparations as a group were more interested in this proposed measure -than were either of the other two manufacturing branches of the drug industry. 2 . The Proposed code of the Perfumery and Cosmetic Institute The original code presented by the Perfumery and Cosmetic Insti- tute did not mention any control of the use of FMs. or demonstrators. In Article C, Rule 6, appeared a mandatory open price system- which also included the permissive right to contract for resale prices found in the Associated Manufacturers of Toilet Articles code. (***) This would have been done by forcing manufacturers to "publish and .circulate to the pur- chasing trade their respective price lists'" which contained also the terms of sale and would have acted, if the- manufacturer had so desired, as the terms of a resale contract.' The manufacturer woxild have simply issued a contract and made reference to bis filed prices . In Rules 7 and 8 stood certain exemptions to the contract price, of the type found in the Capper-Kelly Bill. In the 'last paragraphs of this Rule the Perfumery and Cosmetic Institute hot only asked for "the right to cir- cularize information" about -distributors who .disobeyed the previous provisions profided for under this plan but went a step further and said that a retailer "shall be obliged" to furnish the name of the • wholesaler from whom he obtained the merchandise. (****) This would have resulted in an excellent 'black-list of .both retailers and whole- (*) See Fage 343 of Appendix to this Report (**) See Page 343 of Appendix to" •'this Report . ,.,, • ;. .- ; (***) See Page. 345 of Apiendix :tb- this- Report . h „ (****) See Page 545 of Appendix to thi-s- Report for Rule* 7 and 8 9726 .. ... -;i ;■'.•■•"' - 15 - salers who were upsetting ihe price stabilization scheme. It is^ inter- esting to note that while the AMTA and the FCI were at each other's throats regarding the control of certain competitive practices they were in entire agreement in wanting the right to use resale, price contracts. C. THE ORIGINAL PACKAGE MEDIC IKE COPE The original Package Medicine Code did not contain a request for the permissive right to contract for resale prices. In' its place there was an elaborate mandatory price fixing plan that pegged' prices all the way along the line. Competition in private brand merchandise as well as highly advertised standard products had always' been much keener in packaged medicines than in toiletry products. The Package Medicine manufacturer did not want his resale price's maintained unless he could be assured that at least the standard advertised products of his competitors were going to be under the same rules. After all, con- sumers who want to buy Aspirin or Milk of Magnesia may purchase any one of several prominently known brands. Competitive prices play an important part in the selection. Any one of these' manufacturers was likely to find himself at- a competitive disadvantage if he pegged his resale prices by means of a' permissive contract while the prices on his competitor's merchandise were allowed to go down to a low com- petitive level. Therefore, the package medicine manufacturers if they were going to have resale price maintenance, wanted this to apply equally to their competitors. In the toiletry field, especially in the higher priced cosmetics, the consumer is influenced more by brand than by price. If a woman has decided that A' s face po'wder,. which is a nationally known brand, is the' product she wants to use, it is more difficult to persuade' her to use another brand than to get her to change her mind about Aspirin or Milk of Magnesia. This contrast becomes more emphatic when pri- vate brand substitute products are being offered'. A woman may buy B's face powder or some other nationally known face powder in place of A' s but often she will not purchnse an unknown private brand in place of a standard product, even though the price is very attractive. The originally proposed code of the package medicine industry was a curious document. It endeavored to set up a partially vertical code by its definition of the members of the trade, attempted to curb the sale of private brands, sought to prevent wholesalers from going into the manufacturing business and reached over into the wholesale and retail fields to peg resale prices-. Although two cosmetic codes had already been filed with NRA, the package medicine draft included this branch of the industry in its definition. (•*) The Proprietary Association was the dominant group sponsoring this code. Many of its members made toilet preparations such as tooth pastes, shaving' creams-, mouth washes and hair tonics. It was for this reason they believed such products should be included in their code. (*) See Page 346( Article II) of Appendix to this Report. 9726 - 16 ~ The elaborate price plan set forth in Article V (*) was based on. the standard pricing structure found in the drug industry. (**) This price scheme insured a gross margin of 33-1/3$ of the retail selling price to the retailer and gave the wholesaler at least a 6$ gross margin on his selling price to the retailer. It tied down the wholesaler to a limit of 2$ cash discount with certain exception's on special Occasions where he could give more but with- the restriction that this could not exceed one-third.of the margin he received. . Retailers were prohibited from selling below the full consumer published price less ,21$ (**■-) with the exception of the ten cent size which could not be cut at all. This full price maintenance proposal for the benefit of the five and ten cent stores had previously been a point at issue between manufacturers and certain retail groups. Many manufacturers refused to sell this size to drug stores lest they cut the price to prevent this business from going to the fixed price variety store-. In order to get the five and ten cent stores to handle their products, manufacturers had to assure them that the price would not be cut. The fixing of the ten cent price in the manufacturing code would have added fuel to the fire. There were a number of other clauses in this article that attempted to plug the loopholes in the scheme. The only provision. affecting the price to be received by a manufacturer for his goods was one stating that he could not sell "below his own cost-, of production or manufacture". This clause might have affected some manufacturers of private brands who competed with other manufacturers' low prices on products such as aspirin and mouth washes, but hardly would have touched the makers of nationally advertised products, whose margins of gross profit were usually large. One provision in the Article touched the private- brand- substitute-product situation by stating that distributors "are working contrary to the interests of the trade as a whole if they attempt to substitute or divert sales" on such products made by manu- facturers- who adhere to the price plan mentioned above. This attempt- to curb the competition of private brand substitute products was more fully covered in Article VI. (****) Paragraph (d) of this Article established a far reaching proposal preventing wholesalers from making competitive products. It said that it was "an undesirable and uneconomical practice for the wholesaler to carry on the manufacture or distribution of products in competition with nationally advertised products." The record failed to disclose the feeling of the wholesale druggists on this matter. However, it was apparent that the package medicine people were feeling the competition of the wholesalers' own branded products. (*) See Page 346of Appendix to this 'Report. (**) See Fart II, Chapter I, Section' II of this Report for an explana- tion of the pricing structure of the drug industry, Page 351 (***) This 21$ clause appeared in some of the revised^preliminary drafts of the Retail Drug Code; see Fage 366 (****) See Page 346 of Appendix to this Report , 9726 - 17 - In paragraphs (c), (f) and (g) of Article VI are found restrictions on imitating another manuf acturer ' s products," a. prohibition against re- packaging a product, and an attempt to control counterfeiting by forcing purchasers to buy "from the manufacturer .or his recognized distributors ." (*) The large spread of profits in the drug business had invited a number of undercover companies to make imitations of standard products and even in some instances to make complete counterfeits.: The chaotic price condition in the retail trade made it comparatively easy for such products to re^ch the market . . • ' . ■ 1 In paragraphs (h) and 0) of Article VI (**) the sale of private brand products was completely ■ outlawed when ; these products were offered a-i substitute products for advertised brands. The code sponsors felt that "where a manufacturer, through enterprise, advertising or reputa- tion, has built a trade for an article, he is- entitled to profit there- from and any interference with the normal demand of trade or of con- sumers is unfair." They then described the "switching" of goods "other than those requested" as being an interference which. was a "reprehens- ible and unfair practice" . Not only was switching barred but the dis- tributors were not allowed to make "disparaging statements regarding the products or prices of a manufacturer" . The provision ended with this challenging statement, "when a product is asked for by name, it shall be sold". From these code prohibitions • on the sale of private brand substitute products it was evident that the sponsoring committee of the proprietary medicine industry wanted to put such competition in a straight- jacket. They had much to gain in such an effort-. Sale of pri- vate brands had greatly increased during the depression and the manufactu- rers keenly felt this growth. Large advertising outlays had lost some of their effectiveness and there was grave doubt .-^s to whether the return of good times would dispel the consumers' willingness to accept substitute products. From the restrictions they put in their eode, it seemed evi- dent that the sponsoring group wanted to correct overnight a situation they themselves had helped create by their rush for volume to keep paje with their advertising expenditures. In paragraph (j) of Article VI appeared a provision intended to standardize the use of various price concessions. (***) This restriction was similar to those set forth in the open price provision of the Per- fumery and Cosmetic Institute Code but did not go as far. It would have bound the members to a uniform system of price concessions, tending to clarify some of the various ramifications of the vertical price scheme set forth elsewhere in the code. In Article VII a committee was set up to administer the code, with the Drug Institute as a compliance clearing- house. It is curious to note that the package medicine was the only manufacturing code, so far con- sidered, which mentioned using the Drug Institute as an enforcement agency. ... ( *) See Page 346 of Appendix to this Report. (**) See Page 346 0f Appendix to this Report. (***) See Page 546 0f Appendix to this Report. 9726 ~ 18 - D. THE PROPOSED DRUG INSTITUTE CODS The Drug Institute sponsored a vertical code for the whole industry. (*) It purported to contain all of the best provisions from the codes that had been filed for the different branches of this industry. Article V,~PRICESj of this document was practically identical with Rule 6, the price filing provision, in the code submitted by the Perfumery and Cosmetic Insti- tute, the only difference being that the former was reworded to fit this vertical instrument and contained two additional sections setting up the method for filing prices. There was no elaborate price stabiliza- tion scheme in the Drug Institute code such as that set forth in the package medicine code. . In Article VI, Unfair Practices, Sections 7 and 8, a mild attempt was made to regulate the sale of private brand substitute products. It is difficult to determine the full significance of these two Sections because their language was vague. They read as follows: "It shall be an unfair trade practice "Section 7. To prevent, by uninvited persuasion, disparaging innuendo, or by concealment, a customer or prospective customer from purchasing a particular product which he has requested — . "The uninvited dissuading or the attempt to dissuade a customer or prospective customer from purchasing an article of a particu- lar brand, trademark or type, which such customer has requested, and persuading or attempting to persuade such customer to pur- -• chase an article calculated and designed to serve the same pur- pose, but '.of a different brand, trademark, or type tnan the article requested, unless the vendor has not available for sale the article so requested, and unless such fact is so disclosed to such customer or prospective customer. "Section 8. To prevent the substitution of a product for one ' which the customer believes he is purchasing — "The sale and/or delivery to a person of an article of a differ- ent type, brand, or trademark from that which the customer or ■ prospective customer believes he is purchasing, unless such fact be disclosed at the time, of sale or offer for sale by the vendor to the customer or prospective customer." It is evident that the above two- sections were a milder substitute for the drastic clauses requested in the original package medicine code. The record did not disclose whether or not these sections met with the approval of the package medicine code committee. Before discussing the manufacturing drug codes as NRA approved them we snail examine- the wholesale drug codes as they were originally presented. (*) See "The code for the Drug Industry" in the August 7, 1933 issue of Drug Trade News. 9726 - 19 ~ IV. -TIIE PROPOSES ".iROLESALE DRUG- CODS * A. NATIONAL ',/HOJJSAlE DffJC-C-ISTS' ASSOCIATION PROPOSALS The National Wholesale Druggists Association had a member shin of over two hundred companies, most of which had been established for a number of years. The./ are known as service wholesalers because they stock a complete line of drug oroducts, -extend credit, and as a rule maintain traveling salesmen. The federal Wholesale Druggists' Associa- tion had only about twenty-five members, most of. them established' with- in the nast twenty-five to forty years. These- corn-pan ies were coopera- tives or mutual s, As a rule, they carried a smaller stock, extended less credit, if any at all, and maintained fewer traveling salesmen than did the service wholesalers. They gave patronage dividends to their members or- stockholders and thus afforded the druggist who could finance the plan a decided price advantage over his competitor who had to rely on the service wholesalers' credit facilities! The service and cooperative wholesalers had been fighting each other for years. 1. An Informal Code An informal- wholesale code was presented to the NBA. (*) The record does not disclose whether this proposed code had the endorsement of a sponsoring committee, or was merely prepared by an individual. Regardless o> the authorship, it illustrates the type of business maneuvers which -Tere current in Is-he early days of NPA and should be examined briefly before looking at the authorized drafts which were filed. The title of this document is "Tentative Memorandum as a Basis of Discussion in re; 'Code for '.wholesale Drug Industry' - under the National Industrial Recovery Act. "It is followed by a preamble describing the National • './hole sale Druggists Association as being "fully qualified and equipped to*fulfill all the needs and requirements of the medical profession and-. approximately 60,000 retail druggists in the interest of public health". (**) Turning to Section 6., we find a threat of boycott of manufacturers who did not adhere to certain policies. (***) It first stated that no wholesaler "shall purchase or j. distribute a product of any manufacturer whose policy shall not conform" to certain principles. In the enumerated principles are listed some to which certain manufacturers would have been likely to object. It is difficult to believe, for (*) This document was probably va trial balloon submitted in- formally to see how the NRJf reacted to its terms. It was sent to Deputy Administrator Whiteside on July 27, 1933, See Appendix, Page348for this correspondence and certain pro- visions pertinent to this discussion. The complete document can be found in the Deputy's files. (**) See Page ( of Annendix to .this Report. i (***) gee page a of appendix to this Report. 9726 ~ 20 - instance, that manufacturers would relish "the prepaying freight to all points within the United States" nor would they care to have the wholesalers dictate a "15$ trade discount" and a n2ci cash or prompt payment discount" as being the minimum they could give on their goods. The manufacturer might not object to putting the "retail price to the public" on his package but would be ant to resist issuing "two separate and distinct price lists" to the wholesale and retail trades respectively, especially when such orice lists "must be open and fair to all" in the specific selling terms which they were to set forth. These selling terms included all tyoes of -orice concessions found in the trade. In exchange for the manufacturer bringing all his operations out in the open and equalizing his terms to members of the same class, the manufacturer would receive notice of every retailer or wholesaler who violated his policies. This list was to be his blacklist. The wholesalers would aid him in cutting off the offending retailers. The next section established a rigid limitation on the cut prices a wholesaler could give to a retailer. (*) This was done by limiting discounts -oroportionately to the total amount of each item purchased by the retailer at one time. If a retailer bought $2.00 worth of a product in one -ourchase the wholesaler could give ifo discount. If the amount was between $2.00 and $7.99 he could give a discount "not to ex- ceed 25$ of the discount allowed to the wholesale druggist by the manufacturer." If the retailer bought $8.00 worth or over of a product, the wholesaler could give a discount "not to exceed 33$" of that allowed by the manufacturer, "but in no instance" was the amount -left for the wholesaler "to show le^s than 8$ gross profit" to the whole- saler. This scheme was not as complicated as it sounds and could easily have fitted into the "service" wholesaler's method of billing orders because of the basic pricing structure of the industry. (**) The plan was partially predicated on the idea that it cost a wholesaler practically the same amount to fill an order for an expensive product as it did for a cheap one. On the higher priced article he could have given away more since the percentage of handling cost per dollar sale would have been less. Furthermore, the plan -ould have encouraged a retailer to purchase products in larger quantities to earn a better discount. Even before the depression, the small druggists were buying from hand-to-mouth, in many cases as low as 1/12 of a dozen of a fast selling product. This was especially true in large cities where daily orders and same-day deliveries were one of the "service" wholesaler's best weapons to hold its trade. Another part of this plan provided that discounts would be allowed on monthly purchases. Those amounted to lfo on purchases from $300 to $500, 2°l on $501 to $1,000., and 3$ ever $1,000,, This again would have been an incentive for the retailer to confine his purchases to a smaller number of suppliers. Very few cooperative wholesalers, could supply the complete drug (*) See page 350of Appendix to this Report, (**) See Part II, Chapter I of this Study. Page 351.: 9726 - 21 - needs of a drug store. Refusal-to-sell policies of manufacturers were partially responsible for this but the main reason was that the cooperatives, by their nature, wanted to hold their inventories to products which had a decent turnover. The many thousands of items for which the retailer had only an occasion?! Call, had to ue bought from the "service" wholesaler who, as a rule, orided himself on being able to offer a complete service. Any discount plan based on monthly purchases would have deflected business to the "service" type of wholesaler , since every druggist had to deal with one of them and the total purchases of most - druggists -'ere so small that an even split of business might have kept them out of the jest discount bracket. But regardless of the Potential advantages of such a price plan to the "service" wholesaler, it appears ' that' the cooperative wholesalers' method of opera t iori could not have been adjusted to work under such a rigid scheme and the cooperative would have lost its trade eventually to the "service" wholesaler. Although not all of the wholesale mutual s and cooperatives operated in the same way, they did have the same purpose of sharing profits with their members. Most of these profit sharing dividends were given to the retailers at the end of a week or a month. Receiving a check from one's wholesaler was a tangible indication of the saving the retailer had made on his pur- chases. Even if the retailer 'received. as low net prices from the service wholesaler, at the end of the month when he paid his bill the cooperative's plan of giving him these savings in the f ora. of a check by weekly or monthly payments led him to believe he was saving more under their "system. Added to this, the cooperative member had a proprietary interest in his own company. Cooperative profit sharing was based on the gross profit on each item. It had no relationship to the amount of a particular item purchased on one order, which was the approach set forth in this provision. For example, a member might have purchased one dollar's worth of - product on which the cooperative wholesaler received a 25fj discount ?rom the manufacturer. If the cooperative wholesaler's overhead -was 10fo, this retailer would have received a 15$ (25$ less 101'.) cut on this purchase, and the product would have cost him .85^, (Si. 00 less .15$), This purchase, under the code provision, would have given the retail member a discount of only lcl. The balance of the discount due him would then have been given as a dividend on stock o^nuc1 at the end of the year or by some other method of distri jution. An~r such procedure, however, would have destroyed the psychological effect on the retail member of receiving a share in the profits as he r;ent along, from week to week. In such a situation, unquestionably, the service wholesalers would have tended to regain their lost ground. This proposed rigid, price plan ended with the limitation that all dis- counts set forth in the provision were to be considered cash discounts and that the Board of Governors of this association "ould file, as a public record, a list of "not less than 10,000" medicinal, toiletry and sundry proprietary items "for the benefit of retail druggists and retail dealers" with the stipulation that no product would be included in this standard discount list if the manufacturer's "sales' policy was adverse to the granting of such discounts". This not only gave power to the association to list the products of manufacturers whose policies would pass muster but was to serve as a weapon to force recalciltrant manufacturers into line, since obviously the service 9726 - 22 - wholesaler was interested in selling only such products as appeared on the list. Under Section 9 a wholesale druggist could net give any free goods or other price concessions not specifically authorized "by the manufact- urer. (*) The provision went on to say that where a manufacturer instructed the wholesaler to jive cne free with a dozen or some other type of price concession, the wholesaler was compelled to pass on such benefits to his retail customer. If the wholesaler did mt do this such violation would be "deemed unfair competition and punish- able by a fine of not less than ($ ) for each specific offense if upon majority vote of the Board of Governors of this Association, the offender should be found guilty of such practice". This notion that the Board of Governors should pass judgment on the' violators of this provision and impose a fine when the majority of its members decided the offender was guilty was an extreme examole of "industry governing itself". The next section set up a potential boycott against manufacturers who gave inside discounts to large retailers. (**). It stated that the wholesale druggist "shall not be. Obligated nor required to purchase any product from any manufacturer on which the manuf acturer establishes a price differential "of less than 15';," between wholesale and retail druggists. The next paragraph of this ^revision stated that it was un- fair for a manufacturer to give "retail chain store systems, department stores, mail order houses, syndicate stores, and any and all other organized systems of distribution any prices, terms, conditions, special inducements, or advantages .and special allowances for window or store display or advertising" without giving these same "advantages to any and all other independent retail dru, gists" who would like to take advantage of such offers under the same terms. This idea was amplified in section 15***by stating that wholesale druggists were " committed to a policy of purchasing, featuring, and supporting the products of only those manufacturers whose sales policy would insure the inde- pendent retail druggist against loss caused by predatory price- cutting practices" of stores featuring" standard and nationally advertised" drug products "at cut prices on a basis of cost or net cost." The provision also set forth that the average cost of distribution by the retailer was 27/j "after diligent investigation and research over a period of years". This clause was a direct bid for the good-will of the independent retail druggists. It bound the wholesalers to a policy of supporting only manu- facturers who insured the independents a profit. It did not set forth just how manufacturers could protect these independent- druggists to the extent of insuring them an average gross profit of 27%. It should.be emphasized again that the code we have just discussed was not officially filed with KEA. It illustrates, the conceptions of trade (*) See Pa^e Sbl of Appendix to this Report. (**) See Page 3^jp of Appendix to this Seport. (***) See Page 353 of Appendix- to this Report 3726 possibilities under 1JEA that were held "by certain trade groups in the early- days of code formulation. \'e shall now take up the wholesale codes that were officially presented to the administration. 2 . The original National Wholesale Druggists" Association Code Piled with UFA The National Wholesale. Druggists' Association and the Drug Institute presented to the Administration codes for the wholesale drug trade which, as far as this discussion is concerned, were identical. Article V, Section 1 of this code* established the "cost-sold" formula for the fixing prices at whole':':,.!-:. A wholesaler could not sell a product below the*cost»-Sold" figure which had been previously calculated and circulated in the trade by the Drug Institute after "consultation with the Statistical Division of the Itational Wholesale Druggists Association and the Federal Wholesale Druggists Association on the basis of their own research and the economic, statistical end accounting reports submitted to them froia time to time by members of the code." Certain rules were specified for determining the "cost-sold" price which included all overhead charges used to determine costs "in accordance with good account- ing practice". Ho mention was mace of an average cost to be used or how such an average was to be weighted to be fair to cooperatives and the short line wholesalers whose operating costs were lower than the "service" wholesalers. The nearest approach to a concept of en average cost was the specification that "in calculating the 'cost-sold' of any merchandise, the cost to the entire wholesale drug industry shall be approximately determined" . This draft further provided that all discounts were to be cash discounts and allowed only if paid within the customary discount period provided, of course, that such discounts did not bring the price of a product below the "cost-sold" figure. The administrative difficulties of such a price plan would have been great, for the amount of research necessary to determine the "cost-sold" on many thousands of products would have been too vast for a competent job to be done. This plan was better for the "service" wholesalers than the previous sliding discount scheme, because it not only would have crippled their cooperative com- petitors but would have given them more profit in the process. The cooperative wholesaler would have encountered practically the same dis- advantages in this plan as he would have in the other suggested clause. The "cost-sold" clause had its counterpart in the proposed retail drug code,** The retailers' plan, however, while simpler in operation gave the retailer a relatively better break as it took the St. Louis Drug Survey^ s figure of approximately 38p' as the "cost-sold" percentage and used the manufacturer's wholesale list price per dozen as the cost and then added 5!,i for good measure. The retailers' system not only took care of the average operating expense as did the wholesalers' but (*) See Page 353 of Appendix to this Report (**) See Part II, Chapter III of this Report. [Page 3fi6 9726 - 24 - gave them 5,> profit. In Section 2, Article V, we find the requests for the permissive right to contract for resale prices.* This provision would have tied in with a similar provision found in the proposed Perfume, Cosmetic & Other Toilet Preparations Code and the Drug Institute Code. The proposed Retail Drug Code also asked for this clause**. In Article VI, Sections 7 and 3 appeared the identical clau.se on substitution and switching found in the vertical Drug Institute Code on which we have commented. In Article VII of this draft the. Drug Institute was established along with the national wholesale Drug gists' Association and the'^oleral Wholesale Druggists' Association as a compliance agency. B. TEE FEDERAL WHOLESALE DRUG0-I3TS' ASSOCIATION CODE The first wholesale drug code submitted to the Administration was that drafted bv the Federal Wholesale Druggists' Association. The follow- ing paragraphs from the statment filed with this code are of interest "The cooperative wholesale drug companies, operating their cooperative wholesale warehouses, serving their stockholder and member customers, submit this brieft historical statement of the economic reasons for creation of this cooperative wholesale plan of serving the individual retail merchants in the drug industry. "Thirty-five or forty years ago saw the beginning of the 'cut-rate' retail drug store. The 'cut-rate' druggist realized the advantage over his comoetitors if he could purchase at least his big selling items direct from the manufacturers thus eliminating the profit made by the wholesaler. This he eventually did and as the fight grew warmer, prices were cut lower, and it soon developed that the wholesale margin was the entire profit made by the 'cut-rate' druggist. Most of his competitiors with a small volume of business and less working capitol could not buy in quantities sufficiently large to justify the manufacturers selling to tbom. Something had to be done. There was no hope of remedying conditions except from their own ingenuity. It was determined to do col- lectively what they could net do alone — to buy the big selling items in large quantities direct from the manu- facturer, thus securing the lowest price, and divide the purchases into such proportions as each required, thereby placing themselves in a position to sell goods at the same prices as their 'cut-rate' competitors, sold them. This netted them a small profit where an actual loss had previously been sustained. Subsequently, chain stores came into the picture. They were operating their own ware- houses and buying direct from manufacturers ait whole-salers ' (*) Ss© page 353 of Appendix to this Report (**) See Part II, Chapter III of this Report Page 353 9726 -25— discount and terms, obtaining merchandise at from 10f3 to 25CA less than the retailers' cost. This compelled retailers to form mutual and cooperative wholesale companies and duplicate the chain store warehouse plan. Thur, the jtounda- tion was laid for the development of the large cooperative wholesale drug companies. Many of them now do an annual business of more than one million dollars and some have passed the six million mark. "All customers of the cooperative wholesale drug companies are financially interested in the company from which they secure their supplies .either by investment in the stock of such companies or by a cash deposit in the working capital of such companies. "The Federal Wholesale Druggists' Association is in full ac- cord with any and all plans that will effect an improvement of the profits of the independent retail druggists of the natior and will heartily support such plans. This associa- tion came into being to save the independent retail drug- gist fromdestruction. It will continue to serve this pur- pose particularly at the present time when the independent dr^uggist needs help as never before." This statement also contained the names of the twenty-five members scattered throughout the United States and Canada and gave the following figures which illustrated the sc^pe of the cooperative movement in the drug business: These represent a combined capital of $5,706,643.00 pedng an annual business of 45,323,157.00 Having a surplus of a; --proximately 1,540,120.00 Carrying an inventory a/proximating 5,585,025.00 Employing approximately, men and women 1,500 Their Stockholders and members, independent re- tail druggists, numbering approximately 11,561 These stockholders end members employ in their retail drug business, men and women 46,244 And do an annual business in their retail drug stores ->f approximately 358,391,000.00 The code* drafted on June 28,1933 contained a set of rules applying to all three branches of the drug industry. In the "Hules «n Behalf of Manufacturers" were t^o of interest to the discussion. The first stated that the distribution of drug products should be confined to the essential channels of drug distribution and the second rule prohibited, a manufac- turer from selling merchandise "below cost of production and distribution, plus the interest on capital invested and a reasonable profit". As has (*) See Page 354 of Appendix t© this Heport. 9726 - "2S - - been stated before, this type of price provision would have had very little effect on the drug manufacturing business. In the next -roup of "Pules on Behalf of Cooperative and ifutual Wholesale Druggists" we find this interesting • iropo sal : "Rule, 1. Prop..-.'...; tor::, of new retail drug stores should be required to have sui'ficient capital to rut in their stock of merchandise because there' are now too many rt.te.il units in the industry and wholesalers should not finance new stores except where the potential' patronage' wai-ra htr it."' Obviously, this ride .?ar. aimed at wholesale drag companies faho encouraged retailers tc start with little capital by using what credit facilities the wholesaler could give them. This practice was quite an effective weapon of the service wholesalers to check the growth of coop- erative membership. Cooperatives extended practically no credit and, there- fore, had little, opportunity for obtaining opening orders from new drug stores . Rule d prohibited selling below the full cost of doing business, but this provision was based on each individual's cost and, therefore, entirely different f rom t he "cost-sold" formula found in the ilational Wholesale Druggists* Association code. This method of an elastic code minimum in place of a fixed code minimum would have given the cooperatives a .great advantage over the service wholesaler as their cost of doing business was decidedly less. In (the i:B:ales m behalf of Retail Druggists" a provision appeared similar to the. "cost-sold" plan of the original Retail Drug Code.* However, this request was more modest as it asked only that the minimum price "be ba.sed on manufacturer's list price plus average cost of do in; business in a retail .r ■ store (:J3,. of gross sales which is 4p less than the St. Louis survey)." It is to be remembered that the Retail Drug provision asked' that 28p. be added to the manufacturer's list price and then an additional 5p to . iv.; 1. he retailer a. profit.. Thus, the retailer's request was approximately l1; greater than that suggested here.** The next provision in the Retail;. , P \ s s a forth that the sale of medicinal preparation.'- or drr; products../; confined to "legitimate drug outlets" The definition of a "legit- i i - tlet1' was then given as being a "retail establishment under the supervision of a registered pharmacist" . This provision tied in with the onn nenticned above which stated that manufacturers should confine neir sales to "the essential channels of drug distribution". The j etail membership of r/holesaler cooperatives was/made up entirely of drug m.v e-s thai imployeci pharmacists. The growth of other types of retail outlets handll i ; drug products was quite a threat to the independent pharmacists id, n; irally, when a group of these pharmacists (*) See Pari n, Chapter III of this Report Page 36fi. (**) In Codes that -we have so far examined there seems to be quite a discrepancy in the average retailer's cost of doing business. In fche FIDA draft it was given as '?,.■. In the PITTA draft i L id 22<-l and in the retailer's clause , approxima ; I . ! . . ., i s sugge sted. 9726 -27- got together and formed a cooperative they would admit to membership no store without a prescription department. Por many years the service whole- saler had a policy of confining sties to the so-called legitimate drug stores. However, when manufacturers, under the influence of large ad- vertising expenditure's and the resultant growth of consumer demand, looked around to find a wider market they encoura.ged the service wholesaler to sell to these newer types of outlets who were partially entering the retail drug business. The retail drug state associations had endeavored to pro- tect themselves from this growth of pseudo drug stores by bringing pressure on legislature to pass laws confining the sale of drug products to stores employing a registered pharmacist. An extreme example of the retail grocers reaching over into the drug field was found in the development that occurred among retailer members of a voluntary chain located in an*-"1 around Houston, Texas,. in the fell and winter of 1932. In a comparatively few months, 400 out of a possible 450 outlets had put in a supply of private brand household drug products. In 150 of these, a 3300 assortment was ' placed in s tock. These stocks included such products as aspirin, mouth wash, milk of magnesia, bathing alcohol, and a few toiletry products. Previous to this development the large food markets in Houston had, for a year or so, practically complete drug departments. This sale of drugs by grocers increased to the extent where one drug manufacturer estimated that ?5fo of his sales in Houston were made through grocery stores. Q. OTHER WHOLESAIS MUG: COSES The Independent Wholesale Druggists of America was a newly formed trade association with members located m-inckoally around Hew York City.* Most of them carried limited stocks and as a rule cut prices drastically. Article VI of their proposed code restricted wholesalers from selling below "net invoice cost after all discounts, (including cash discount) had been deducted or open market price, whichever is lower" :j1us 5,.:. It further stipulated that all discounts allowed by wholesale druggists should be cash discounts and allowed only if the retail' r aaid within the customary discount period. Members of this association claimed that their overhead was lower than the service or cooperative wholesalers. This price restriction was lower than that in the other two .wholesale codes we have examined. In fact, this provision would have listed P bottom on prices below the competitive cut- price level amd, therefore, would have been no aid in curbing wholesale cut prices. The Allied wholesale Druggists' Association was als* a new trade association formed f»r code purposed. Its membership was of small cut-price wholesalers located chiefly in Hew fork City. Sales to many of these wholesalers had been cut off by manufacturers who adopted the refusal-to- sell policy early in 1933. This association presented a code to tho HPA and the following paragraphs, nuoted from the preamble of this document indicate that the members of this association desired the NBA to do some- thing about this refusal-tc-sell movement: (*) See Page 354 of Appendix to this Report 972fi - 28 - "Nationally advertised products are obviously an essen- tial part of the inventory of a wholesale druggist. Deprived of them or any of them, a wholesaler is under a most severe handicap and is forced to offer in- ducements to his customers in an effort to retain their patronage. "Certain manufacturers of nrtionall:/ advertised products have restricted the distribution of their products to certain specially selected wholesalers and have ar- bitrarily refused to sell to others, forcing many whole- salers out of business and causing others to set up retaliatory tactics in order to survive. [These tactics have assumed many forms but were in substance, price- cutting. A vicious economic system was thus created which has vjidorrnined the entire industry affecting manufacturers, wholesalers, and' retailers, increasing hours of employment and decreasing wa^es. "In order to maintain minimum wages and maximum hours of labor, wholesalers must be in a ■oosition to. fairly compete with one another; distribution of nationally advertised products must be unrestricted and available to all wholesalers who are willing to abicfcby the sales policy of our manufacturers. "It is our belief that this form of discrimination has been engendered hj powerful minority interests with monopolistic ambitions. We do feel, however, that a statement in the drug code to the effect tha.t arbitrary discrimination by manufacturers of nationally advertised products in the selection of their distributors shall be deemed to be an unfair trade practice, will go far to the elimination of this abuse." u In the body of the Code* they declared that "it is an unfair trade practice for a manufacturer to use any arbitrary discrimination in the selection of its distributors." In the next Section they endeavored to prohibit e. manuf acturer from enforcing any refusal-tc-sell policy and to force him to sell to every body. This code contained another clause which prohibited the sale of merchandise by a wholesaler "below the cost of purchase and- distribution ~olus the interest on capitol invested and a reasonable profit". Such a restriction, if enforced, would have been an advantage to this group as the overhead of its members wo.s probably .as low as could be fonnd in the country. (*) See Page 354)f Appendix to this Report. 9736 SUMMARY This brieT examination of the original drug codes filed with u3A illustrates clearly that the predominant elements in the manufacturing, wholesaling, and retailing bra ichos of this industry wonted the Govern- ment to approve codes which would stabilize resale prides and curt other competitive practices attendant on the price cutting condition found in the trade in 1933. In the manufacturing division', the pharmaceutical group was silent on this problem in its proposed code, However, they represented r„ com- paratively small part of the manufacturing drug business. The period from 1911 to 1935 (following the Miles' decision) saw continuous, pressure in various elements of the industry on Congress to nullify the effects of this decision. Along with this effort were vari- ous attempts to use refusal- to* sell policies as practically the only legal method a manufacturer could adopt as long as the Miles' decision was in effect* The principle of the Capper-Kelly bill then before Congress of giving the permissive right to contract for resrle prices was found in the two porpoised codes of the Perfume, Cosmetic and Other Toilet Prepara- tions' group," in the Drug Institute's vertical code, in the Wholesale Drug Code filed by the service wholesalers, and in the Retail Drug pro- posal. While the retail members of cooperative wholesalers were in favor of resale contracts, the Federal Wholesale Druggists' Association appar- ently anticipated difficulties in resale contracts with their method of doing business as their draft did not contain this proposal. Obviously, the Independent and the Allied Wholesale Druggists'' Association, since they were cut-price wholesalers and sola chiefly to cut-price retailers, opposed the Capoer-Kelly idea. Host of the proposed drug codes con- tained provisions affecting other branches of the industry. The Drug Institute endeavored to draft a vertical code arrangement but it cannot be said that this was responsible for the many provisions that attempted to govern other branches of the industry. By its nature, resale price maintenance, to be effective, must be integrated through- out an industry. Whole the members of the Package Medicine Industry asked for resale price maintenance they wanted it only if it could be mandatory not only for all manufacturers but for distributors as well. They had no interest in obtaining merely the permissive right to contract. From the other clauses in their code designed to eliminate all competition from private brand substitute products it seems evident that they suf- fered a great deal from this type of competition. 9726 ■ - 30 - CHAPTE?. II - DUEDTG I3RA I. ATTEMPTS AT DRUG CODE C0I7S0LIDATI0II Price stabilization provisions T7hich finally emerged approved in the various codes usually differed completely from the proposals origi- nally presented to the Administration. This was especially true of the proposals just examined. Elimination of these original proposals or their evolution into the resultant approved druses with their subsequent amendments illustrates the shifting of business forces under the LIRA experiment. ■ Before taking up each proposal discussed in the previous chapter to determine what happened to it, we shall describe efforts ma.de by IffiA and trade committees to consolidate the codes or to integrate theia in some fashion for the industry as a whole. As has been said, the Drug Institute was formed early in 1933 as a drug industry clearing house where price stabilization and other indus- try problems could be discussed and possibly corrected. Its membership was made up of individual persons from all branches of the industry. Companies or corporations as such, were not permitted to join. The Appalachian Cools Decision encouraged such vertical trade associations, and it was believed that possibly some constructive work could be done with refusal-tc— sell policies by open discussion and individual example in such PT. all-industry forum as the Drag Institute was'' intended to be. Details of price stabilization plans were being formulated by the Insti- tute when the ITIPA was passed. The Institute immediately jumped into the typical activity of the period and endeavored to draft a vertical code for the whole industry with appropriate subordinate codes for each branch. Fron the start, I1RA refused to consider any vertical arrange- ment of cedes for the Drug Industry. This position was taken not so much on the assumption that the industry might use it as a vehicle for setting up some sort of a. "drug trust" as because the UFA early adopted the policy of establishing horizontal functional codes for the .distribu- tive trades. Some officials of IIPA suggested that a drug industry coordina.ting council be established as an advisory planning body to assist the Ad- ministration and the separate code authorities in administering the codes and to act as a general clearing house for the overlapping code prob- lems of the industry. This Council was to be composed of representa- tives of every code authority, but in no way were the functions of these bodies to be subordinated to the council except where certain routine matters were given it "oy vote of each individual code authority. A meeting was held on December 14, 1933 "oy IiEA.X*Httitb.,: representatives of the various drug code committees and the retail drug code author- ity. (**) Many code oroblems in tthe industry were discussed at this meeting and the various code committees were informed that their pro- (*) See transcript of this meeting in Code Record Section, ERA. (**) Only the Retail Drug Code was approved by this date. The other drug codes had not ever ^oeen presented at public hearing. 9726 - 31 - posed price control plans would not be approved. At the time of this meeting HRA had already disapproved the price provisions suggested by the retail druggists, hut the manufacturers and wholesalers were still hopeful of IIRA's acceptance of their price control plans. Very, little was accomplished with the suggestion for the coordinating council. However, the plan did not corrroletely die at this tine and all the "branches of the industry with the exception of the Pharmaceutical group subsequently requested a provision in their codes to provide for the appointment of representatives to serve on such a council when it was established. (*) Because the three drug manufacturing groups overlap ^ed, to a con- siderable degree, ERA endeavored from the start to consolidate their codes. It soon appeared that trade practice abuses differed among them and that it would be difficult to harmonize their trade practice provisions. Therefore, the suggestion for one master manufacturing code was set aside in favor of a basic wage and hour code with separate trade practice schedules and sub-code authorities. The code committees for the Package Medicine and Perfume and Toilet Preparations groups in- dicated that thejr would approve some sort of joint code, but the Pharma- ceutical code committee refused even to attend a -oroposed meeting of the three code committees to discuss the suggestion. With this branch refusing to enter into such an arrangement it was deemed unwise to try to merge the other two. (*) See page 35fiof Appendix 1 for copy, of proposed Exe'oitive QrA&e es- tablishing Drug Industry Coordinating Council 9726 - 52 - II. THE PHARMACEUTICAL AMD BIOLOGICAL CODE The Pharmaceutical code was finally set for public hearing on Lay 1, 1934, without any tra.de practice provisions. The long delay was due to basic differences of opinion between 33RA and the code committee about certain labor and administrative pro- visions. This argument continued into the post-hearing period so that the code was not approved until October 25, 1934. At various points during the negotiations for this code, the Code Committee gave some thought to trade practice provisions but the NRA did not insist that they be included in the code and the approved draft contained none. In this draft, however, appeared a provision (*) instructing the code authority to make a study and report to the NBA within four months after the code authority was approved on the needs of the industry for the establishment of fair trade practice rules in the code. j:'o official recommendation was ever made ''oy the code authority to IIRA on this problem. III. THE PErrUhJi, COSMETIC Aim OTHER TOILET PREPARATION'S CODE The public hearing on January 17, 1S34 for the Perfume and Cosmetic Industry was held on a. code presented by the Associated Manufacturers of Toilet Articles. (**) Lany drafts of this code were made from the time it was originally filed until it was in shape to go to public hearing. Some of the provisions that appeared in the original Perfume and Cosmetic Industry proposal were incorporated. The open price provision appearing in the public hearing draft was modeled after a similar provision that appeared in the original Perfume L Cosmetic Industry code. However, the new provision had been enlarged to include the posting of all direct and indirect price concessions. The principle of using the open price plan as the basis for permissive contracts for resale price remained. The NBA1 s refusal to approve the right to contract for resale prices in the retail drug code should have clearly indicated that the same policy would hold in this code. (***) The Code Committee wanted to convince IIRA that it was wrong and insisted that the clause stay in the code at least through the public he -ring stage. (****) (*) See Article VI, Section 2 (h) of this approved code, #529 (**) Sep page 360 Appendix of this Report for Price provisions in this Code. (***) See Part II to this Report, pages 566 et seq. (****) In order not to delay hearings, NBA officials sometimes al- lowed certain clauses to remain in the hearing draft of a code even though definite NBA policy ^-ould prevent their final approval. This action often helped the Code Committee to convince its constituents that it had put up a good fight for their demands and tnereby obtained for IIRA the necessary consent of the Committee to the calling of a public hearing. Furthermore, the inclusion of these clauses in the hearing draft usually brought out in open discussion the controver- sial issues within the industry. 9726 - 33 - In the code approved on March 23, 1934, the permissive right to contract for resale prices did not/appear in the open price system. (*) In other respects this open price clause remained practically throughout the life of the Code as it had been drafted for hearing. The various price discrimination clauses and restrictions on cooperative advertising are so interwoven into the open price system that an examination should he made of the approved provisions to judge the full significance of the attempt made in this code to eliminate competitive abuses. (**.) The fight over the elimination of PMs between the American Manufacturers of Toilet Articles and the Perfume and Cosmetic Industry continued up to the approval of the Code. The hearing draft contained a direct prohibition of PMs but in the approved code this provision was stayed for a period of sir. months in which time the Code Authority was to report on the need for the prohibi- tion. (***) This stay was never removed as the condition for its removal was never approved by IIRA. In the hearing draft, the American Manufacturers of Toilet Articles had their way in requesting that a demonstrator be clearly identified to the public as being in the employ of a manufacturer. (****) Some of the manufacturers who did not employ demonstrators wanted them prohibited but the majority of the larger manufacturers, both members of the American Manufacturers of Toilet Articles and the Perfume and Cosmetic Institute, were decidedly against their elimin- ation. In the approved code the provision appeared (*****) unchanged except for an additional restriction which stated "that the demon- strator shall be available at all times for the salesof merchandise." This referred to certain department stores who accepted more demonstrators than their toiletry departments could accommodate and used the excess as stock clerics or possibly bookkeepers. The approved retail drug code also contained a similar clause requesting that demonstrators be identified to the public. (******) The approved perfume and cosmetic code was a compromise not only between the two opposing interests in the industry but between the industry as a whole and HRA. .'.Thereas NRA refused to grant them the permissive right to contract for resale prices it did approve, at least in principle, practically all other provisions for vhich (*) See Page 361 of Appendix for this provision. (**) See page 361 of Appendix to this Report. (***) See page 361 of Appendix to this Report. (****) The AHTA dropped this idea of having demonstrators sign pledges. (*****) "See page.3Blof Appendix to this Report. (******) See Section 4(c) of Schedule (A) of Retail Trade Code. S726 • - 54 - they asked. The inter-industry fight in this industry over', trade practice problems created more interest in this code than: was seen, in either of the other manuf ac taring f"roaps. Interest con- tinued after the code was finally approved and as a result and effective code authority was elected. IV. ■■■ THE PACKAGE ilEDICIIIE CODS After' the effort to consolidate the three manufacturing codes had failed, the Package kedicine Code Com.ittee still insisted that their definition snould include cosmetics and toilet preparations. It was not until e^rly in January, 1934.' when; their code was approved for public hearing that 11BA succeeded in convincing the Code Com- mittee that their code could not cover another "branch of the industry. In the final approved definition, however, ±*RA lifted out of the cosmetic and toilet prepar ations code, deitrifices and mouth washes and placed then under the Package i.edicine Code. (*) The Package Lledicine Code Committee was committed to the f-laborate price-firing scheme (**) which their original draft con- t tined and it took until January, 1354 to get the Committee to "agree that , the plan. should not go in the hearing draft of the code . ar, .a. mandatory provision. The issue was finally settled "by including the provision as a suggestion from the Code Committee to-' the Admini- stration, preceded "by the following instruction: "Article VII - Prices t "In the general interest of the industry and of the entire trade, including wholesale and retail distributors, so that there will he free and unimpeded distribution of its products not to the end or extent; that there he established 'a monopoly therein, not to the end or extent that consumers "ill be im- posed upon, or manufacturers of other products be dealt with unfairly, but ..to the extent of f reelv supplying' the consumer demand created by the member — the Code Authority, subject to the approval and with. the advice of the Administrator, may arrange for a conference of all interested parties deal- ing in package medicines, including wholesalers, or the Code Authority governing them, and retailers, or the Code Au- thority governing -them, for 'the purpose of defining and establishing price standards which shall be fair and reasonable in relation to the nature and extent of the (*) See Definition of Package kedicine. Code, page 3't3 Appendix ■to this Report* This switch was made because most of the large manufacturers of dentrifices and mouth washes were members of the Package- Medicine Trade Association. This definition - should be examined as it illustrates the type of definition found in the three manufacturing drug codes in regard to covering four distinct sources for products. (**) See Page 363 of Chapter I of this Part of the Report. 9726 - 35 - distributing services and functions rendered by each buying and selling class. Such price standards are to include all elements, such as, policies, terras, maximum or minimum discounts, and allowances. "With the advice and consent of the Administrator after such price standards have been obtained as fair and just to all interested parties, the code authority, as well as the code authority for each branch of the trade, shall formally an- nounce such price standards on the products of thp industry. "TThen the code authority, as well as the code authorities for wholesalers and retailers dealing in package medicines, announces the price standards established on the products of the industry, it slia.ll be an unfair trade practice for such products to be sold other than as provided for in the price standards. "As an aid in arriving at just, fair and proper price stan- dards, the industry recommends for consideration the follow- ing principles: " The principles then enumerated were practically identical with the provisions set forth in Article V, Prices, of the original draft filed". (*) The Code Committee had but faint hope that 1TRA would approve the price standard principle for the industry, let alone the suggestion set forth in the hearing draft of the code as a guide for determining such standards. However, the package medicine industry, as a whole, had voted on this price plan and instructed the committee to demand its approval and the plan had to go into this draft in orcier to obtain the Committee's assent« to the hearing. The provision prohibiting imitations of products and restriction of purchases through legitimate channels so as to curb counterfeiting was omitted from the hearing draft. However, the restriction on repackaging a product remained. All provisions restricting and eliminating sale of private brand substitute merchandise were elimin- ated. The public hearing on the Package Medicine and Perfume, Cos- metic and Other Toilet Preparations Codes was held on January 17, 1934. The definitions of both Codes were attacked because they went so far as to induce retailers who sold private brand drug and toiletry products or who made them in their prescription depart'ients; and a modification of these definitions was required. The definition in the proposed pharmaceutical code was likewise modified in the ap- proved draft. The Perfume, Cosmetic and Other Toilet Preparations Code Committee accepted the modification without argument, (**), (*) See page 3*46, Appendix to this Report, and also Chapter I of this Part for a discussion of this price plan. (**) See Article II, Section 1(b) of the Pharmaceutical and Bio- logical Industry Code, #529. Also see Article II, Section 1(d) of the Perfume, Cosmetic and Other Toilet Preparations Code, #361. 9726 — 56 ■* but the Package "Medicine Code Coihmittee tool: a decided stand against it. Final approval of the latter code was delayed about four '-eeks bee- use iL'A officials would not send the code up for approval so long as it covered retailers and the Package Medicine Committee would not assent to a clause talcing retailers out of the definition. Finally, to e-pedite the code, the HRA official in charge sent the code up for approval without this clause; but 'Then the Administrator approved the Code, on May 15, 1034, he included the clause a.s a condition in his order of approval* (*) The Package Medicine Code Committee's objection to this clause seemed lodged in the notion that, if all retailers who marketed their o'-n brands of package medicines were under the Package Medicine Code there would be some control over substitution;, s itching and other' practices from which the nationally advertised products suffered. Although the final drift of their code contained no provision bearing on the sale of private, brands, they perhaps felt that some future amendment might affect the situation. In post-hearing negotiations, NRA suggested that the Package Medicine Committee adopt an open price plan similar to the one approved, in the Perfume, Cosmetic -and Other Toilet Preparations Code to replace the Committee's suggested price standards. They finally followed tnis suggestion, but the open price system upon which they agreed was not as comprehensive as the one in the Perfume Sn Cosmetic Code. (**) The rest of the trade practice pro- visions in the p proved Package Medicine Code had only a minor effect on price stabilization. (*) See page 365, Appendix to this Report. (**) See Page 360, ApPendix t-6 this' Report. 9726 - 37 - V. IHL WHOLESALE DRUG CODE The Wholesale Drug Code Committee refused to assent to ITRA' s re- quest that the code contain a basic forty-hour week such as was approved in the General Wholesale Code. ITRA, likewise, refused to approve a forty-five hour week and at the sane tirae would not impose the forty- hour limitation on the trade without its consent. Therefore, after ex- p tended negotiations, no code ^as ever approved for the trade and, fur- thermore, the wholesale druggists succeeded in staying out from under the terms of the General' wholesale Code -hose definition technically included them. This controversy illuminates certain aspects of the USA administrative experience, hut is not germane to this study. Vie shall touch only on the various orice provisions appearing in the many drafts of the proposed code. (*) One of the main reasons why ITRA was unsuccessful in obtaining the assent of the Code Committee to the forty-hour week was the lack of a satisfactory m-ice provision for which the trade, in exchange, might have "been willing to make labor concessions. If the wholesale drag trade had been more closely united instead of being s;olit fundamentally be- tween the "service", "cooperative" and "cut-price" types of wholesalers, the result might have been different. As it was, it seemed impossible to draft a "selling below cost" or loss limitation provision beneficial to all three groups. NBA began rather early to eliminate the possible selling below cost provisions, kany shifts of policy and model cost provisions were draft- ed, but almost always they appeared to be unworkable or of no use to the trade involved. The "cost- sold" idea which appeared in the original draft submitted by the kational wholesale Druggists' Association was early discarded. (**) In the draft of the code at the first hearing on karch 15, 1934,(***) there appeared a selling-below-cost provision based on the costs of the individual wholesaler. This provision was to go into effect after the code authority had received from the Adnini strati on approval of a cost- acco-onting system to be used by the individual wholesaler in determining his cost. (****) This draft also contained a provision giving the whole- sale drug code authority the permissive right to arrange a conference of (*) Por a more thorough account of the negotiations of this code, see the Code History of the Wholesale Drug Code. (**) See page 355of Appendix to this Report and Chapter I of this Part. (***) There ^ere two public hearings on the Wholesale Drag Code. Both drafts were different. The first hearing had to be set aside as the 1TT7DA v»ho sponsored the code had ine/quitahle restrictions on membership and refiised to amend their by-laws to meet the ITRA re- quirement. The second hearing on June 25, 1334, was held on the code sponsored by the code committee which had been elected by vote of the entire trade. (****)See page Sfifiof Appendix to this Report. S726 - 38 - interested parties for the purpose of establishing price differentials. Upon ".IRA's approval of these price differentials it would then become an unfair practice for a who 1 coaler to handle the products of a manufac- turer who refused to adhere to tne particular differentials applicable to his products. (*) This clause was identical with that approved in the General Wholesale Code on January 12, 1934i ('**■) There were no other clauses in the March 15 draft of the Wholesale Drug Code directly bearing on price stabilization. In the June 35th hearing- draft of the code both selling-below-cost and price differential provisions were rittoa. The two separate Code Co imittees sponsoring the Wholesale Drug Code were lukewarm about both of these provisions. Tne nrice dif- ierential provision was included in the March 15 draft, principally be- cause it had alreauy been approved in tne General Wholesale Code and not because the wholesale druggists especially liked it. 3y the time of the June 25th hearing, NRA had adopted a definite policy of not ap- proving the type of selling-below-cost provision thai appeared in the March 15th draft of the code, here a ain tne Cede Committee did not put up much of a fight because the National Wholesale Druggists1 fac- tion thought such a provision ineffective ana the Federal Wholesale Druggists' faction was afraid of all selling- belov/-cost clauses. In the final prop sea draft of the Wholesale Dru£ Code aated August 28, 1934 (***) there appeared only one provision nf interest to this discussion. We have already examined tne preamble arm. trade -prac- tice provisions in the code originally presented by the Allied 'Thole- sale Druggists1 Association, (****) illustrating the desire of this Association to have the government curb the refusai-to-sell policies of manufacturers. At both hearings on the Wholesale Drug Code, members of the allied group presented testimony accusing members of the NWDA of collusion with manufacturers to cut off wholesale and retail dis- tributors. (*****) it was well known in tne drug industry that the FTC was conducting an investigation of tne F.VDA, the Drug Institute, and certain chain store groups in relation to the refusal-to-sell movement f 1S35. Certain members of the Code Committee desired a clause in the code relating to this subject, and as a result, trie- following appeared in the draft of August 23, 193-1: (0 See page 366Appendix to this Report. (**) Several conferences were held under the terms of this provision in the General Fnolesale Code, but no set of price differentials was ever approved as a result. (***) See copy in Deputy's files of Wholesale Drug Code. (****) See page 330 Chapter I this Part of the Report. (*****) See transcripts of the '.larch 15 and June 25 (1934) hearings for tiie Wholesale Drug Trade in Code Record, Members of the NWDA emphatically denied any such efforts on their part to persuade manufacturers tc cut off distributors. 972fi - 39 - "Rule 11. No member of the Trade, in concert with another member or members thereof, shall, by threat, express or implied, of refusal to deal, or by other unlawful conduct, induce or attempt to induce or require 'any manufacturer of proprietary medicines, cosmetics, toilet' "preparations, drugs", medicinal oils, ' chemicals, pharmaceutical" or /biological products, or druggists sundries to refrain cr to agree to refrain from sel- ling any of said articles to any other member or members of the Trade; provided that nothing in this section shall be con- strued to suspend any of the provisions of the anti- trust laws of the United States." While the NRA was endeavoring to work out some reconciliation with the Wholesale Drug Committee so that it Yrould accept a maximum forty-hour week provision thQ Committee members from the N.W.D.A. were negotiating with the Federal Trade Commission for a Fair Trade Confer- ence. A conference war. set by the Federal Trade Commission for December 6, 1934 ana because of lac': of liaison between the two agencies, N.R.A. was not informed of these negotiations. xhis was the first Fair Trade Conference scheduled by the Commission after the advent of N.I.R.A. and as a result some publicity was given in the press (* ) to the effect that the Wholesale Drug Trade had succeeded in sidestepping the regimentation of the NRA and would receive from the "ederal Trade Commission all the fair trade rules it needed. The Conference rules ware approved jne week after the con- ference was held. (**) ""nly three of these rules were redrafted before final approval and these changes v/ere slight. (***) Twenty-one Sroup I Rules and nine "roup II Rules were approved by the Commission. (****) Crroup I Rules approved by the Commission "express unfair methods of competition while i"-roup II condemn trade abuses and unethical and wasteful practices. (*****) (*) See New York Herald Tribune and Washington Post of Nov. .22, 1934. (**) According to Drug Trade News of December 34, 1'?.34, "Veteran observers of Federal Trade Commission operation here cannot recall an instance where the Commission worked so expeditiously in approving a set of trau^ practice rules. Ordinarily, months and sometimes a year or more elapse before the Commission ap- proves rules following their adoption at a conference." (**») Ibid (****) See Page 367 Appendix to this Report. (*****) From June 30, 1933 Federal Trade Commission report "Trade Practice Conferences." 9726 - 40 - Of the twenty-one rules in G-roup One, the following two pertaining to selling 'below cost are of interest to this discussion: "Rule' 3 — Selling Below Cost — The selling of goods below cost, with the intent and with the effect of injuring a competitor and where the effect aay be to substantially lessen competition or tend to create a monopoly or to un- reasonably restrain trace, is an unfair trad" practice. "Rule 1<2 — The practice of certain wholesale druggists of shipping and selling certain classes of merchandise in to the marketing territories of competitors below cost, where the effect may be to greatly injure competitors, to sub- stantially lessen competition, or tend to create a monopoly, is an unfair trace practice." Negotiations for the Wholesale Drug Code came practically to a standstill after the Federal Trade Commission rules were aporoved. The National Industrial Recovery Roarcl inherited the problem of imposing a code on this trade, but they, like the Administrator, did not do so. !724 ~ 41 - SUMMARY Hone of the provisions originally requested in the manufacturing and wholesaling drug codes designed to stabilize resale prices or to prevent selling below cost was approved by ERA. In the approved Hctail Drug Code appeared the Loss Limitation Provision substituted by ERA for the many price plans the retailers had requested. It will be seen that many of the retailers' stabilization suggestions were identical or complementary to provisions in the manufacturers' and wholesalers' codes. The Retail Drug Code was approved long before the other drug codes went to public hearing, yet their code committees insisted that the principles at least of their -orice plans be incorporated in the hearing drafts of their codes. In order to make progress with these codes ERA officials permitted them to be heard while they still con- tained tabooed price provisions. The ¥holesale Drug Trade was successful in staying out from under a code and, while negotiations were still supposed to be continuing, obtained Pair Trade Conference Rules from the Pedoral Trade Commission. The negotiations for this code reached the noint where the only possibility of a code lay in ERA' s imposing labor provisions on the Trade. The Administrator refused to act in the matter as did also the National Industrial Recovery Board. 9726 - 42 r •PART II TEE LOSS LIMITATION PROVISION OP THE RETAIL DRUG CODE 1/ CHAPTER I. INTRODUCTION I . The Code's Place in the Entire Price Stabilization Picture The previous part of this report has traced the -"Trice stabiliza- tion efforts of the drug industry, through illegal resale price contracts, unsuccessful attempts to legalize then, and successive waves of selective distribution. In June, 1933, while the retail druggists were pushing a Federal resale price contract bill, Congress passed the National Industrial Recovery Act and the President announced that one of its ob- jects was to curb the unfair practices of the predatory 10$ in each industry and bring prosperity to the honest 90$?, The small druggists felt that the President's sneech was directed particularly to them. They felt that they represented 90$ of their trade and that the cut-rate druggists were the predatory 10$ to whom the President referred. * NRA, to the ' small druggists, meant primarily a new chance for price stabilization by Federal means; and while. they favored the principles of re~ employment and increased purchasing power, these things seemed in- cidental. They temporarily laid aside their other price control efforts and concentrated en drafting a code. . •■ I I . Fundamental Pricing Structure 'of the DruH Industry Prerequisite to ar. understanding of the loss limitation provision of the retail dru& code is a knowledge of the fundamental pricing structure of thn drug industry. The basis of this structure is a price knjwn as the "manufacturer's wholesale list price per dozen", quoted by practically every producer of identified package medicine and cosmetic product s**as his indication of the product's value in dozen lots at wholesale, and as a base for the calculation of all discounts. 1/ Prepared by Sumner S. Kittclle * That tiie Small druggists felt that the President's speech es- pecially applicable to them, is illustrated by several hundred druggists' telegrams in NRA files in the following terms: "As a member of the 90$ pledging support to your program, I re- spectfully urge you to sign the Retail Drug Code." Also: "Understand the unfair 10$ at present delaying the signing of Retail Drug Code. Is this in keeping with the spirit of NRA?...* ** The price structure of pharmaceutical manufacturers differed from that described herein. Sec Chapter VI of this part - Adminis- trative Problems - Page 120 9726 - 4-1 Ordinarily , the manufacturer's wholesale price per dozen is 33-l/3$ below the manufacturer »s consumers price, printed on the package or featured in advertisements as an indication of value to the consumer. Also, the manuf acturer ' s wholesale price per dozen is, on the majority of products, the cost to the small retailer buying from th# wholesaler in dozen or less than dozen lots. As far as the manufacturer is concerned, his wholesale list price per dozen is not his own selling price, for he rarely sells in lots as small as one dozen. However, when he sells large quantities to whole- salers or "big retailers, he "bills the goods at the manufacturer's wholesale list price per dozen and then deducts his quantity and cash discounts, amounting usually to 15$ and 2$. Likewise, if the whole- saler sells to retailers at a. cut price, he bills the goads at the manufacturer's wholesale list price per dozen less discounts, thus maintaining this list price as the basis for all price computations in the industry. As an example of how the pricing structure would work if there were no price cutting and no extra discounts allowed either by manu- facturers or wholesalers, a hair tonic with a consumer price of $1,00 printed on the package would have a manufacturer's wholesale list priee per dozen of 56-2/3$* ($1.00 less 33~l/3$). Small druggists would buy it from their wholesalers at this price, and -holesalers and large retailers would buy it in quantity from the manufacturer at a reduction of 15$ and 2$ or at about 55%:^ , If there were no price cutting at retail, large retailers and small alike would sell the tonic for $1,00, the former making a. gross profit af 44 -5$ (mark-up of 30$) and the latter making a gross profit of 33-l/3$ (mark-up of 50$), Price cutting at retail changes this situation. Large retailers buying at 55yjf can sell at or "below the manufacturer's wholesale list price and still make a gross profit. If the small retailer meets their prices, he makes no gross profit and may take a loss on the cost of his goods. If he fails to meet their prices, he may lose his trade. Pressure of price cutting on small rotailers caused them to demand cut prices from their wholesalers, and these, coerced by competition among themselves, acceded to the demand and allowed discounts from 5$ to 10$ below the manufacturer's wholesale list price per dozen. Some re- tailers formed or joined cooperative or mutual wholesale houses for the purpose of enjoying the advantages of mass buying. This movement in the drug trade, however, has never been as widespread as in the grocery trade, principally because small druggists owe so much money to their service wholesalers that they are obliged to continue buy- ing from them. Such mutual and cooperative wholesalers as exist, usually do not handle a complete stock of products. Deviations by manufacturers from the normal discounts also compli- cate the price situation in the industry. Secret discounts and rebates to chains and large retailers, and indirect price concessions such as payment for advertising and window display tend to increase the dif- ferential between the cost of the goods to the small and the larger dealer. Manufacturers' offers, through the wholesaler, of discounts 9726 and free goods in dozen lots, tend to decrease this differential. But regardless of these deviations from the usual pricing structure and regardless of how manufacturers' and wholesalers' price concessions may change, the lias is of calculation remains the manufacturer's wholesale list price per dozen. 9726 - 45 - CHAPTER II. ALIGklEirr OF OPPOSING FORCES 1. Proponents of Price Stabilization From the prasentatio.n of the original code to ERA. in August 1953, and throughout the code period, the principal "backers of price stabiliza- tion were the associations representing the small, independent druggists who did not initiate price cutting and who disliked "being forced to meet cut-rate competition. These druggists, numbering about 50,000, took ser- iously the -professional aspects of their "business, especially their pre»* scription departments.* Three national trs.de associations represented the small druggists: The national Association of Retail Druggists (KARD), the American Phar- maceutical Association, (APHA), and -*jfce Drug Institute of America, Inc.** The HARD had a total membership of about 55,000 druggists., principally derived from its affiliated State Pharmaceutical Associations and local retail drug associations in cities. This association had always been militantly in favor of -rice stabilization, fighting and lobbying for it in state legislatures and in. Congress. In its official application for a code in 1935, it submitted the following figures:*** Annual Volume of Business Tcrtal for trade *, $1,300,000,000 - lO&fo Members of Association ,.,734,482,758 - 60-10/29,1. ilon-members ' 515,517,241 - 39-19/29^ The American Pharmaceutical Association was -affiliated with the same State Pharmaceutical Associations as the I'Tational Association of Retail Druggists but was not affiliated- direct!.-'- with the local retail drug associations. The affiliated memberships of the 'American Pharma- ceutical Association and the National Association of Retail Druggists thus' overlapped greatly, being about 35,000, In addition to its affil- iated membership,' the American .Pharmaceutical Association had a direct ■ membership of about 3,000. This association emphasised the professional rather than the commercial side of the drug store and had a high, ethical standing. t It admitted pharmacists to membership whether they owned stores or were merely employees; and it also admitted professors of pharmacy and scientists. Inasmuch as the success of the professional side, of phar- macy depended considerably upon the success of the commercial side, the A.Ph.A. saw very nearly eye to e^e with the N.A.R.D. on the issue of price stabilization. (*) Throughout this part the term "small druggist" designates the type described above. The term "independent druggist" is some- what misleading inasmuch as many of the cut-rate tyoe were ind- " \ ependent ' i.s»r.flot chains. (**) The following descriptive data on all trade associations comes from the History of the Retail Drug Code, pp. 13 to 16. (***) Volume A, Retail Drug Code; Code Record Section files. '• 9726 - 46 - The Drug Institute of America, Inc., was organized in 1933, shortly "before the passage of the N. I.R.A. ; and its principal object was to pro- mote price stabilization for the entire industry. With this in view, it admitted to membership manufacturers, wholesalers and retailers, the membership of the last-named class being about 30,000 and including both chains end small druggists. Its membership was entirely direct, it hav- ing no affiliation with local or state associations, and its members joined as individuals and not as corporations or firms. Powerful during the code period, the Drug Institute declined rapidly after the Schechter decision and is now out of existence. At the original public hearing on the retail drug code in August 1933, one of the most significant speakers on behalf of price stabili- zation was I.Ir. George Li. Gales, president of the Liggett Drug Company, From the time of their inception, chains had been the opponents of small druggists, but students of the retail drug trade had noticed a trend to- ward a new spirit of cooperation between chain and small druggist in the latter's fight for price protection. Chains had established their places in the economic field through aggressive price cutting, but the process involved price wars and the re- sulting competition became cut-throat. Once established, the chains sew possibilities of more profitable operation under price stabilization, aid commenced to view with approbation the efforts of small druggists in this behalf. A new type of outlet entering the market during or just prior to the depression hastened this tendency. This type was an independent store, or small local chain of low overhead, high volume, and a policy of extremely low-cut prices. These outlets could beat the established chain at its own price-cutting game.* Shortly after the original public hearing, lir. Gales became pres- ident of the National Association of Chain Drug Stores and, as such, tool: a seat on the National Retail Drug Code Author it}?-. From that time, the most of the important national chains were openly behind the program of price stabilization. The National Association of Chain Drug Stores arose from a merger of two pre-existing organizations, the Affiliated Chain Stores Association and the Associated Chain Stores Association, and admitted to membership any firm operating a chain of four or more stores. Its members included the largest and best-known drug chain sys- tems in the country. II. Q-.yoonents of Price Stabilization The opponents of price stabilization throughout the code period were of two classes: The cut-rate drug or cosmetic stores, and the de- partment stores. The first type consisted of medium-sized or large in- dependent drug stores; small drug chains, usually local in extent; and so-called cosmetic shops, either 'chain or independent. Some of the. drug stores had sizeable prescription departments, doing a good volume of business^ of .ers odd not emphasize their prescription business, and still others had no prescription departments. '(*) For a further discussion of this subject, see Part I of this Report Page 12 et. seq, 9726 - 47 - The cosmetic shops did not fill -orescrintions , though where state and local law --emitted, the-"' ma" have handled jacka e medicines as well as co^ia^oics. Some representatives of the small druggists at the public hearings applied the tarn "pine board" indiscriminately to all of their cut-rate opponents, and this tern was sometimes misleading. Strictly applied, the term "mine board" refers to a type of store, developed in California, with ckeau shelving and counters, usually made of pine instead of a more expensive wood. These stores cut d^wn their overhead by occupying cheap- er down-town locations, usually in the middle of the block and freouently at distress rentals made mossible by the degression. Often they were mere "holes in the wall", filled to the bursting noint with goods, oper- ated on a cash and carry basis, and with no prescription sorvice. A large niimbor of "pine boards" were at the time of the code, and no doubt still are, in existence; but it was a nit'take to classify all cut-rate drug establishments by this title, since many of them had locations and fixtures as fine as any drug store, and some had large prescription de- partments. The common denominctor of the cut-raters was not cheapness of location or fixtures, nor lack of -orescriution service, but rather a molicy of extremely deeu-orice cutting on nationally-advertised mer- chandise and the handlin- of a ra.ther complete line of private brand, substitute orpducts. There was nothing new about the basic policy of the cut-rate store. It featured a number of standard items at low pri- ces to draw trade, and attempted to sell the customers private brand merchandise in lieu of or in addition to the standard brand. This was the oolicy that established the chain drug store's place in the community, but there were differences between the chain and the cut-rater in the method of carrying out the policy. The chains had sufficient funds to use newspaper and radio advertising, and considered such publicity neces- sary to the continuance of their goodwill. The cut-raters, having less capital, needed another mode of attracting notice, and they found it in the medium of prices cut so extravagantly low that they advertised them- selves by word of mouth, A few handbills judiciously distributed at nominal cost sometimes supplemented the prices posted in the store window.* Possibly anotherfaetor on the side of the cut-rate store in its battle with the chain was the former's small size. The chain was an or- ganisation with hired store managers who were often not permitted to change prices without direction from the head office. The cut-rate store manager was the owner, usually a shrewd merchant with a knack for shift- ing prices effectively, and not restricted from doing so by any higher authority-. Furthermore, though the volume of business of the cut-rater was large enough to enable him to buy directly from manufacturers at low prices, his stocks were not so large that he was limited to this one source of supply* Being an independent, he could personally watch for bargains, especially in distress goods, on quantities too small to int- erest the chain. (*) The author thanks Kr. Wroe Alderson, consultant on this study, for the following terse statement of the distinc- tion between the policies of chains and cut-raters: "Cut -orices are what the chains advertise, but cut-prices are what the cut-ra':ers advertise with", 9726 - 48 - During the code period, there was no national association of cut- rate drug stores, and only two associations appeared at the hearings. One of these was the rational Independent Pharmacists, -Inc. , having a member** ship, by its own figures*, of about 75 stores in JJew York City with an annual volume of business between $7,500,000 and $12,000,000, According to thin association's attorney, very few of these stores dealt in cigars or cigarettes, and few had soda fountains or luncheonettes. Their aver- age prescription business was from $50 to $100 per day per store and they sole1, for cash and went aggressively after tr-ade. The attorney stated the t this association war, affiliated with similar groups throughout the country but naied r.one of them. During the spring of 1935, ERA sent a government representative to sit as administration member on the local retail drug code authority in LTew Yoi"h City. This man, seeking knowledge of conditions in the trade, befrieiiaeo. and had many conversations -with members of the national Inde- pendent Pharmacists, Inc. In his final revert to the Deputy Administra,- tor** rendered after the Schechter decision, he stated: "I have person- ally visited meny of these stores and. fotind a great many of them to be of the highest type, With large prescription departments, finest of fix- tures and handling nothing but drug and cosmetic items." Another cut-rate association represented at the public hearings was The Associated Retail Druggists of America. The size of this group was difficult to determine. T.ie snokes -.an for it was i.ir. Maurice Singer of Cleveland, Ohio, and at the first hearing in August, 1933, he gave the title of his association as set forth above.*** At t.^e second hearing in June, 1934, however, he called it the "Association of Retail Druggists, Cleveland, Ohio".**** At the first hearing Mr. Singer stated that his association contained stores in t'-elve or more large midwestern cities, some of the stores bein~: independent and some small chains, and oil doing a large volume of business. At the second he.- ring, he further described his gnou^ as containing 200 to 300 stores. (*) See testimony of Miss Frances Kneitel, attorney for this group, transcript of hearing August 26, 1933, pages 338 to 342; and transcript of herring of June 7, 1934, pa. -es ,204—235 (**) Reriort of Walter P. Spreckels, Administration Member, to A.S. Donaldson, Depute -Administrator, Jxily 29, 1935; "Adiinistration members" folder, Deputy's files. (***) Transcript of hearing, August 26, 1933; pages 356 to 365 (****)Transcript of hearing, June 7, 1934, pages 124 to 135 9726 - 49 - ' • » * : tlii r\.w.\l av.tivrte drug and cocraetic stores, the d|pnptr!\9i|V stares eonsistently opposed price stabilization throughout the C<|d# periodt T he association representing this group was the National Betail'Dry Goods Association, having, according to its representative, (*) a membership of 4,555 department stores and specialty shops, most of them celling drugs and cosmetics. This association's opposition to price £«htr6l;by-the Government extended beyond the Retail Drag Code. It sent its representative to register its objections at practically every hear- ing on any code involving price devices. It appeared before the congress** ional committee considering the Capper-Kelly bill and objected to that measure while it was pending. In addition to the above-named trade association, two individual firms, ■.important, enough to warrant mentioning, appeared to object to price stabilization at both public hearings on the Retail Drug Code. One of these firms was R.H. Macy & Company, a large department store in New York City. . This firm achieved renown through its policy of selling exclusively for cash and its allegations that it endeavor to undersell all competitors by 6$. Its drug and cosmetic department was cut-rate in its tactics and, prior to the code, greatly disturbed the small druggists of New York. This firm employed an economist and also a Washington attor- ney, one or both of whom appeared at all hearings on price control to submit the company's objections.- During the code period, Macy freauently threa.tened*to violate the loss limitation provision, and expressed con- sistent objections to it, but actually remained in compliance. Another individual firm represented at the hearings was the Katz Drug Company of Kansas City. According to its representative, it had, in June 1934, eight stores, five in Kansas City, Missouri one in Kansas City, Kansas, one in St. Joseph, Missouri, and one in Iowa. (**) Druggists of Kansas City questioned Katz's right to call its establishments drug stores be- cause of the great variety of merchandise handled. Late in 1934, or early in 1935, Katz built a new "Super Service" drug store in Kansas City, carrying so great a variety of articles that druggists of the city promptly classified it as a department store. (***) Katz consistently op- posed all price control measures in the codes, and even succeeded in ob- taining an injunction preventing the enforcement of the price provisions of the Cigar Code. Though it disliked the loss limitation provision of the Retail Drug Code, its Washington attorney assured NRA that Katz wnuld comply; and available records show no outright violations by this firm. (*) See testimony of Irving 0. Fox, transcript of hearing of June 7, 1934; pages 247-261 (**) See testimony of Paul Stinson, transcript of hearing of June 7, 1934; pages 261-266 (***) To the layman, the dividing line between drug store and depart- ment store seems somewhat obscure. Drug stores, apparently, can sell electric irons, flashlights, cameras and toys, but not awn- ings, clothing and refrigerators without becoming, in the minds of other druggists, department stores. 9726 - 50 - • -;:or w^f* aef CHAPTER -ill .••.... . ...... _„.,.. historic;,! jv:v:'lop:!z:^ b'f ^-!i!o!ss Mii^ATMHW^;^ ^j •provision: to tie A].:.:-;.ii"T cp march, 1934^6*$ ^?iS£TOf|l i : T ,- I. Tra.de Activities fa smimer of 'Ja3vi£) r, ,? * s ■■ ♦ .» j -•]?••, • . f The national Association of Retail DrpV;is"ts ^an^i:' t'haotoa^^ti^^&t^l tute of America, Inc., commenced formulating a code soon -af teV tftiev '-V;-*i passage of the national Industrial Recovery* Act". _ER4'.rec^ji^,,ind4£ate that a number of State Pharmaceutical Assod-a-tions'-wij^e^,^ %§)?#*3^i,t£.#A codes also but, the principal effort lay in the drafting o£i& •^c^0Hk% code by the national bodies. Thou h the Dru'r Institute had particlpat'ecL prominently in the draftin,, of the"' .ropo'sVilcot^ name of the- Eatfcna.1 Association of Retail Druggist's'* Pi$i%g^m*%W Pharmaceutical Association ^joined in the presentation, not a*s "'sponsor-,* j but as an' as sen tin,-' grouD. •■ ;;.- ■'-; ••''•' , > t * .» a . . ' „ ■••*--o XJ .;: .->♦ i»#i#4*A*s-Rl ;0IJ'-* II • Presonoacion of Coi e; Public Hearing; -Sub s-e ouerht- ;Sr'a»Cfo& j '•« '.- { > £gt«i •■* *:- ■- -' -;. ; ; 1 . -i .••■,.- - - ) J ERA received the proposed code on AUT-*srt ' l\y Vl3^^ a public hearing for- Auust 2b. Shortly before the hearing ^he^Iat ipijaitL Association pf Retail Druggists withdrew the original draft .^id; subisMys tuted a new one, (**) and- at the hearing all arguments' ajwT'+lJejl''tiiirrany;»ae:r;ai oasod upon- the new, substituted draft, readiiig i'n ~suh-startfcfe:<; /rj&$.i§t&'io,wst in its pries control- -provision: -(***'). ■ "' -'u' ■-' ■ •&xtri -vo-D a,;-; . Vp ;.[og.-!;f,-»3 ■•- 9vi:T-3ir re -• y-- ai2 (a) Retailers, shall not receive or accept any secret r"e*- -bates, unearned' discounts or similar concessions' - from manufacturers. Payments by manuf an'turers^to -««bi . retailers for window display shall be in cash and ■ not. contin ;ent...on Jthe& apount Qfi SWP4S| $&¥£$$' til * (b) • - Tra.cdar; allowances or -premiums to consuaorsi-aro p-rfciS- hibited unless the consumers pay for them at the code i • minimum J.rice. P/ft cti-u— - ists can se3aL: to doctprs • ' at a, "afferent" -£:'ice . e"J I 'J* H , _";«/ ».'•'•" *■«*«#£ jftfegtfilftfi (c) Uc- trading stamps or other schemes or' 3ubterfu""geV*to evade the code minimum Prices are' pej*ita:ft!t'ed. Special sales cannot be held 'unless" prioirap'^r^vfel<,'6"f''A;he.*^ "•Enforcement •Board»--.is-.obtai-ned. ^ , .." . <■■'■ o ''•'.' •- .' B* mj>M- ( '*-• i Ml | (d) Combination sales are- hot prohibited ,-a^ tfoe,-.t£>jt&lfl(k price covers the code minimum prices of«:thtn-G-on»'tii> tuent items. . ' ' ■ (*) See official application for code;., Vgljime A, Retail l^ufoQodei CoAf Record Section, ERA • ' ,- • :'":,»* J* U^UM '-?* (**) The s Johsors, apparently withdrew every? &©»y of the &&(*$$£', .dj-af't-' in •.. ERA' s(. posse's pi on.', The' author has net b ■ n able to' find the rfesorr* for the substitution, nor to obtain- copies of the f ir s}a draft. '■• k I (***)This draft appears at pa e 2S:j transcript of hearing " "a ■ - , '^, - - j -i rosier.*.* ■.-.:•_ n -- ■) ■ -:.i 9726 ■' ^^ri - 51 - (e) ITo manufacturer or wholesaler can sell to anyone, including hospitals, at a price less than he sells to retailer, if such goods are to "be resold. : (f) Ho' retailer can sell or offer to sell below "cost sold" plus 5fi net profit. "Cost sold" is defined as the "standard wholesale cost" fixed. by the manufac- turer^.) plus the average drugstore overhead as de- termined by the St. Louis drug store survey of the Department of Commerce (about 23 .0 . (s) A grower, producer or dealer who sells goods identi- fied by a special brand, name or trade mark. of which he is the owner, is permitted to specify the resale ' price of such goods by agreement with his idstribu- tors. The prices stipulated must be uniform to all distributors, who are in like circumstances; and such contracts are to be free from the anti-trust laws. Clauses (f) and (g) were the most important to the sponsors; the intent of the others was merely to plug up possible loopholes and to bring about incidental benefits. Items (e) and (g) and part of item (a) would have controlled manufacturers and wholesalers thou/ii this code was supposed-- to govern retailers only. lor this reason, Mr. Donald Richberg, then General Counsel of ERA, arose at the start of the hearing and attacked the legality of the draft . (**.) Later, however, Mr. wroe Alderson, then Industrial Adviser to the drug trace, commented that the attempt to 'control manufacturers was a significant sympton, since elimi- nation of bad retail price conditions' necessitated some control over, or cooperation by manufacturers' and wholesalers .(***) The ublic hearing lasted two days and urin; the inter" ening evening the sponsors revisec. the code to accord with Mr. Rici.berg's views and to modify their demands for price protection. This revision, read into the record on August 25, changed the wording of the resale price Contract clause so as to permit retailers to enter into contracts with manufacturers, instead .of manufacturers with retailers. To render such a clause as this workable, there would have been need for a similar clause in the codes covering drug manufacturers^ ****)?his revised draft of the code abandoned the "cost sold plus 5 ■" clause and included in its (*) The ghra.se "standard wholesale cost fixed by the manufacturer" evidently means the manufacturer's wholesale list price t>er dozen. (**) Mr. Richberg' s attack appears on pa es 49 to 58 of the transcript «f August 25, 1933. Mr. Richberg also attacked these clauses on the ground that ITTA'S legal right to approve price-fixing clauses was doubtful . (***) Mr. Alderson 's comment appears in the Pinal Report of the Industrial Adviser (undated), addressed to A.D. Whiteside, Deputy Administrator. A copy is in folder marked "157 Retail-Code Doc"; Deputy's files. (****) See Part I for discussion of efforts to secure su.ch a clause in one of these codes, Page 12 et . seq. — 9725 ~ 52 - place a clause substantially as follows: Retail druggists are orohibited from offering or selling merchandise at less than the manufacturer's published or de- clared retail (consumer's) price less 21f6. If, however, a manufacturer of a particiilar product does not -orovide the usual retail margin of 33-1/3$, the minimum code trice is to be the manufacturer's wholesale list price per dozen plus a per- centage mark-up to be determined later. Taxes are to be added and not absorbed. (*) This clause (commonly known as the "21$ clause") meant that the minimum price of a $1.00 hair tonic would be $79r£. But if the man- ufacturer's wholesale list price per dozen of the hair tonic was less than 33-1/3$ below the retail price (i.e., greater than 66~2/3<#) , the minimum code price would be the manufacturer's wholesale list price per dozen plus a mark-up to be determined later. This clause re- presented a much lower degree of nrice protection than the original "cost sold plus 5$ clause. Under the "cost sold" clause, a $1.00 hair tonic would have had a minimum price of $1.00 (manufacturer's whole- sale list price cer dozen of 66~2/3rf; plus 28$ of the selling price for overhead, or about 28rf; plus 5$ of the selling price for net profit, or about 5-4; total about 99-2/3rf). The report of Deputy Administrator A. D. Whiteside to General Johnson on "Outstanding Impressions Drawn f rom t he General Retail and Retail Drug Trade Hearings" (**) shows the attitude at least of the administrative officers of HRA toward the druggists' proposals. Mr. Whiteside stated that while the retailers adiitted the depression was the principal cause of their operating losses, they still insisted on a loss limitation provision, and that they could not abide by code labor provisions without price protection. He stated that the loss limitation idea was so popular with retailers that, irrespective of economic implications, a denial of the retailers' request might have serious results at the crucial point of lIRA's inception, and the de- cision in the matter might have a decided bearing on NRA's success. Mr. Whiteside pointed out that the mere setting of uniform wages and hours would not, in retailing, result in curbing price cutting to the same degree as in manufacturing. He added that, under price sta- bilization the aggregate cost of goods to the consumer should not go up because of the small number of loss leader items. On September 8, 1933, after numerous conferences (***) the spon- sors revised the price control provisions of the code again, com- promising still further their desire for a high degree of price pro- tection. (*) This second draft appears in full at page 404, et seq. , of the transcript of August 26, 1930. Note that each day of the hearing had its own volume of the transcript, but page numbers ran continuously through both volumes (**) Dated September 14, 1933. Located in files on Retail Trade Code; also in History of Retail Trade Code, Beginning at page 30 (***) There is no record of the actual proceedings at informal conferences 9726 — 53 — The two inroortant price clauses in this draft were substantially as follows: Drug merchandise cannot he sold at less than the man- ufacturer's wholesale list -price per dozen as of the date of sale or 3 months prior' thereto, whichever is lower, less such discounts as are available to all, plus 15$. Druggists cannot hold more than one seasonal clearance , sale per quarter and must report it in advance to the code authority. Per- ishable and damaged .goods can be sold below the minimum price if advertised, marked and sold as perishable or damaged. Bona fide discontinued lines, goods sold on complete final liqui- dation of a business, and foods sold for charitable purposes can be sold below the minimum. Before selling anything below the minimum, the druggist must first offer it back to the man- ufacturer at 10$ below the price naid for the goods by the druggist. Retailers may enter into resale nrice contracts with man- ufacturers but only on commodities the manufacture of which . is subject to an ERA code, and the contracts must be approved by the code authority, the Administrator of ERA, and the Pres- ident under Section 4(a) of ERA. Clearance sales are permitted if the manufacturer is first given an opportunity to re-pur- chase the goods. The first clause mentioned above would have made the minimum price- of a $1.00 hair tonic about 77 J; (manufacturer's wholesale list price per dozen of 66~2/3<£ plus 15$) less whatever discounts were "available to all". These discounts might have totaled as much as 25$ on a few products, while on most there would have been no dis- count "available to all", but only a discount available to buyers of large quantities. The resale -price contracts clause in. this draft was so hedged with restrictions that it would hardly have been practical. (*) Negotia- tions between ERA and the trade continued throughout September. ERA's administrative staff was not averse to granting some price protection in the code, provided it did not go so far as to injure the public, and the -Industrial Adviser shared this view to the extent of recom- mending price protection in order to keep small druggists coo-Derat- ing with ERA. (**) Other "interests in ERA, on the other hand, notably the Consumers' Advisory Board, were oppsed to any price control clauses , . at all. (***) The representatives of the small druggists, naturally, wanted as much price- projection S.& they could secure. .The atter.pt to 'co'inpro- mise these diverse views accounts for the frequent changes in the pro- posed code. (*) Cory of draft of September 8 is in Volume A, Retail Drug Code, Code Record Section, ERA (**) See interim report of. Wroe Alderson to A. D. Whiteside, Septem- ber 9, 1933; Volume A, Retail Drug Code; Code Record Section filed (***) See report of William Loucks to A.D.Whiteside .September 14,1933, Volume A, Retail Drug Code, Code Record Section files 9726 - 54 ~ The druggists started with a bold proposal and gradually reduced their demands* . In the next draft, on September 15, 1933, the druggists regained some ground on their minimum price clause, but at the expense of giv- ing up their resale contract clause altogether. The minimum price clause in this draft provided in substance as follows: (a) On standard brands (well-known nationally advertised products), the code minimum price is the manufacturer's retail list price (full consumer's price) less 21%. (b) On off-brands (not highly advertised or well-knoin) , the code minimum price is the lowest wholesale net price quoted to all retailers within 30 days preceding the date of sale, plus'10$» (c) Clearance sales must be bona fide and can be held only at the end of a "well recognized season". (Other conditions under which goods could be sold below the code -orice remained the same as in the preceding draft. The retailer was required to give the manufacturer an opportunity to repurchase the goods before cutting the price) . The re-gained ground here was the re-acauisition of the "21$ clause", but the gain was limited to standard brands. The provision concerning off-brands would have produced a fluctuating price very dif- ficult of determination. (*) Two more preliminary drafts appear in the records, bearing the dates September 19 and September 21, respective- ly, but contain no substantial changes in the price provisions. (**) The last draft on record containing price provisions in line with those developed during the negotiations since the hearing was a draft, trans- mitted by Deputy Administrator Whiteside to the Administrator for ap- proval on October 1, 1953. It contained the "21$ clause", but limited its application to trade marked, trade named, or advertised goods, readily identifiable by the consumer. On other goods the minimum price was the individual store's cost of the goods plus a mark-up of either 10$ regardless of the source of the goods, or 10$ on goods purchased directly from manufacturers, and 7$ on goods bought from wholesalers. ***) The Deputy, in his letter of transmittal to the Administrator, ****) urged the immediate approval of this draft, saying that the trade, except for a few price cutters, was aggressively in favor of loss *) Copy of the draft of September 15 appears in Volume A, Re- tail Drug Code, Code Record Section, NRA **) Copies of these drafts are in Volume A, Retail Drug Code, Code Record Section, KRA ***) Parts of this draft are missing from the files and the record does not show which of the above alternatives was included in it. ****) Copy of this letter and copy of parts of the code as trans- mitted are in folder marked "157~Retail-Co.de Doc", Deputy's files' 9726 ~ 55 ~ limitation and would smother ERA in an avalanche of criticism if it were denied. He ■ warned of the serious political significance of such an avalanche. The Deputy further stated that labor leaders were in favor of the loss limitation -provision and that the opposition of the Consumers' Advisory Board was based on an academic viewpoint. The Deputy Administrator sent this draft to the Administrator in alternate forms: one, as a separate code,, and the other as ' a part of the general retail code,, The Deputy from the .beginning had /shown a desire to consolidate all retail codes and the retail drug trade had consistently opposed him on the ground that its problems were' wholly dissimilar to those of hardware and dry goods stores. Apparently, in transmitting the code in alternate forms, the Deputy was leaving the decision to the Administrator. Before looking at the differences between the code as transmitted for approval and the code as approved by the President, it is well to go back and examine the reaction of individuals in the field while the trade's representatives were in Washington negotiating with 11EA. Ill Reaction of Individuals; Mass Pressure A flood of telegrams and letters to the President and NBA from druggists and- local drug associations commenced in July 1933, prior to the presaitation of the proposed retail drug code. (*) The im- mediate cause of this correspondence was the President's Re-Employ- ment Agreement, setting hours and wages, but containing no trade prac- tice provisions. Druggists wrote and wired by the hundreds to the effect that they could not continue operating under the "blanket Code" with no curb on "unfair cut-rate competition". Prom' two cities in partic- ular came a batch of telegrams to the President couched in identical language, (**) from apparently every small druggist in these places. Many of these sent the same telegram twice, once under their own names as druggists, and again under the names of their stores. After the presentation of the code and during the negotiations prior to its ap- proval, the druggists were especially vociferous. A summary of mail ■ received after publication of the proposed code in the newspapers (***) showed a total of 779 pieces of correspondence, with 719 in favor of the (*) All of the corresoondence mentioned in this Subsection is in the Deputy's files, scattered throughout a large number of folders, all bearing the legend "157-Retail". (**) There were two forms of wording of these wires. One read "Cut-rate situation on tobacco, drugs deplorable here. Cannot give whole-hearted support unless relief comes". The other read, "Starvation wages, long hours will continue un- less local cut-rate drug company allows living profit". (***) Copy of the summary is in folder marked "157 Retail (a)," Deputy's files. The summary does not give the date of publication of the proposed code, but this was probably about the time of the public hearing, August 25, 1933. The summary shows the mail received from that date until September 25, 1933* 9726 - 56 - code as. published, 51 opposed to the pr.ice maintenance provisions, 4 onoosed to the hours provisions, and 5 miscellaneous objections. A count of correspondence received between September 25, 1933' (=0 and the approval of the code revealed 484 letters and telegrams (with, the latter predominating) ashing the President or NRA to a'rorove the price protection- provisions requested by the sponsors. A large num- ber cf the telegrams were identical in wording though emanating from different parts of the country. Two examples aopear In a footnote to the Chanter 1 of this part, showing that the small druggists felt themselves to be the "honest 90^"and the cut-raters the "predatory 10$" in their trade. Other examples of uniform wording of telegrams were: "Urging you not eliminate orice protection clause retail drug code"; "Independent drug- cists cannot possibly x>^y higher wages and shorter hours unless 2l:o provision retained in drug code....."; and "The vicious 10$ mark-up (**) over invoice cost will close the doors of 75;'o of retail druggists of nation. I petition you for release in form of right contract in retail drug code". There is little doubt that much of t he flood of correspondence was loosed at the instance of the drug .associations and was. not the spontaneous expression of the druggists individually. Uniformity of wording, of telegrams bears out this conclusion,, An interesting example appears in the consistent misspelling of the same word in all of the telegrams from one city. One druggist was naive enough to write a letter of confirmation of his telegram to the President, stating that the wire had been comoosed in response to a hurry call from the secretary of his state pharmaceutical association,, (***) An inter- esting item among the mass of correspondence was a series of 28 iden- tical mimeographed letters to General Johnson signed by individual con- sumers, -and three consumers' petitions containing 52, 41 and 18 names., respectively. The tenor of these documents was that, while the writer was not connected in any way with the drug trade, he or she appreciated the value of the neighborhood druggist and realized his need of orice protection. 5TRA acknowledged all of these letters, and in one case, the addressee replied that he had never written General Johnson in his life. Among the miscellaneous correspondence received during the pre- approval period of tne code were 139 letters from individual druggists urging a separate drug code rather than the inclusion of druggists under the general retail code. A large number of these were also uniform in wording. There were also three items from persons outside the retail drug trade. One of these, a telegram from the Utah Poultry' Producers Cooperative Association, opposed, in behalf of the farmers, any resale price maintenance clauses in either the retail drug or general retail codes. - • (*) l.iade.in connection with the present study (**) Referring, no doubt, to the attempts of i_iA to place drug- gists on the same ba.sis as. general retailers under a "cost plus l>o" provision (***) In view of the wholesale use of- this t:H?e of lobbying by the druggists themselves,- it is amusing to note that a number of their letters and telegrams warned MEA to beware of the lobbying activities of Large interests. 9726 - 57 - Another, from the secretary of the National Wholesale Druggists Asso- ciation, urged the approval of price protection in the retail drug code so that small retailers and wholesalers could stay in "business and employ help-. The third, f rom t he president of the Proprietary As- sociation of America, an organization of package medicine manufacturers, urged the approval of the "21$ clause" in the retail drug code. (*) (*) This association presented a code of its own to cover the manufacture of package medicines, containing an elaborate "orice maintenance plan. The nlan -provided, among other things, that retailers should not sell p^ck&ge medicines below the top consumer -orice less 21$. This plan was never anproved. See Part I, Intemlay of Interests in the Drug Industry, for a discussion of this code. Page 15 et.seq. 9726 - 58 - IV The Loss Limitation Provision as Arroroved by the president On October 21, 1933:, the President aporoved the Retail Trade Code covering both the general retail and retial drug trad.es. Attached to it was a schedule of additional provisions, applicable specially to the retail drug trade. A loss limitation provision appeared in the main body of the code applicable to both retailers and druggists, reading as follows: "Article VIII, Section 1 - Loss Limitation Provision. In order to prevent unfair competition against local merchants, the use of the so-called "loss leader" is hereby declared to be an unfair trade practice. These "loss leaders" are articles often sold belovr cost by the r.erchant for the pur- pose of attracting trade. This practice results, of course, either in efforts by the merchant to make up the loss by charging more than a reasonable profit for other articles, or else in driving the small merchant with little capital out of legitimate business. It works back against the producer of raw materials on farns and in industry and against the labor so employed. 1. This declaration against the iise of "loss leaders" by the storekeeper does not prohibit him from selling an article without any profit to himself. But the selling price of articles to the consumer should include an allowance for actual wages of store labor, to be fixed and published from time to time by the Trade Author ity hereinafter estab- lished. 2. Such an allowance for labor need not be included in the selling ;orice of any article of food, or be applied by storekee-oers doing business only in communities of less than 2,500 oopulation (according to the 1930 Census) which are not part of a larger trade area. Provided, however, that any retailer may sell e.ny article of merchandise at a price as low as the price set by any competitor in his trade area on merchandise which is iden- tical or essentially the same, if such competitor' s ririce is set in conformity with the foregoing provision. A re- tailer who thus reduces a -orice to meet a competitor's price as above defined shall not be deemed to have violated the provisions of this section if such retailer immediately notifies the nearest representative retail trade organization of such action pnd. all facts oertinont thereto. " "Article VIII, Section 2 - Exceptions to Loss Limitation provision. (a) Notwithstanding the provisions of the preceding Section, any retailer may sell- at less than the orices specified above, merchandise sold as bona fide clearance, if advertised, marked and sold as such; highly perishable merchandise, which must r;726 - 59 - be promptly sold in order to forestall lose.; imperfect or actually damaged • >erc"hand.ise, or bona fide discontinued lines of merchandise, if advertised, narked and sold as such; mer- chandise sold upon the complete final liquidation of an3^ "business; merchandise sold in quantity on contract to "oublic carriers, departments of government, hospitals, schools and colleges, clubs, hotels, and other institutions, not for re- sole and not for redistribution to individuals; merchandise sold or donated for charitable purposes or to unemployment relief . agencies; and drugs or drug sundries sold to physi- cians, nurses, dentists, veterinarians, or hospitals. (b) Nothing in the provisions of the preceding Section shall be construed to prevent bona fide farmers' associations en- gaged in purchasing supplies and/or equipment for their mem- bership from making patronage refunds to their membership. (c) Tlhere a bona, fide premium or certificate representing a shore in a premium is given array with any article the base upon which the minimum price of the article is calculated shall include the cost of the premium or share thereof. A nine-page explanatory bulletin on the code, iss '.ec1 by ERA on October 23, 1933, '(*) interpreted the loss limitation pr vision to mean that no retailer could sell merchandise below his actual net delivered cost, less discounts,' or his current replacement cost, whichever mas lower. Until ITRk fixed a markup to cover labor costs, the code minimum nrice remained at bare merchandise cost. Inasmuch as individual costs differed small retailers with high costs could meet prices set by large retailers with low costs provided the latters' prices mere not in violation of the code, and provid.ed the small man notified the code authority of his action. TThy the retail druggists, against their will, were placed under the general retail code, and why their suggestions for price protection were ignored in spite of the Deputy's recommendation that they be approved, does not apmear from the available files. Hot until April 5, 1934, did ItRA fix a labor mark-up for this loss limitation provision (**) and b~r that time the druggists had a new loss limitation provision of their own. The mark-up established was 10^ (*) Cony is. in folder marked "157 Retail - Code Documents"'; Deputj'-'s files (**) Administrative Order 60-26 5726 ~ 60 - V. Objections of Trade to Approved Provision The sponsors of the code were far from satisfied with the ap- proved loss limitation provision, George 1,1, Gples, president of the Liggett Drug Company wrote Deputy Administrator Whiteside* that he was keenly disappointed at the rejection of the druggists' loss limitation suggestions and the approval of cost plus a labor mark-up. The Assist- ant Deputy Administrator must have foreseen trouble with the officials of the National Association of Retail Druggists, for his telegram ask- ing this association to appoint two members of the code authority pleaded with it not to refuse or it inight ''endanger what 'has "been accom- plished and what I know you still hope for11,,** The answer from the secretary of the H-AaEoD,,*** stated, "Under protest we nevertheless are willing to cooperate with your department and John Ac G-oode and myself wil will he in Washington Friday morning to act as terroorary representatives of i\foAoS»Do on Retail Drug Council, .-■»•- Repercussions of this initial dissatisfaction continued at intervals throughout the life of the cooe, In January, 1934 N.R0A. issued a press release mentioning that the retail drug code was the result of an agreement hetween the trade and IToRoAo The secretary of N»AR»D« wrote the Assistant Deouty Administrator that the press statement was false, and that he, for one, had. not agreed to any part of the code and at first intended not to have anything to do with it0 He closed his letter by saying, "The Drug Code, in my opinion, is a disgrace for any government to try to put over or any group of men who are supposed to have any intelligence at alio....*"**** On October 4, 1934, this same trade association revived the matter by publishing in its journal an editorial***** stating that the trade never had a chance to assent to the approved code. The occasion for the editorial was a statement by the President of the United States on September 30, 1934 that each industry had been allowed to write its ideas into its code, and the editorial urged each druggist to write the President, correcting him0 A number of such letters came, though by that time, FoR«Ae had long since granted the druggists their own loss limi- tation provision and the conditions surrounding the approval of the original code were a dead issue****** (*) Letter of 10/24/33; folder marked "157-Retail -A-L"; Deputy' s files (**) Telegram from C.7. Smith of IT.E.Ao to John Dar gavel, secretary of the association, 10/24/33; Deputy's files (***) Telegram from Dargavel to C.W. ' Smith, 10/25/33; Deputy's files. (****) Letter from John Dargavel to C.W. Smith of ItRA. January 15, 1934; Deputy's files. (*****) Copy is in folder marked "Protests"; Deputy's files (^*****) Copies of these letters are in the folder marked "General Correspondence"; Deputy's file. 9726 - 61 - The objections of the small druggists to the approved loss limitation provision centered around its low degree of price protection. In principle, it pegged prices at the merchandise cost of the dealer with the largest buying power in each trade area. In the drug trade, since. the large dealer's cost was 15$ or more "below that of the small dealer, the latter took a considerable loss when meeting the prices /jf the former, The'provision purported to eliminate loss leader selling but it did so only in the narrowest sense, by preventing the large price cutter from selling below his own invoice cost. Some hope for relief lay in the promise of a labor mark-up. Small druggists realized, however, that the addition of a percentage covering perhaps part of the price-cutter's labor costs, might still not raise the .code price to the cost of the goods to the small man, and in any event would not give him a sufficient return on his own lab^r costs. As the drug code authorities attempted to administer the loss limitation provision, they discovered another defect in it. The clause was unenforceable. There was no fixed, definite minimum price on each product, but the code price fluctuated from trade area to trade" area and from day to day according to the success 'of individual price cutters in obtaining goods' at a low cost. Even had the price-cutters' merchan- dise costs been readily ascertainable, the constant fluctuation of the code price would have caused administrative difficulty; but to add to the problem, . the merchandise cost of a given store was a matter usually .known only to. that store, and divulged reluctantly if at all. A code authority suspecting a given price of being below the code minimum had ,no means of checking except by examining the store's invoices. If the store refused to disclose these documents, there was nothing to compel them to do so. VI. Efforts for a Hew Loss Limitation Provision: Attitude of ERA From their initial dissatisfaction "with the approved loss Limitation provision, drug association: leaders turned to a search for ways to improve it. At first they felt that ERA could, if it would, erect a satisfactory structure upon the approved provision by revising the definition of "cost" and adding a substantial labor mark-up. There- fore, in November, 1933, the National Retail Drug Code Authority pre- sented ERA two briefs*. One of these urged that ERA withdraw with respect to drug products, its statement that "cost" meant individual in- voice or replacement cost-, and issue instead an interpretation that "cost" meant the manufacturer's wholesale list price per dozen on products possessing such a price, and on other products the "normal wholesale price actually prevailing in the immediate market". The second brief urged the approval of a 15$ labor mark-up stating that the normal wage cost of a drug store, exclusive of a proprietor's salary, was 18^; but that 15. ■ .raid be satisfactory. (*) Both dated 11/15/33; "Mr Whiteside's folder"; Deputy' s file ' 9726 - 62 - ■■0 The early attitude of NBA toward these proposals appears from two documents. ■ One of them, a pencilled memorandum, on a printed form ""headed "From- the Desk of Hugh S, Johnson", was, attached to the second brief mentioned above, and states, "Whiteside; This* is too much', hut we must act at once on .the differential - H.J." The second document was a memorandum from Deputy White side to General Johnson*, returned to 7fiiitehe reason for this chsftige of tactics was that the general retail trade seemed satisfied with the invoice cost type of code price, and so long as this trade and the drug trade used the same provision, it could not be interpreted as t*he druggists -wished. She first suggestion' for a new 'clause appearing in the records' examined:" was "that no one should 'sell drug products below the "lowest price published .or openly quoted. in dozen lots by any wholesaler to retailers in -the particular trading area, free goods and other premiums andrgifts to be considered pro rata in arriving at such price. ..*." Deputy Whiteside in a memorandum to General Johnson recommended approval of this proposal for a 90-day trial period, urging that the small druggist should be helped quickly to overcome the buy- ing advantages of large stores.* General Johnson evidently changed his former attitude and NRA. published the" proposed clause in a Notice of Opportunity to File Ob-jections. ** Inasmuch as the clause was pro- posed, as an amendment to the code, it was irregular to handle it on a mere notice instead of by public hearing, and this irregularity re-" suited in criticism from .the price-cutting interests. The files do not contain any correspondence ' objecting to the purposed clause but it is known that a number of price-cutters, did object.*** The files do not contain, however, a document probably representative of the price- cutters' attitude, This-is a press release from the office of the Washington attorney for the Katz Drug Company of Kansas City, stating that the proposed amendment would greatly increase prices in large drug stores, department stores and chains, and that the Katz Drug Company would attack it in court if it were approved. The release criticized Deputy Whiteside as the "number 1 price -fixer" of NRA and' stated that the amendment would psevent the consumer from obtaining any saving from Katz' car-loading buying. It ended by objecting to the lack of a hearing, saying that the public would not know how many persons had objected and that the provision was invented in secrecy and could not stand the full light of day,**** The small druggists responded rather strongly to the Notice of Opportunity to File Objections. On February 28, 1934, NRA received 349 telegrams asking prompt action on a code price based on the (*) Memorandum dated 2/l/34; "157 Retail - Code Documents"; Deputy's files (**) Notice of Opportunity to File Objections, Administrative Orcer 60-18, 2/20/34; Code Record Section files, (***) At the public hearing of June 7, 1934 (discussed herein- after), several of the price-cutters specifically men- tioned having filed objections in response to the Notice, See transcript of hearing. (****) A carbon copy of the press release is in the folder marked "Memoranda"; Deputy's files, Katz' Washington attorney informed the author during the course of this study that several newspapers had published the release. 9726 - 64 w manuf aet_r*r ' s wholesale list price per d»zen plus a 10$ labor mark-up.* The telegrams came from 29 regional drug associations, 70-odd individuals in the mid-west, and the "balance scattered pver the rest of the c#v_f!ry, country.** Soon after the NRA had issued The Notice of Opportunity to File Objections, the Code Authority "became convinced that the proposed clause weuld not work. The "lowest price published or openly qv.«f--'"' quo ted...... "by any wholesaler" would have fluctuated from day to day, and there would have been a possibility that wholesalers friendly to eut-price retailers would have quoted unusually low dozen-lot prices without the intent or ability to supply all retailers in the area at such figures. Unending legal squabbles over the meaning of. .the provision might have- followed. The Cede Authority tentatively suggested a substitute based ^n the "prevailing wholesale price" in each area. This too had the ob- jection of being difficult of determination, subject to fluctuation, and productive, of a different code price in each trading area. Finally, in Mareh, 1934, NBA agreed to consider something akin to what the druggists had always wanted - a loss limitation provision based upon a uniform ascertainable 'price, practically equal to the cost of goods to small druggists. m Inasmuch as the proposal under consideration had nothing to do with the manufacturer's wholesale list price per dozen and contained no provision for a mark-up, it is difficult to view these telegrams except as objections coupled with a substitute suggestion, (**) For the summary of this correspondence, see memorandum from C, Sterry Long to A.D. Fniteside, March 1, 1234; "157- Retail - Memorandum"; Deputy's files. 9726 - 65 ~ VII. The March Amendment to the Lo ss Limitation Provision , and Its Interpretation On March 5, 1934, Deputy Administrator Harwood wrote Division Administrator Fniteside recommending an amendment to prohibit druggists from selling "below the manufacturer's wholesale list price i er dozen, Mr. Harwood mentioned the question of a 10$ labor mark-up, out suggest- ed that this "be postponed so that prices to the consumer would 'not rise too fast.* The record does not show why Mr, Harwood' s recommendation was changed in the approved draft of the amendment, "but doubtless it was because some officials foresaw the result of. handing too much power.- to manufacturers. Although the manufacturer's wholesale list price per dozen had for years been a stable price, fairly close to the srn3.11 drug-gust' s merchandise cost, there was a chance that its establishment as a. code price wotild induce manufacturers to manipulate their price policies Gf as to insure a margin to the small druggist selling at the code price. Such manipulation would have violated the principle of the provision that the minimum price should be the cost of the goods to the small druggist, and to prevent such a violation, i!RA at the last minute threw into, the clause a proviso requiring the t eduction from the manu- facturer's wholesale list price per dozen of discounts, free deals, and rebates available- to all purchasers of. aozen lots.** The Amendment was approved on March 29., 1934, without a prior public hearing and without further Notice to File Objections (though it differed substantially from the clause previously published) . The approval was contrary to the recomraendatioas of the Consumers' Ad- visory Board, Research and planning Dividion, Industrial Advisory Board ', and Labor Advisory Board. The Assistant deputy Administrator, in transmitting the proposed amend ;ent to General Johnson, wrote that it would eliminate loss leader selling and probably reduce prices to the consumer over a wide range of products, thus more than counter- acting its tendency to raise prices on the few loss leader .'terns. The Assistant Deputy took issue with the advisory boards on the definition of 'Efficiency", saying that mere heavy buying power and lcrs "leader selling were not efficiency but "chiseling practice" , and that the price cutters rendered little public health service. General Johnson, in his le:tter to the President explaining why he had approved the amend- ment, stated that the previous loss limitation provision had, uroven un- enforceable in the drug trade, and the amendment', while not altering the' basic principle of the former provision, made.it enforceable. As a proved the amendment re-ad as follows:. ■"Inasr.iucli: as the vast preponderance of drug store products are distributed through small drug retailers who are unable to (*) This memorandum is in folder marked "157 Re-tail -I Memoranda? ; ^i Deputy's files » (**) Chapter VI of this part shows how the possibility of price manip- ulation by manufacturers-. became an actuality when, in the Septem- ber-amendment, this safeguarding proviso was removed. See page 107 et. seq. . ■■. , .. ' g ■ j. j\..;-. o .■ c.:r:i!;.ltif basis but who perform services which, are essential to the welfare of those in their communities, and whereas such service:; can- ot adequately be performed through the facilities provided by their competitors,, and whereas in some cases sales are made to consumers by such competitors at prices below the lowest cost of purchase n027.1c.lly obtainable for such merchandise by small drug retailers, ;v. whereas in most instances such sales prices are not a true indie ,tion of the general level of prices of such competitors and no general benefit to those in the community accompanies the same, but such prices ere in fact in the nature of bait -offers of merchan- dise to attract trade, it is hereby declared an unfair trade practice and is prohibited by this code for any drug retailer to sell any drugs, medicines, cosuetics, toilet preparations or drug sundries at a price below tho manufacturer's wholesale list price -per dozen, provided, however, 'civ. t in the case of biologicals or other of the above-mention- ed products which are not customarily sold in dozen or greater lots the Code Authority may fix a comparable unit quantity, and provided further that my discount, free deal, or rebate which is made available to all purchasers o" dozen lots or comparable quantities, shall be considered as part of the manufacturer's wholesale list price." Prom th< frets alleged in the preamble, the avowed purpose of .' j this ameni . as to peg minimum prices at, but no higher than, the snail dealer's Merchandise cost. The use of the manuf acturer ' s wholesale li t nice per dozen to accompolish this purpose involved the presunption that the small dealer regularly purchased in dozen lots or smaller quantities. Trade association representatives had frequently assured 1TEA that this was so. However, the dozen-lot cost of drug products in some instances was leas than the manufacturer's wholesale list /'rice per dozen by the amount of dozen lot discounts or free goods offered by the manufacturer or the wholesaler or both. The amendment(*) in its "last proviso" (**) required the deduction of certain discounts in the determination of the code price; and a question imr.ediately arose as to what discounts it meant to cover. To answer this question required several conferences among NEA officials; and a formal interpretation. One faction at the conferences argued that the "last proviso" should cover both manufacturer's and wholesaler's discounts, otherwise, the code price would not precisely euusl the dozen- lot cost of the small dealer. The other faction argued that such e^act equality between code price and small dealer's cost was unnecessary; that wholesalers' discounts were negligible in amount, and that to include them would produce a different price in each trade area and seriously hamper enforcement of the code. General Johnson decided in favor of the latter view, and on April 6, 1934, UEA issued an interpretation that the "last proviso" referred only to |rF Hereof or in this report, the amendment now under discussion will be referred to as either the "March amendment" or the "March provision". (('**) Herr af ter in this report the proviso in the March amendment con- cerc.in- the deduction of dozen-lot discounts and deals will be ref.trred to as the "last proviso". / - S7 - Manufacture rfs pr.'.ce ccnce.j.~ica. I-lie interpretation, containing also certain other explanations of the amendment, read in substance, as follows :(*) 1. The amendment does not apply to all items sold in ding stores, "but only to drugs, medicines, cosmetics, toilet preperations and drug sundries as defined in the code. Drug sundries being doubt- ful of meaning are interpreted as "articles or appliances used in the promotion of public health and sanitation". 2. Certain commodities with no manufacturer's wholesale list price per dozen, such as unbranded products, and goods put up under the retailer*s om brand (private brand goods), are not subject to the amendment and the retailer may sell them at any price he plea.ses. 3. The "comparable units" section of the amendment means the lowest number of the article quoted or listed and made available to all members of the trade, but never more than one dozen. 4. The code minimum price set forth in the amendment applies regard- less of "hat the retailer has paid for the goods. 5. Free deals are to be considered in computing the code minimum price only during the time that they qre offered by the manufac- turer. 6. The old retail trade loss limitation provision (Article VIII, Section 1) no longer applies to drugs, medicines, cosmetics, toilet pr.parations and drug sundries. 7. The only discounts, free deals or rebates to be considered in computing the code price are those offered by manufacturers; and, furthermore, they must be offered either to the entire retail drug trade, or to all druggists in an area where the manufacturer is conducting a sectional promotion. The net result of the liarch amendment plus the above interpreta- tion was the fixing of a uniform and fairly stable code price, not dependent upon such violently fluctuating and unascertainable factors as individual invoice cost, but nevertheless approximately equal to the small druggist's merchandise cost. As stated previously, the only factor preventing exact equality between the code price and the small man's cost was the wholesalers' dozen-lot discounts. Inasmuch as KRA had not made any study of the economic desirability of placing the minimum price at the small dealer's cost, slight deviations from a mathematical application of the principle should have caused no concern. T*) The interpretation appeared as Administrative Order 50-27 and is in Code Eeoord Section files. The account here given is a sum- mary and not the actual wording of the provisions. 9726 - n8 - The wholesaler himself rarely received more than _.15$ plus 2$ from the manufacturer, consequently, his discount to the ratailer was limited. Furthermore, preservation of his o- n business reauired the wholesaler to restrict his large discounts to a few fast-selling items. Mutual and cooperative wholesalers, "by their very nature, gave discounts or patronage dividends to their members on all items, but these firms handled, usually, an incomplete line of merchandise'. 9726 - 69 - chapter iv. historical development of the loss limitation provision pro:: the march amendment to the expiration cp codps I . Administrative Problem Railed by "Last Proviso" of Parch Amen dm -nt Though the March amendment aroduced a, uniform and fairly rtablc code uric^ much more sati praetor" to th^, small druagists than the ov<-~ vious Ion? limitation provision, it had one .jreat weakness in its "last proviso" . Pver3r druggist knew or could quickly ascertain the manufacturer1 s wholesale list price }er dozen on a given drug or cosmetic product by consulting the Druggists Circular Red Book Price List* or the American Druggist Price Book.** The editor of the latter publication estimated in 1934 that more than 40,000 druggists had copier,*** ano this circula- tion added to that of the Red Book probahjv included every druggist in the country. However, the ee.s. of ascertaining the manufacturer's wholesale list price per dozen did not help the druggists in determining the code price, for the latter depended upon the deduction from the for- mer of all manufacturers' current dozen-lot free deals and discounts. Po sousce of information existed to inform druggists of the current deals of all manufacturers except perhaps the wholesal r, and ever he was often confused and unable to keep track of the constant 'luctuations on the 40,000 items he stocked. A few manufacturers of fere* 'ixed do^en-lot d~als as part of their permanent -'rice policies**** and these were easy to handle but the vast majority ran their deals seasonally and not in accordance rrith any definite plan. The traditional mode of think- ing of the small dru:-:~ists increased their difficulty in ascertaining the code price. To them the unadulterated manufacturer'? wholesale list price p^r dozen was their invoice cost, a,nd anv free snoods or discounts were- mere pleasant gratuities. Because the code price included these deal? and discounts, the small druggist was confused by it, er.z sought information from his wholesaler. But NRA could not expect wholesalers to assume the sxpense of acting as price information jureaus nor place the burden on the retailer to check by telephone all doubtful trices. To ace to the oroblem some of the larger retailors a.nd department stores objected that — con't. (*) Published by the Druggists Circular, Pew "fork Cit:r and revised in iiay and November each year. HereinaJter referred to a? the "Red look". (**) Fublishec trr the American Drag ist, ."e^ Per: Git r and revised an- nuallv. In addition, when new products appeared their prices were jublished in the American Druggist, a monthly magazine of the same publish! ' house. Hereinafter referrec to as the "Blue took". (***) Letter fro ■ Id "". Futclii s, sditor to As°ietant Deuutv Adminis- trator hark Merre.ll, 3/17/34; folder marked "Frices" Denut^'s File. (****) Por example, the Arnlanc' Company, Des oir % lea has for years given three extra packages free with the purchase of n. dozen. 9726 - 70 since th^y never bought in dozen lots and had little contact with wholesalers, they had no p-urce of inf ormation on th<; code price.* A method of circulating accurate and current code price information to the trade had t" be devised. (*) The 7ashiifl;t^n attornev for 2. H. :'acv * Company, v™ York City- made frecm^nt verbal reprassnt8*ions to WIA on this r>oint after the approval or the "arch amendment. 9726 ~ 71 - I I . Order 60-54 and the Minimum Price Lists On Ar>ril 19, 1934 NBA issued Admini strati ve Order 60-54 (*) re- quiring the National Retail Drug Code Authority to issue a list of minimum code nrices and permitting local retail drug code authorities to do likewise if they wished. The list was to he lerima facie evi- dence of the correct price so that anyone who violated it had the ■burden of proving the list wrong". On unlisted items, any retailer could cut his -orice to meet that of a competitor provided he noti- fied, his local code authority. This last-named t>Prt of the order meant virtually that the loss limitation provision covered only such, products as the code authority could assemble in a list and this is an important point in' view of the small number of items in the lists actually issued. During April, the Nat o'nal Retail Drug Code Authority compiled a list of about 800 items, obtaining their -orice information directly from manufacturers. The task proved difficult and when the list finally appeared it contained many errors and soon became wholly ob- solete because of changes in manufacturers' discounts. The National Code Authority issued a second list in May, covering about 1,000 items. (**) Eroericnce gained with the first list made for greater initial accuracy in the sec-nd, but it too gradually became obsolete. The ezpens.e of making and distributing the two lists was so great, that the National Code Authority never issued another, but bent its efforts toward persuading NBA to eliminate the "last proviso" from the March amendment so that the flat manufacturer's wholesale list price per dozen would become the code price. Some of the larger local code authorities had also issued price lists under Order 60-54, and a few of them tried to keep their lists up to date as late as the summer of 1934. However, most of them were even less able to stand the expense than the National Code Au- thority. Abandonment of the task of issuing price lists brought the full burden of acting as -orice information bureaus on the local code authorities. Their attitude toward this burden is indicated by a letter from one of them(***) stating that unless manufacturers' dozen-lot deals were prohibited or else eliminated from the comouta- tion of the code -orice, the work of the local code authority would degenerate into a "constant scrutiny of price lists and the. issuance of puerile price changes of interest only to cut-raters". The writer added that the small druggist was naying code assessments to keep the cut-raters informed as to the keenness of the w ipon used to cut the small man's throat. ( *) Copies are in Code Record Section files. Hereinafter , this order will be called by its number - 60-54. ( **) Both lists are in "Prices" folder; Deputy's files. (***) Letter to NBA from Northern California Retail Druggists Asso- ciation, July 23, 1934; "trade' practices" folder; Deputy's files. 9726 III. proposed Solutions of the Problem • The Code Authority 's to osed solution of the problem was to eli- minate the "last proviso" from the Parch ar.1endx.1ent and nrlie the flat manufacturer's wholesale list -rice the. code minimum. II.H.A. , however, wag not willing to assent to this -ro^osition without erecting some safeguard for the consuner. Chough ".".&. had not seriously investi- gated tne economic inrrli cat ions of retail -rice control, it had estab- lished fixedly in its own thinking a principle for the retail drug code. This - riaci.-le wis that any fixing of -.rices at a level high- er than the small dealer's merchandise cost was uneconomic. The prin- ciple bee: me established somev/hat subconsciously, more as a compromico among diverse interests than as a result of economic analysis. Among these interests were: the trade, wanting all the price protection it could secure; the Consumers' Advisory Board, convinced that any form of price fixing would raise consumer trices anc perpetuate inefficient distribution units; and the Legal Division, afraid that courts would invalidate cede price provisions as thej had done private price-fix- ing, probably the development of the small dealer's cost theory wis a natural evolution from the earlier -principle that loss leader selling was an evil, for loss leader selling involved selling below. -cost . The' first loss limitation rovirion rohibited sales beloi"' the large dc: 1- er'p invoice cost, but -roved no protection to the small man; so, the' small man's merchandise cost became the point, in 'J.R.A.'s mind, at which loss leader selling began.* The resistance of opposing interes-ts was too strong to permit adding a marh-up to cover the small man's over- head expense; hence the compromise was struck at the small dealer's mer- chandise cost, and there it remained.** When the Code Authority pro- posed the elimination of the "1-st aroviso" from the March amendment, J.R.A. foresaw that manufacturers might, by giving substantial discounts and free poods to small dealers, make their manufacturer' s wholesale list prices per dozen fictitious and considerably higher than tiie .small dealer's cost.*** The possibility wa.s not merely theoretical , for there were compelling reasons why ra nui octurers would want to manipulate their -or ices. One doing so woiilu incur much good will imon^, the small drug- gists who "(juld thereby receive a gross profit when selling at the code price. At the tvublic hearing on June 7, 1934**** the Code Authority (*) Compare 'J.a.A.'s principle that price fixing must not rise -°oove the small dealer's merchandise cost, with the principle behind the State Fair Trade .Laws permitting manufacturers to set their minimum prices at any point they please. Fart III of this re- port. Page 174 (**)See infra for discussion of ineffectual attempts of the trade to obtain a mark-up. (***)There was r loophole even under the "last proviso" enabling manufacturers to accomplish this result by offering discounts or free goods on lots of 13 units instead of a dozen because the "Last proviso" applied only to dozen-lot deals. However, no instances of this subterfuge ever came to h.R.A.'s notice. (****)Discussed infra in this Section; paragraph E - 73 - proposed an amendment to replace the llarch amendment, eliminating the "last -proviso" and setting up a safeguard against price manipulation "by manufacturers .' The safeguard errrowered I1.?. .4. to order the deduc- tion of dozen-lot deals on any product where these deals made the manufacturer's wholesale list price unreasonably greater than the small dealer's cost.* H.R.A. gave little consideration to this proposal at the tine though of all the subsequently-considered pirns it was most nearly like the one finally approved. After the hearing, administrative officials felt that they could best answer the objections of the Consumers' Advisor;- Board and Re- search and planning Division by establishing "a "price control committee, composed of representatives of these two bodies and of the Code Autho- rity, to investigate manufacturers' price manipulations. The committee's functions were to be advisory, and the Administrator was to have po- wer to suspend the loss limitation provision as to an offending pro- duct and establish in its stead- such other regulations as . e deemed advisable.** Both the Consumers' Board and the Research .nd Planning Division objected to the plan. The Consumers' Board wrote that the Committee would have an impossible task; and the Research and planning Division feared that the scheme would involve H.R.A. in permanent price control. Both seemed to dislike the name "Price Control Committee."*** Inasmuch as the principal advantage expected from this plan was the support of these two advisory boards, the sponsors turned to something- else. The next suggestion was that N.E.A. leave the Parch amendment and its "last -nroviso" intact, and iss\ie new regulations for its ad- ministration in place of Order 60-.'j4. Under the proposed new regula- tions, the National 'Retail Drug Code Authority would have recommended certain commercial price lists as guides' to the code price.**** Inas- much as the prices in these lists were higher than the code price oy the amount of manufacturers ' dozen-lot deals, local code authorities would have had ~ ower to determine for each product, as the question arose, the amount of deduction under the "last proviso." From a prac- tical viewpoint, this was little better than Order 60-54. The burden on the local' code authorities to distribute price information would have been greater than before, though the National Code Authority would have been freed of this task. From a legal viewpoint, the proposed re- gulations were bad, ana received prompt objection from the Legal Di- vision on the ground that they were confusing, unnecessary and inef- fective and gave too much power to the local code authorities. The legal division also objected to the Government placing any measure of (*) See testimony of John Go ode, page 388 transcript of hearing, June 7 and 8., 1934. (**) A copy of this plan is in "memoranda" folder; De uty's file. (***) See Consumer Board Report to Mark Llerrell, 7/20/34; and Re- search and Planning Report of 6/23/34; "memoranda" folder, Deputy's files. (****) The Code Authority's intent was to recommend the B'->d Book and Blue Boo]", mentioned supra. 9726 - 74 - approval seu commercially-published price lists'. At this time, the Legal Division reviewed -Order 60-54 mid found it defective in that it permitted, for the purpose of meeting competition, violations of the code price on items not in the Code Authority's list. Only by code amendment and not by mere administrative order' could P.P. A. so sub- stantially change the operation of a code provision. The "e-gal Di- vision observed that if the Parch amendment was so indefi; ::c that a retailer could not readily determine the code price, the whole provi- sion might fail in court.* This report of the Legal Division made it imperative that II. P. A. not only rescind Order 60-54 but also elimi- nate the "last proviso" from the March amendment. But the question of how to prevent price manipulations by manufacturers was still un- solved. IV. The Amendment of September 21, 1954. The final proposal of the Code Authority and the administrative officials of P.P. A. was an amendment eliminating the "last proviso" and empowering the Administrator to suspend or modify the operation of the loss limitation provision whereever he found a manufacturer manipula- ting his prices in a manner -ire judicial to the consumer or small en- terpriser. This plan was simple compared to former ones and all ad- visory boards, except the Consumers' Board, approved it on the ground that it did not change the principle of the Parch amendment but merely made it more effective. Regardless of objections to the provision, so long as it remained in the Code it was P.P.A.'s duty to malce it work- able, and upon this ground, boards that had objected to the March amend- ment were consistently able to approve the new one. The Consumers' Advisory Board did not voice a strong disapproval but merely reitera- ted its stand against the principle of setting minimum trices at the manufacturer's wholesale list price per dozen.** The Administrator approved this proposal as an amendment to the code on September 21, 1954, stating in his letter to the President, *** " at a public hearing called to determine the effects of this amendment (the March amendment) upon the trade after sixty days of operation, if was found that enforcement of this provision, while good, had been hampered some- what by the last proviso which permitted certain deductions on account of manufacturers' discouits and allowances to dozen-lot purchasers. These allowances have only a negligible effect on the resultant price, yet cause considerable confusion in its determination. " "This amendment (the September amendment) does not alter the prin- ciple set forth in the previous provision nor does it appreciably alter the bp.sis on which that principle was applied, except insofar as that (*) The Report of Legal Adviser Hays to P.L. Houston, September 10, 1954 - Deputy's files. (**) For all Board reports, see docket on Amendment Ho. 6, Code Record Section files. (***) Letter is included in printed issue of Amendment Ho. 6, Retail Trade Code. 9726. -..75 - basis had proven confusing in practice." The September amendment, as approved, reads as' follows :-* "It is hereby declared an unfair trade practice** for any drug; retailer to sell any drugs, medicines, cosmetic?, toilet preparations or drug sundries at a "rice below the manufacturers' wholesale list price per dozen; provided, however, that in the case of biologicals or other of the above-mentioned products, which arc not customarily •sold in dozen or greater lots, the Code Authority may fix a comparable unit quantity. "The Administrator, at the recommendation of the National Retail Drug Code Authority or otherwise, after such notice and lit ring as he may deem necessary, may suspend or modify the operation o," this clause at any time when it appears that such operation does not tend to ef- fectuate the purpose of Title I of the Act. The Administrator shall suspend or modify the operation of this clause in any particular case where a manufacturer is found to be manipulating his prices because of this provision in such a manner as to maintain an unwarrantedly higher ;^rice to the ultimate consumer or to oppress small enterprises, or to otherwise defeat the purposes of the Act." In the above form, the loss limitation provision remained until the expiration of the code on May 28, 1935. Inasmuch. as Order 60-54 was no longer necessary, N.R.A. rescinded it on September 25, 1934.*** V. The Public Hearing of June 7 rnd 8, 1934. Having examined, historically, the factors directly leading to the approval of the September amendment, it is advisable to go bach and examine some of the collateral historical happenings during the period from April 1954 to the expiration of the Code. One of these incidents was the holding of a public hearing on June 7 and 8, 1934. Immediately after the approval of the March amendment, U.S.A. re- viewed its legal position and decided that amends were necessary for the failure to hold a -nublic hearing. Several of the cut-rate re- presentatives had objected to the procedure of issuing a mere Notice of Opportunity to File Objections, and the validity of their complaint gained strength from the substantial changes in the clause between the Notice and the final approval. Consequently, M..R.A. scheduled a (*) Hereinafter, this amendment' will always be referred to as the " Se" • tembe r amendment . " (**) Mote that the long preamble of the March amendment is omitted, it having no legal value. Mote also that the words "and is pro- hibited by this code" are omitted at the point where the as- terisk appears. This latter omission was purely an oversight, but caused some worry among lawyers for fear courts might re- gard the provision as purely advisory and not mandatory. How- ever, no court rendered a decision on the point. (***) See Administrative Order 60-200; Code Record' Section files. 9726 - 76 - public hearing, ostensibly to determine the effects of the March amend- ment, after 60 days of operation, "but also for the purpose of insuring that amendment's legality. The announced purpose of the hearing, how- ever, frightened some of the code sponsors who read into it a possibi- lity that H.R.A. might rescind their new loss limitation provision if the hearing adduced enough evidence against it. John Dargavel, sec- retary of the national Retail Druggists' Association, wired, asking the Deputy Administrator to sidetrack the hearing unless H.E.A. saw some actual bad effects from the loss limitation provision in 60 days.* George M. Gales, president of the national Association of Chain Drug Stores, also wrote the Deputy, deploring the uncertainty the hearing would create.** On April 11, 1934 the Deputy wrote the Assistant Ad- ministrator suggesting that it would be a mistake to hold the hearing on June 7, since not enough time would have elapsed to show the ef- fects of the March amendment.*** In spite of these objections, the hearing convened on June 7, and lasted two days. The witnesses presented little factual material on the effects of the March amendment but much argument on whether its basic principle-was sound and whether or not the druggists should re- vert to the "cost plus 10$" provision of the General fietail Trade. Much of the argument was identical with that introduced at the origi- nal code hearing in August, 1933. The representatives of the Oode Authority gave a good part of their time to arguing for the elimination of the "last proviso" of the March amendment. The legal division con- sidered this hearing sufficient to warrant the approval of the Septem- ber amendment without further hearing, though this amendment was not up for discussion. Thus both the March and September amendments lacked the benefit of a regular hearing called specifically to consider them prior to their approval. VI . The Movement for a Mark-up. As mentioned before,**** prior to the approval of the March amend- ment , the question of a mark-up arose. The Deputy Administrator in recommending a code price based on the manufacturer's wholesale list price per dozen, suggested postponing the approval of a -percentage mark-up so that consumer prices would not rise too fast. The Code Au- thority realized that a code price at the level of the small dealer's merchandise cost would not permit small dealers to pay their overhead in areas of severe price competition. However, P.R.A. was afraid to (.*) Telegram Dargavel to Harwood, April 10, 1934; "157-Retail M-Z"; Deputy's files . (**) Letter Gales to Harwood, April 13, 1934; " 157-Retail-A-L" De- puty's files. (***) Memorandum Harwood to Colonel Lea, April 11, 1934; "157-Re- . tail-M-Z; Deputy's files. (****) Chapter III. of this part, supra, page 114 - 77 - grant too much price protection all at once and the Code A shority, glad to receive even part of what it ashed for, did not press the point too strongly. On April 13, 1934, George M, Gales, Code Authority member and pre- sident of the national Association of Chain Drug Stores, wrote the Deputy Administrator asking if it were then advisable to request a mark-up covering labor costs.* The Deputy replied that such a request might he all right in 60 da^s.** This correspondence was perhaps the "beginning of a long fight, and in this, for once, the individual small druggists in the field were more active than their Code Authority. As opposition developed within and without IT.H.A. to the manufacturer's wholesale list "rice as a code price, the Deputy's Office affixed it- self to the principle that price protection in the drug trade must not exceed the small dealer's merchandise cost. The Code Authority members had achieved this limit in the March amendment and confirmed it in the September amendment and could have no more. This they realised, and, since their minds were occupied witfe other major problems such as the "last proviso" and, later, compliance, they made no formal de- mands for a labor-markup » However, they did frequently mention it in- formally and the National Association of Retail Druggists at its con- vention in 1934 went on record in favor of a mark-up.*** Letters to W.R.A. from small druggists were plentiful during the code period and most of them expressed dissatisfaction explainable only by the fact that the loss limitation provision contained.no mark- up above their merchandise cost. Fifty-seven letters specifically asked for mark-ups ranging from 5fo to 25$ according to the writer's notion of what he needed; and in one congressional district, the lo- cal pharmaceutical association passed a resolution urging .1.1 druggists to violate the cmde until N.R.A. granted their request. The number of letters on this subject did not rim into the hundreds as did letters received by II.R.A. in 1933 but perhaps they were more significant since they came in a continual flow rather than in batches and not, so far as appears as a. result of any trade association pressure.**** VII. Interpretation of the September Amendment Chapter 111. of this Part describes an interpretation of the March amendment. When 1'T.R.A. approved the September amendment, this interpretation needed revision, and though work on it commenced prompt- ly it was not completed until April 1935. The cause of the delay was an attempt of the administrative officials to include a series of clauses on the effect of Federal and State taxes on the code price. These (*) Gales to Harwood, 2/13/34; "157-Re tail-A-I" ; Deputy's files. (**) Harwood to Gales, 4/14/34; "157-Retail~A-L" ; Deputy's files. (***) See Resolution, "Code Authority" folder; Deputy's file. (****) All of the letters mentioned above are in the folders marked "General Correspondence" or "Trade practices"; Deputy's files. 27,36 ~ 78 - clauses required many conference .with the Legal Division "before they were in shape, and considerable time thereafter in an unsuccessful attempt tq convince the Review Division* of their propriety. Finally the Deputy Administrator abandoned the tax interpretati ms** and sent the remainder, a group of explanations, on their wa.3r towar approval. As approved on April 5, 1935, they read as follows:-*** QJJESTIC:7 #1: Does the interpretation issued by the Division Ad- ministrator on -"pril 6, 1934 and released to the public on April V, 1934 apply to this loss limita- tion provision? IlTTERFRETATIOi" QUESTION #2: IHTERPRETATIOU: It does not. The interpretation of April 6, 1934 applies to the former loss limitation provision which has 'been amended. That interpretation should henceforth be disregarded. Does this loss limitation rovision apply to all items sold by drug retailers? It does not. It applies only to drugs, medicines, cosmetics, toilet preparations, and drug sundries. These -are defined in the Code. . QUESTION. #3: &?. Does this loss limitation provision apply to drugs, medicines, cosmetics ,. toilet preparations and drug sundries sold by stores other than drug stores? I1ITERFRETATI01T: question §4 INTERPRETATION: It does. It does not matter who sells any of the above named items. He cannot sell them below the price determined by this loss limitation provision. Where certain commodities are not avail-hie to the trade generally, and hence bear no manufacturer's wholesale list price per dozen or comparable unit quantity, does this loss limitation provision apply? It does not. Items of this type, such as, but with- out limitation, private brand items put up by the producer for a special retailer under such retailer's own name, mark or brand, nay be sold at any price such retailer may care to set. QUESTION #5: Do the provisions of Article VIII, Section 1 of the (*) A body of lawyers who gave all formal orders a final checking as to form and substance and whose approval was almost prere- quisite to official approval of the order. (**) Full discussion of the abandoned tax interpretations is in Chap- ter VI of this Part, page '122. (***) Administrative Order ITo. 60-397; Code Record Section files. - 79 - IK TEEPEE TAT I Oil Code of Fair Competition for the Eetp.il Trn.de apply- to the retail sale of drugs, medicines, cosmetics, toilet preparations and drug sundries? No, Article, VIII, Section 1 has "been superseded by this loss limitation provision as far as the sale of the aliove -mentioned items is concerned. QUESTION #6 If a retailer is a"ble to purchase at less than the manufacturers' wholesale list price per dozen, or if he is able to obtain goods absolutely free, can he sell below the manufacturers' wholesale list price per dozen? INTERPRETATION QUESTION #7: He cannot sell drugs, medicines, cosmetics, toilet preparations, or drug sundries below the manufacturers' wholesale list price per dozen regardless of what he has paid for the goods, and regardless of whether he has gotten them free. When the price for a unit or combination of units under this loss limitation provision figures out with g, fractional cent, what price shall prevail? INTERPRETATION The minimum selling price shall be figured by drop- ping the fraction and adding one cent, regardless of whether the fraction is more or less than one-half cent . Where the minimum selling -rice of a combination of these items is to be determined, fractions shall be left intact until the total price of the combination has been determined, and then, if a fraction remains, it should be dropped and one -cent added. - 80 - CHAPTER V. ISSUES SEEN BY OPPOSING FORCES I FOREWORD During the preliminary negotiations for a. code in the Pall of 1933, and the subsequent negotiations in 1934, the proponents and opponents of price stabilization arrived at certain conceptions of what economic and factual issuer, mi;,ht control ITRA's decision upon their respective de- mands. Scan arrived at t'neso issue: through a. bona fide analysis of social and economic considerations; others arrived at them through emotional hunches. ITRA held two important hearings on the retail drug code, and, at these forums both proponents and opponents had their greatest opportunity to present their views. The following compilation of issues seen by proponents and opponents has its source principally in the transcripts of hearings, since records of informal conversations are scarce. In each case, the issui • i h ars as a brostcl principle with an analysis of why it seemed an issue to those advanci... it, and is followed by a brief di est of the evidence and arguments advanced. In presenting the issues hereinbelow, the author has tried to ar- range them in an orderly fashion, separating, the proponents' issues from those of the opponents, and re-arran in the points on each side to form a logical whole. Actually, at the hearings, the presentation was quite disorganized. w'ithout reference to their views, speakers were mi:;ed upon the >ro .ram, and many had no orderly arrangement of joints within their own briefs. Moreover some sneakers were given to emotional aopeals a.nd sweeping assertions, unsumorted by evidence and difficult to classify. I I . Issies Seen by the Proponents of Price Stabilization The issues seen by the proponents of price stabilization were di- visable into two parts: first, issues upon price stabilization as a broad principle without reference to specific clauses, and second, price stabilization through the medium of the manufacturer's wholesale list price per dozen. The testimony at the hearing in August 1933 was devoted principally to the first point; the testimony at the hearin^ in June 1934 to the second. A. Issues "pon Price Stabilization in General 1. Bad Business Conditions in the Trade. Knowing that 1'RA's principal objective v/as the promotion of re- covery from the depression the proponents dwelt at length upon thp bad business conditions in the retail dr\v- trade. To show that sales volume was declining, one witnefes presented returns from questionnaires sent to 6,500 druL, stores in New York State in 1930, 1931 and 1933, showing that sales volume of the stores reporting had declined 13.95"' in 1930 (pre- sumably over the previous year), 16. 4f> in 1931 and 22! ■ in 1933. (*_) (*) The witness was Leon iionell, Chairman, Committee on Pharmaceutical Economics, new York State Phar. Assn., a group affiliated with HARD and APhA. His testimony appears on Pa_cs .306 to 211, transcript of Aufo. 25-26, 1933, Mr. Monell's association had conducted the questionnaire survey mentioned, and t he returns had boon: 596 stores in 1930, 404 in 1931, and 406 in 1932. - SI - The witness also stated that a survey by the University of Buffalo of 40 selected 'drug stores in Buffalo 3hovred a sales decline of 20$ in 1933. The witness' added that the majority of stores in Hew York State had had a steady sales decline since January 1, 1933. This same witness testified that drub store rent was still high in snite of the depression, and in sr>ite of declining sales. He quoted again from his questionnaire survey to show that rent er-iense was 7.1$ of sales in ITew York State in 1931, and 8.4$ in 1932- Two witnesses stated that drug rtores were operating without a profit. One of them (*) made the statement without aimlif ication, but the other (**) backed it with returns from a questionnaire survey in ".'est Virginia showing that '54$ of the stores reporting had a net loss in 1932, and that in over half of these instances the loss was more then 21$> of sales. Dollar losses ranged from $500 to $4,000 with the majority over $1,000. Only 46$ of the stores reporting had a net gain in 1932, and of these 62$ had a net gain of less than 5$ of sales. Dollar gains ranged from $300 to 33,000, but the majority were under $1,000. (***) Five witness sought to show that the credit of the si.v 1 druggist was. strained or totally lost, so that he was forced to buy for cash on a hand-to-mouth basis. One of these witnesses (****) stated that 3,000 (*****) sraall drug stores in California had lose their reserves and had strained their credit. Another (******) estimated that 40$ of the druggists of the entire country were on a C.O.D. basis. The third witness (*******) stated that 90'/; of Che dru0 stores in Alabama had been able to obtain credit from wholesalers in 1S2S, but that this figure had declined to 50$ in 1933; and that the corresponding decline for the city of Birmingham was from 95p to 25/0 of the stores. (*) George II. Gales, president of the Liggett Drug Company, pages 157 to 164, transcript of August 25-26, 1933. (**) J. L. Hayman, sec, ,7'.va. Pharm. Assn. andpres., Conference of Pharmaceutical Secretaries. The former association was affiliated with both HARD and APliA; the latter was a division of APhA. His testimony aroears at Tjages-201 to 105, transcript of August 35-25, 1933. (***)The dates of the survey was August 19 to 24, 1933. 17$ of the drug stores in W.Va. replied to the questionnaire. (****) Roy S. Warnack, sec, Calif. Pharm. Assn. affiliated with both HARD and APhA Testimony appears at na^es 180 to 197, transcript of August 25-26, 1933. (*****) In 1S33 there were on]_y 3,030 independent dru^. sto. s in the State of California, according to the 1933 Census of American Bus- iness, Retail Distribution, Department of Commerce. This fact makes the witness1 statement rather broad. (******) Dr. R. L. Swain of the American Pharmaceutical Assn., pages 20-27, transcript of August 25-26, 1933. (*******) ii. G. Hubbard, pres., Birmingham Retail Druggists Assn. , affil- iated with HARD. Testimony at :>atoes 344 to 348, transcript of Aug. 25-26, 1933. 9726 - 82 - This witness quoted HcKesson-Peter-~:Tept Co., Louisville wholesale druggists, to the effect that this firm had 25 druggists on their C.O.D. list in 1931 and 44 in 1933; that 28, > of their druggist customers had past due accounts in 1931, out 43$ had then in 1953; and that 73$ of their dzmggist customers discounted their current purchases in 1931, but only 58$ did so in 1933. This witness also read a letter from Geo. H. Gould & Son, Louisville wholesale druggists, to the effect that 2$ of their dnnggist customers were on C.O.D. in 1928-29., 15' • in 1930 and 29$ in 1933; and that in 1930, 76$ of their druggist customers discounted their bills, but in 1933, only 55S did so. The fourth witness (*) quoted Smith, Kline and French, Philadelphia wholesale druggists, to the effect that 600 drutj stores in that city were on a C.O.D. basis in 1933,' and 200 of these were "cash only - no checks accepted". .The fifth witness (**) said that GO- of the druggists in Kansas City, Ho., were on C.O.D. in 1933. To further illustrate the bad business situation, one witness (***) testified that only 30 > of the dru,, stores in Alabama and only 10$ of those in Birmingham were solvent in 1933; and that there was a decline in the number od dru^ stores from 1928 to 1933 from 850 to 775 in Alabama, and from 228 to 180 in Birmingham. Another witness attempted to connect the subject of bankruptcies with one of the basic principles of 17RA by arguing that a ruined retail dealer was a loss of buying . power in his coinmunity. (***) (*) J. 3. Pilchard, sec, Pennsylvania Pharm. Assn. affiliated with HARD and APhA. Testimony on pa_;es 321 to 320, transcript of August 25-36, 1933. Note that at this hearing, ilr. Pilchard gave no testimony on his own behalf, but read into the record a letter from Louis Milner, chairman, Committee on Surveys, Philadelphia. Association of Retail Druggists, affiliated with HARD.* The Census of American Business, Dent, of Conmerce, shows 1.-30? drug stores in Philadelphia in 1933. (**) George C. E0y, representing the Greater Kansas City Retail Druggists" ( Assn., affiliated with 1'ARD. Testimony at pages'397 to 403, tran- script of August 25-26, 1933. (***) IT. G. Hubbard, pac,es 244-243, August 1933 transcript. (****) W. Bruce Philip, Washington counsel for HARD, president of APhA, and owner of a small dru_. store in Oakland, ■ Calif . Testimony at pages 421 to 436 and 446 to 454, transcript of August 25-26, 1933. 9726 2. Price Demoralization as the Cause of Bad ! lusiness Conditions Had the proponents presented no further testimony they might have made no case for price protection. I'M could well have concluded that the druggists' plight was no worse than that of other trades in the depression, and the the cure was to raise wages and shorten working hours and wait for industry as a whole to pull out of the slump. But the proponents advanced two arguments to counteract such a conclusion, one bein„ that the financial condition of druggists was so weak that they could not bear the harden of raising wages and shortening hours without some orices protection, (*) and the other being that price demoralization was responsible equally with the depression for the bad business situation in their trade. (**) One witness, to illustrate the extent of price demoralization throughout ' the country and within cities, -resented data showing -ore- code prices on Id items in a. number of cities; and -ore-code prices on the same items within a city. In each case there was a total lack of uniformity. The witness argued that the consumer was confused, not knowing what was the best price unless he shopped extensively. (***) 3. Incidental Bad Effects of Price Demoralization To strengthen their point that, in their trade, irice demoralization was a greater cause of evil than the depression, the proponents exhibited a nu.iber of additional effects of tiie former. Six witnesses testified that price demoralization had caused a drop in employment and salaries in the trade. Five of them (****) made this statement without elaboration, but the sixth (*****) backed it with the results of a. questionnaire survey conducted in Hew York State showing that salary expense was 14.3$ of sales in 1931, and only 13.3$ in 193.?. According to this witness, both the number of employees and the amount of salaries ha., decreased. (*) Five witnesses stressed this point. Four of them, mentioned before, spoke at the August 1933 hearing, their testimony appearing at the following nages of the transcript :, R.L. Swain, -n~i 20-27; George M. Gales, pp 157-164.; Roy S. tfarnack, -ro 188-197, and Ge-' :e 0. Egy, pp 397-403. The fifth was Hoy H. Sterne, counsel for he Liggett Dru^ Co., speaking at pages 5 to 26 transcript of hearing of June 7-8, 1934. (**) Only four witnesses expressly presented their point, but others included it in their testimony by inference. The four were: H. L. Swain, pages 20-27, August transcript; George Li. Gales, pages 137- 164, Aug. transcript; J. L. Eayrnan, pages 201-205, Aug. transcript, and Samuel C. Henry, sec. Kat'l Assn. of Retail Druggists, pages 211-213, Aug. transcript. (***)Wheeler Sammons, Managing Director, Drug Institute of America, Inc., pp. 150-204 & 499-527, transcript of June 7-8, 1934. (****) H. L. Swain, pp 20-27, au0. transcript; Samuel C. Henry, pp 211-213, ■Aug. transcript; Geor6e Li. Gales, pp. 157-164, Au0 . transcript; Hoy M. Sterne, pp. 5-25 June transcript, and ".'. Bruce Philip, ^j 36-70, June transcript. (*****) Leon Monell, pp 206-211, August transcript. 97P6 .- 84 - Two witnesses mentioned that substitution and counterfeiting were evils attendant upon price demoralization. (*) Counterfeiting of trado- marked articles, of course, was against the law, tut sometimes difficult to detect. There seemed little question of the und^sirability of this practice, and if the proponents could convince ERA that price demoraliza- tion increased it, and that price stabilization might decrease it, they would have added weight to their side of the scales. The question of substitution was not so simple, however, since the practice took several possible forms. Its worst form involved wrapping up and delivering to the customer a substitute for the trade-marked product ashed for, but in its lesser form it involved merely dissuading the customer from his original desires and selling him soia thin else. If the sales talk involved false dis iars sment Df the roduct ordered, it was unfair and perhaps illegal, but if it involved only legitimate selling tactics, there was little room for objection. Small druggists tended to label all forms of substitution as evil, principally because the practice, whether used fairly or unfairly, was the jrice cutters' customary method of selling his jrivate bra/ids. Though the proponents presented no figures showin an incre; se of counterfeiting and substitution under price demoralization, there was some logic behind their statements. A ti.ic of lew prices on nationally advertised Loods might conceivably pro- duce an increase in the number of substitutes, both counterfeits and private brands, because the retailer could buy them cheap and make a good margin of profit even at a low selling price. One speaker introduced a note of atriotism by stating that most private brand toothbrushes v. r< ; do in Japan, and continued substitution of them might ruin the toothbrush manufact rers of the United States. (**) Leaving th< questio . of substitution and counterfeiting, another harmful effect of price demoralization, according to a. witness, (***) was that chains and large outlets sometimes cut orices purposely to destroy an independent so they could raise prices again without fear of competition. Three witnesses (****) argued that price demoralization tended to deprive tlw oublic of its ability to purchase freely the articles cut in price. Vvo of these witnesses (*****) quoted from the dissenting (*) George I.i. Jales, pp. 157-164, August transcript; and George T7. Duncan, representing the IT. H. Phrrm. Assn., and a druggist him- self for 41 years; also speaking for Rodney A. Griffin, ores., Hew England Rexall Drug .1st p. Assn., and representing the State Pharm. Assn. of Maine & Vermont; Transcript of August 25-26, 1933, pages 350 to 35b. (**) W. Bruce Philip, pp. 421-436 & 446-454, August Transcript. (***)W. Bruce Philip, t>p 421-436 & 446-454, August Transcript. (****) Samuel C. Henry"," pp. 211-213; George TV. Duncan pp. 350-355; and '?. Bruce Phili; , »p 421-436 & 44G-454 - all in August transcript. (*****) Samuel C. Henry and 17. Bruce Philip 9726 - 85 - opinion of Justice Holmes in the Miles Medical Co. case (*); and one of them (**) cited the report of the Federal Trade Co; mission to Congress on the Chain Store Investigation to the effect that unfair price cutting did more harm than good to consumers in thr- long run by impairing or destroying the manufacture and distribution of desirable articles. One witness illustrated the shortening of the life of a price-cut product by stating that Peruna had oiice been a fast-seller, but it was deeply cut in price. Soon it v;as no longer used much as a loss leader because it had become a dead item. (***) There was logic in this reasoning. The choice of an article as a price leader depended usually upon its popularity with the public and upon the fact that all dru,; "ores handled it, enabling the consumer to compare prices. As other cut-, ters met or beat the price of the original cutter, however, the comparison became less obvious, and finally as prices continued to sin.1: and small druggists found the item unprofitable, they ceased to handle it or at least ceased to feature it. At this point the product's usefulness as a loss leader ceased. Consumers had come to regard the cat orice as the regular price rather than as a bargain, and the price cutters, finding no value in further cutting, but unable because of competition to raise the nricc, discontinued handling or featuring th« item. The manufacturer lost his volume in that area, and the public lost its opportunity to obtain that product freely. 4. Causes of Price Demoralization The proponents advanced several possible causes of price demoraliza- tion, the most obvious, of course, being loss leader selling. (****) Five witnesses specifically mentioned loss leader selling, some (*) The quotation from Justice Holmes was: "...I cannot believe that in the long run the niblic will profit by this course, ■permitting knaves to cut reasonable prices for ulterior methods of their own, and thus to impair if not to destroy the production and sale of articles which it is assumed to be desirable that the people should be able to get n (**) Samuel C. Henry (***)W. Bruce Philip, pp. 36-70, transcript of June 7-8, 1'. (****)"Loss leader selling" is difficult to define. A "le; -or", roughly speaking, is an item .sold at a bargain price calculated to draw cus- tomers into the store. A "loss leader" would seem merely to add the element of a loss, but the definition of a "loss" involves many factors. It may mean a loss based upon the actual cost of the item plus the cost of selling it, or it may mean a loss merely on the cost of the item. If one follows the theory that there is no loss if the store as a whole is making a profit, there is further com- plication. The small drug:.ist used the term "loss leader" without attempting to distinguish its various meanings, but this in itself is significant, for it indicates that to him any item of a competitor was a loss leader if it were so^d below a profitable price to the small druggist. 9726 ~ tin - merely statin,; without elaboration that it was the primrry cause of price demon ligation, and others going into some description of how loss leader selling operated. (*) The theme of this testimony was that prices were cut lov or branded items and the losses recouped by charging exorbitant rates for a 1. r ;e number of other products, the purpose being to impress the customer that everything in the store was cheap. One of the witnesses objected to the use by department stores of whole depart- ments as loss leaders, saying, that the department store could recoup the loss in its other lines, but the single-line merchant whose products were thus cut lv d no means of recovery. (**) This same witness quoted the" Federal Trad? Commission Report of January 15, 193.3, as authority that losses on loss leaders were recouped by exorbitant profits on un- known anc private Jrand Ooocs. Two witnesses indicated that the d< oression had accentuated price demoralization. Retailers, in a frantic effort to stop declining sales, had resorted to hi vy Trice cutting, and competition soon forced the praccicc out of control. (***) Three witnesses (****) testified that the e trance of "pi >ards" into the drug field had caused an increase in the severity of price cutting. Another witness (*****) stated that some volume seeking ma.nufacturers actually incited price cutting at reti il to increase the sales of their products in certain areas. 5. Failure of Previously-Tried Remedies To show that they had not been inactive in trying to help them- selves out of their price-cutting difficulties, the proponents testified concerning the failure of remedies previously attempted. One witness (******) stated th t the efforts of manufacturers to stabilize prices by refusal-to-sell ?.nd consignment selling were expensive and inadequate. This witness alsc stated that Congress h< d power to stabilize prices by legislation, but would not act without definite information upon the economic effects of its action. This same witness later testified (*******) that snail druggists were eng In.: in cooperative buying, but (*) The five witnesses were as follows:- At the August hearing: N. G. Hubbard, pp. 344-248; 3". Bruce Phili >, pp. 421-436 <3 446-454; and G Gcoru:e M. Gales, n. 157-164. At the June hearing: 3.oy M. Sterne, pp. 5-36; George M. Gales, tto. 71-39, and John Goode, op. 138-149 & 388-393. (**) W. 3iuce Philip, pp. 421-436 & 446-454, August Transcript. (***) George M. Gales, pp. 157-164, August transcript, and -y^. 71-89, June transcript; and Roy !.[. Sterne, pp. 5-36, June transcript. ('****) George U. Gales, tp. 157-164; llo-r S. warnack, pp. 168-197", J. B. Pilchard, 331-535, ■ 11 in August transcript. (*****) John Goode, pp. 138-149, June transcript. (******) w> Bruce Philip, po. 431-456 & 446-454, August transcript. (*******) At the June hearing. '3. Bruce Philip, v-^. 36-70. 9736 - 87 - that the movement was not as effective as it should have "been because small druggists owed their wholesalers too much money. Furthermore, he stated, cooperative buying placed the v/holesaler's operating expenses and problems on the shoulders of the retailers; and, since it was effect- ive only on 500 out of the 10,000 items stocked by a dru, store, the dru00ist had to rely on the service vholes'ler for 9,500 items. If cooperative buying oecame too orevalent, the service wholesaler might raise the price on these 9,500 products. 6. Right of the Dru^ Trade to Special Consideration Not only because it was logical for each trade to try to convince KHA that its problems were different from those of other trades, but also because the small druggists had a sincere professional -ride, the pro- ponents, stressed the importance of the retail dru6 trade to the public health of the nation. Eight witnesses, at both hearings, covered this point. One witness (*) stated that pharmacists compounded 250 million pre- scriptions each year, and that 200 million persons were ill annually in this country. He stated that more than 87r- of all the drugs and medicines sold in the country were handled by drug stores. He point out that Federal a.nd State governments recognized the importance oi *he druggist and controlled his activities through 'educational and registration re- quirements for pharmacists, and narcotic and pure food and dru^ laws. This witness alleged that the income 'from prescriptions, medicines and drugs was not enough to maintain a drug store and that the druggist had to sell other articles of merchandise to help carry the load. He alleged that the volume of Jusiness in the retail drug trade was 2 billion dollars per year, 54. 8, J of this amount being in drugs, medicines and prescriptions, and 45.2$o in merchandise and commodities. He maintained that the selling of general merchandise permitted a reduction in the cost of prescription service to the public. He concluded by urging that the drug store, as a unit, professional and commercial, needed economic security in the interest of public health. Other witnesses ar0ued that the country needed its 60,000 drug stores, and that they should be kept in business even at the expense of higher prices. They stated that large price cutters, not stressing health service themselves, caused the public to distrust small druggists and to believe them profiteers. They added that cut prices tended to increase the number of sub-standard drugs on the market. (**) One witness admitted that theoretical economic efficiency would require the Government to lot the small diww^ist no bankrupt if he could (*) E. L. Swain, pp. 20-27, August transcript; pp. 406,-414, June transcript. (**) Witnesses presenting these views were: T.F. Schuler, represent- in, the Greater Kansas City Retail Druggists' Assn. (affiliated with HARD*), pp. 329-551, August transcript; "u. Bruco Philip, pp. 421-436 & 446-454, August transcript, and ^. 36-' .. June trans- cript; Geo. W. Duncan, pp. 350-355, Aug. transcript; P.oy S. ViTar- nack, pp. 188-197, Aug. transcript; Roy ii. Sterne, pp. 5-26, June transcript; Dr. S.F. Kelly, Sec. of A.P.H.A. pp. 25-36, Juno transcript; (John Goode, yp. 133-149, June transcript; ana Dr. R. L. Swain, pp. 406-414, June transcript. 9726 - 88 - not maintain himself in open competition; but this witness argued that the same view of efficiency would applaud sweatshop wages as an excellent way to keep down costs of manufacture and distribution. The witness pointed out that since I~RA was opposed to the latter tyne of efficiency, it should also oppose the former. (*) 7. Predicted Effects of Price Control At the first hearing in August 1935, the proponents sought to clinch their case by visualizing for KRA1 s benefit the possible effect of price stabilization. They predicted chat price stabilization would stop counterfeiting of trade marked articles1; end the "evil" of substitution2; increase wages and employment3; stop the sale of substandard drugs and aid the public health"*; make quality and service, rather than price, the important elements of competition^; insure the distribution of mcrchan- ise°, thereby benefitting the manufacturer9; being prosperity to legitimate business, causing stocks to pay dividends1'*'; increase sales and profits and decrease banknrotcies in the retail drug trade11; restore the public's faith in the small drug. ist12; and accomplish the greatest t^ood for the greatest number of drug stores13. 1. C-eorge I/I. Gales, pp. 157-164 2. Roy S. Uarnack, ~o. 188-197 3. Geo. M Gales, pp. 157-164; Sa.muel C. Henry, pp. 211-213, and Leon Monell, pp. 206-211. 4. Roy S. Warnack, pp. 188-197 5. Samuel C. Henry, pp. 311-213; J. B. Pilchard, pp. 321-326; and W. Bruce Philro, r>p. 421-435 & 445-454. 6. \1. Bruce Phili-o, rro. 421-435 f cash discounts*, and these normally were two percent. Subtracting 2t from Zif%> left 1^% as the average trade discount re- ceived by druggists from wholesalers.** Having argued that the code price was very little above the small dealer's merchandise cost, the proponents discussed the amount of the differential between the cost of goods to the small and large dealer. One reason why this became an issue was that the presiding off iceirratt the hearing was new to the entire loss limitation problem, having - recently been transferred from another division of NRA. He considered it important to find out just how far the large dealers had to sell above their own costs under the March amendment; and he seemed impressed by statements of some of the cut-rate witnesses***' that they received discounts as high as 30%. The proponents hastened to produce evidence on the point. One witness**** stated that the manufacturer generally allowed no discount on 2 dozen lots, the usual minimum quantity for a discount being a gross. This witness also testified that the average discount for a gross was 12%. The president of the Liggett Drug Com- pany***** stated that the average discount received by his company was 10% and 5%. JTwo manufacturers at the hearing testified upon this point. One****** stated that not more than 10$ or 15 % of all the manufacturers of package medicines gave more than 15% and 2t> discounts. (*) In the old loss limitation provision, Article VIII of the Re- tail Trade Code, "cost" was defined as net invoice cost, less all discounts except discounts for prompt payment . Thus NRA sanctioned this much difference between actual cost and the code price. (**) The fallacy in the above reasoning lies in the subtraction of the 2^ cash discount after dividing the normal discount in half. In other words, if the normal discount of 7%" contained a cash discount of 2%, the net trade discount must have been 5*. If the druggist received 5% trade discount and 2$ cash discount upon only half the goods he bought, his discount on total purchases would have been 2k^ trade and 1% cash discount. Leaving out of consideration the cash discount would have left the trade discount 2^%\ The witness' figure of l-§^, thus, was in error, even assuming his initial data correct. (***) See issues of opponents, infra. (****) Dr> E> F# Kelly, pp. 26-36. (*****) Geo. M. Gales, pp, 71-89. (******) Frank A. Blair, president of the Centaur Co ., manufacturers of a package medicine; also president of the Proprietary Associa- tion of America, an association of package medicine manufact- urers. 9726 . op _ The other"1 merely stated that his own quantity discount was 15^. Throughout their arguments, the proponents took pains to state that the March amendment was not "price fixing". The witnesses on both sides realized the stigma attached to this term by years of court de- cisions, and the opponents used the term frequently in their arguments. The proponents, naturally, sought to counteract the effects of its use, by insisting that "price" stabilization" or "fair competition", rather than "price fixing", were the nroper words to use.** One witness*** added two additional points to the argument upon the theoretical soundness of the March amendment, saying that the fixing of a code minimum still left plenty of room for price competition above that level. This witness also stressed the basic simplicity of the provision and relative ease of proving violations. (*) Earl A. Means, Vice President of Bristol-Myers Co., manufacturers of several package medicines and toilet preparations. (**) Witnesses stressing this point were: Geo. M . Gales, pp. 71-89; John Goode, ppt 138-149, and Geo. L. Secord, pp. 393-406. (***) Roy M. Sterne, pp. 5-26. 97?6 - 93 - 2, The Effects of the i. arch. -Amendment after 60 days of Operation inieh of the testimony on the effects of the ilarch nnendmer.t Fas mere ooinion, though there was some effort to Esther statistical infor- mation. The lack of oetter evidence "as no reflection on the speakers since 50 days was too short ..■ time for the trade to make a full adjust- ment to the new code prices, and too short a time for rn adequate sur- vey. One of the points stressed was th;. t compliance with the March amend- ment had been food. NRA was interested in this, since it die1 not wish to retain a code provision that was too difficult to police. One wit- ness* estimated that 99;,o of the drug volome of business was in com- pliance, and another* stated that "a prominent and reliable drug corn- pan;'- official" v7hose work brought him in contact with all sections of the country believed prices ''ore 99.1$ observed. A third witness* pro- duced the results of a questionnaire sent by the National Retail Drug Code Authority to its local bodies. 130 of the locrl code authorities had replied, the compilation of their returns being as follows: No. of violations reported 1,491 Range per local code authority 210 to 0 No. of hearings held. 1, 258 No. of complaints adjusted 1, 245 No. pending as of iiay 15, 1934 235 The witness stated that of the complaints pending, 195 were con- centrated in 5 sities; Los Angeles, Newark, 7ort Worth, Birmingham, and Freejort, 111.; "nd that all the complaints in Los Angeles, numbering 97, were violations of one store. 4e stated that, in 7 cities, from 2 to 5 complaints were pending; in 15 cities, one complaint was pending; and in 103 places no complaints were pending. Another witness* submitted the following statistics for Hew York City covering the period from April 8 (effective date of the Liarch amendment) to May 15, 1934: No. of complaints reported 3, 247 Rejected 120 Valid ' 3,127 No. adjusted by code authority 2,745 Ho. sent to NRA office for adjustment 382 No. reported against chains 43 No. reported against department stores 213 No. reported, against drug stores 1 , 827 (And, since there were 4,500 drug stores in the city, this was one complaint for every three stores.) ( *) J. Bruce Kreraer, representing the Drug Institute of America, Inc., pp. 118-123. (**) Roy M. Sterne, pp. 5-25. (***) Wheeler Sammons, pp. 150-204 & 383-392. (****) Samuel A. ~eiss, pp. 362-387. 9726 - 94 - No. reported against cosmetic shops .994 (And. since there were 257 cosmetic shops in the area, this wa,s almost 4 per store.) "Jo. reported against miscellaneous outlets 38 Total No. of stores, violatin : 706 No. violating only once 439 No. violating only twice 176 No. violating 3 times ' 48 No. violating 4 times 21 No. violating 5 times 3 No. viola.ting from 6 to 10 tines 19 The witness added that, though 70S stores had violated between April 8th and May 15th, the number violating between May 16, and 31, 1934, was only 73. Perhaps the most import; nt isine in the minds of the proponents was whether the inarch amendment had caused o^ices to the consumer to go up or down. Because of the short time between the effective date of the amendment and the public hearing, little factual data "as available, hut the witnesses presentee considerable opinion evidence to the effect that the consumer was paying les! nor his drug rnd cosmetic items than before. Pive witnesses* swowe on this point. To substantiate their vie^s, the proponents argued that the lowering of consumer prices was a logical effect of the code price for t"o reasons: rir^t, because manufacturers i hose products .•■ r. sev rely cut in price would lower thei"- aanuf cturer ' s wholesale list prices to prevent their re- tail prices from risin~ too fast; -rir.ciple, and second, issuss with respect to the manu- facturer's "hol.s le list price per dozen tyoe oj loss limitation provision. A. Issues with Respect f.o trice Stabilizacion in General. Witnesses for. the opponents c ■ ed, in broad language, that any form of price control would tend i;o eliminate competition among- retailers, promote monopoly son;- manufacturers; lead to inefficiency' in the distri- bution system, destrpy the initiative of business, and lead more and more toward Government ccr-.rol of industry. ( ******) (*) This raight be true .up to a certain point, but the point would be difficult to determine. (**) ILoy k, Sterne^ pp.5--2S; Samuel .... Weiss', pp. 362-387; and Geo. L. S cord, op. 392-406= (***) Samuel A. Weiss. (****) Dr. E. F, Kelly, vv. 26-36. ( *****) baauel" A . IV iss, op. 36'; -367. (******) The following witnesses testified upon these broad points; Myron Helvin Cohen, Washington Attorney for A. H. Macy A Co., iTe- York City, an Katz Drug, Co., Kansas City, pp. 283-293 of August tran- script; :iauric3 Singer, representing the issociatec' Pv t,al Drug- gists of America, pp. 356-365 of August transcript, (note that Ilr. Singer's testimony in the August transcript was almost word for word identical with that of Mr. Cohen); q. Forrest vfclker, economist for A.E. Macy & Co., Hew York, pp. 260-270 of August transcri it; and pp.0S9?M.7ro£ June^inanscript; Irving C. Fox rep- res, at lag the national Retail Dry Goods Assn., pp. 274-278 of .. .. . August transcript (note that the recorder, through error, listed iir. For. in the August transcript as C. 7. Smith. Mr. C. W. Smith was an Assistant Deputy Administrator in ERA.) . - 97 - One witness (*) stated that there were too many drug stores in existence, and that it was too easy for inefficient units to enter the trade anc" to remain in it. He argued that the efficient merchant needed no orice protection. This "itness added that 85^b of the lead- ing economists of the country haci. condemned price-f ixing(**) ; and that the Federal Trade Commission, in its report to Congress on the Chain Store Investigation had stated that price maintenance legislation was not called for. Another witness (***) alleged that the American Fed- eration of Labor had always opposed price fixing. Four witnesses(****) testified that price-fixing provisions in the code would raise the cost of living and go\ige the consumers, ©ne of these witnesses (*****) testified that retail prices would he unable to decrease with reductions in manufacturing and raw material costs. The other three of these- witnesses connected their argument with one of ISA's basic principles by stating that price fixing would cause a sudden rise of consumer prices ahead of purchasing power, thus imped- ing recovery. One witness( ******) sought to strike at the roots of the small druggists' arguments. He alleged that price-fixing in the code would not accomplish its objective of stopping predatory price cutting; and would merely tend to diminish the volume of drug products sold, to the detriment of the entire industry, including the small druggists. One witness( *******) urged that price-fixing would cause the cash and carry store to suffer because it could not undersell the store offering credit and delivery service, and if both sold at the same price the customer would choose the latter. Another witness (********) contended that, if a price-fixing scheme were approved, it should include a differential for cash and carry stores, permitting; them to sell from 12$ to 15$ below the mini- mum price otherwise applicable. The witness claimed that his clients had studied the cost of delivery service and found that it cost 10^ or more to make a delivery in Kansas City, and that the average delivered order was less than 50^, making the cost of delivery 2C4. '. (*) Q. Forrest Walker, -pp. 260-270 of August transcript, and pp. 89—117 of June Transcript. (**) He cited a survey conducted in 1931 covering all members of the American Economic Association. (***) Irving C. Fox, (listed as C. W. Smith), pp. 274-278 of August transcript. (****) Q,. Forrest Walker, pp. 260-270; Myron Melvin Cohen, pp. 283- 293; Maurice Singer, -pp. 356-365; and Frances Kneitel, Attorney for the National Independent Pharmacists, Inc., of He York, pp. 338-342 (all page numbers given are in August trans cript . ) (*****) q# Forrest Walker (******) q> Forrest Walker, pp. 260-270, August transcript. (*******) Q. Forrest Walker, pp. 89-117, June transcript. £********) prul stinson, attorney for Katz Drug Co., Kansas City, and Fred Meyer, Inc., Portland, Oregon, pp. 261-393 June transcript 9726 He -added that costs of credit and collection were from 3$ to 5$; and that consumers who air1, not want these services should not have to pay" for them. A third witness (*) urged that' a cash and carry differential v/as absolutely essential. Four witnesses for the opponents presented considerable testimony rebutting the proponents' claim that the drug trade needed special consideration because of its public health aspects and because it was in bad financial condition. One witness (**) testified that drug stores suffer- d worse from the depression than other retail outlets. He cited a report of the University of Illinois, entitled "Business Mortality of Illinois Retail Stores, 1925-30", rnd a report of the University of Buffalo, entitled "Mortality in Retail Trade", to show that the drug trade had a greater longevity than other retail trades. (***) This witness .also stated that the modern drug store was a general merchandise store and should be able to overcome lower profits on drugs by higher profits in other lines, notably soda fountain products. He added that there was no evidence that drug products in a well-managed store bore a star- vation mark-flip. (****) Another witness (*****) testified that the credit (*) Frances Kneitel, pp. 204-235 6 415-433, June transcript. (**) q,. Forrest Walker, pp. 89-117, June transcript. (***) One of the proponents, Samuel A. Feins, pn. 362-387, June transcript, disputed Mr. Walker's statements on this subject, stating that the sample covered by the University of Buffalo's report was too small. Weiss introduced a statement of the Bureau of Business Standards, Inc., Chicago, to the effect that the life expectancy of hardware stores was better than that of drug stores, and that the expectancy of drug and grocery stores was about equal. (****) One of the proponents, Samuel A. Weiss, also disputed the statement", that drug stores could make up their profits on o her lines than drugs. He quoted from a survey of New York Drug Stores, the following figures; 75$ of stores with fountains did less than 20$ of their total business in fountain products, and 45$ less than 10$ in these products. 90$ of the stores did less than 6$ in these items, 37$ of the stores did less than 10$ of their business in candy, rnd 85$ did less than 6$ in this product. (*****) Frank Milne, representing' the Miller Drug Stores of Ohio and Pennsylvania, a ffircill chain of cut-rate stores; pp. 619-634 June transcript 9726 - 9? - status of suirurban drug stores was not nearly as "bad as the proponents had painted it; and added that the so-called ethical drug stores were actually no more ethical than the cut-raters. Ke stated that the push- ing of substitute products was a practice not confined to cut-raters, but practiced by all stores that had any substitute products to push. One witness (*) stated that drugs "ere no more necessary to health than food, vet no drastic price protection appeared in the Retail Food and Grocery Code. Another witness (*) stated that the cut-raters saved noney for the iniQlic, and that consumers did not need and did not want to jay for the type of service some drug stores offered. So;:e of the opponents thought it important to show the existence of a wide difference between consumer prices and manufacturing costs of products in the drug industry. Two witnesses (**) objected that price fixing would permit the manufacturer to set exorbitant consumer prices, as much as 2,000^ in excesr of manufacturing cost. Another witness(***) stated that the raark-up of drug manufacturers was 50(X?> and higher, and that the manufacturers with the longest margins were the ones most in favor of price maintenance. Individual witnesses for the opponents raised a number of miscel- laneous issues. One witness (****) stated that "destructive price cut- ting", as the anti-trust laws defined the term, could never exist in the retail drug trade, becar.se there conld be no restraint of trade and no monopoly.- For example, he stated, if a large store cut the nrice on a toothpaste, there were still 40 other brands of toothpaste on the market, and the store could secure no monopoly nor even severaly res- train trade in the commodity. This witness also pointed out that, to be destructive, price cutting must actually destroy trade, a fact re- quiring definite proof. Another r'itness (*****) stated that, in his opinion, it was good advertising to sell goods below cost to attract customers to the store. Two witnesses (******) stated, "it is a well- known fact that no store can invariably mahe a profit on each separate article that it sells, and every merchant considers his business as a whole and sekks to make a profit on the entire turnover rather than a separate profit on each article. Another witness (*******) stated that, though less than l/3 of all the drug stores did over $30,000 worth of business per year, this one-third did 2/5 of the total drug (*) The witness was Paul Stinson, pp. 261-393, June transcript. The approved loss limitation provision in the Retail Food and Grocery Code was individual invoice or replacement cost, whichever was lower, plus a 6)o labor mark-up. This was comparable to the loss limitation provision of the Retail Trade Code, covering druggists prior to the March amendment. L'aurice Singer, pp. 124-135 & 528-539, June transcript. (**) i'yron Melvin Cohen, pp. 282-293, and Mauri' ce' Singer, _pp. 124- 365, both in August transcript. (***) Paul Stinson, pp. 261-393, June transcript. (****) Q,. Forrest Walker, pp. 89-117, June hearing. (*****) B. L. Klein, cut-rate druggist, Cleveland;pp. 135-136, June hearing. (******) Myron Melvin Cohen, pp. 283- 293, August transcript , and Maurice Singer, up. 356-365, August transcript. (******* )Francis Kneitel, pp. 204-235 & 415-433, June transcript. 9726 - 100 - drug business of the country. This witness also alleged that the small cut-rater needed price appeal as a weapon to compete with the large chain's advertising advantages. B. Issues with he spec t to the Lanufacturer' s Wholesale List Price per Dozen as a Code Linimum. At the public hearing on June 7th arid 3th, 1034, the opponents vigorous!;- attacked the principle of the Larch amendment , and contend- ed that its effects daring GO days of operation had been detrimental. Three -.'itnesses attached the (*) Manufacturer's wholesale list price per dozen on the ground that it was a fictitious figure used merely as a base for the granting of discounts, and not representative of any- one's cost. They termed it a "vicious principle of price fixing.'\ One of these witnesses (**) stated that the Larch amendment failed to con- sider varying costs of handling slow and fast-moving items, and foiled to consider sales volume as a factor in the determination of cost. Furthermore, she stated, the manufacturer's wholesale list price per dozen was not even the cost of small druggists, since wholesalers' dis- counts were from 10$ to 20$ in dozens, or even in less than dozens, taking into account free goods, rebates, and cash and trade discounts. She added that the small druggist in hew York City received a dis- count of lO'j plus 2$ from the wholesaler. Another of these witnesses (***), to show that the manufacturer's wholesale list price was not the small druggist's cost, produced a list of products sold by the McKesson- Faxon Wholesale Drug Co. of Kansas City, showing the manufac- turer's wholesale list price per dozen and McKesson' s price in lots from 1/12 of a dozen up. The list covered 113 items and the range of discounts was from 10$ to 15$. This witness also testified that by careful buying in fairly small quantities a druggist could obtain a 30,o discount, and by buying $50 worth at a time, could obtain 33-1/3$. This witness alleged that almost 50$ of the total drag sales in Port- land, Oregon, were made by chains, department stores, and buying pools receiving large discounts from the manufacturer's wholesale list price per dozen, hence the proponents were wrong in stating that the vast majority of druggists bought at the manufacturer's wholesale list price. (*) The witnesses were: Q,. Forrest Walker, pp. 89-117; Frances Kneitel, pp. 204-235 & 415-433; and Paul Stinson, pp. 26.1-393. (**) hiss kneitel. (***) Paul Stinson, pp. 261-393. 3726 -ini- Three witnesses stated (*) that the March amendment gave too much po^er to the manufacturers to manipulate the code price to suit their own interests. Five witnesses testified that large stores, buying in quantity, received big discounts from the manufacturer's wholesale list price per dozen. The presiding officer at the hearing was greatly interested in this testimony, since he wished to know how far about their own merchandise costs the March amendment required large stores to sell. One witness (**) stated that he received an average discount from the manufacturer's wholesale list price of 20$, and estimated that his cost of doing business averaged 14$. He said that he carried a line of 10,0<"><~i or more items, but did not stock heavily on slow-moving items. He added that the whole basis of the cut-rater's policy was to keep down costs by rapid turnover. A second witness (***) simply stated, without elaboration, that he received large discounts by buying in quantity directly from manufacturers. A third witness (****) stated that members of her association received from 10$ to 20$ discount by buying directly from manufacturers, and had an overhead ranging from 12$ to 14$. She stated that the March amendment, by requiring her mem- bers to sell at the code price, sanctioned profiteering, A fourth witness (*****) stated that his client had an overhead, expense of 15$ and received discounts from the manufacturer's wholesale list pricein excess of 15$. The fifth witness (******) submitted a list of 38 pro- ducts showing his own regular discounts on quantity purchases and al- leging that he obtained them through normal trade channels and not through bankruptcy sales or other irregular means. He stated that they were manufacturers' deals available to anyone who bought the same quan- tity at the same time as the witness. Every discount on the list was (*) Francis Kneitel, pp. 204-233 & 415-433; Paul Stinson, pp. 261-393; and Samuel H. Miller, cut-rate druggist and vice-chairman of the Local Retail Drug Code Authority of the 20th Congressional District of Ohio; pp. 599-614. Mr. Miller classed himself as the only cut-rater that was a member of a local drug code authority. (**) Maurice Singer, pp. 124-135 & 528-539. (***) B. L. Klein, pp. 135-136. (****) Frances Kneitel, National Independent Pharmacists, Inc., New York City, pp. 204-235 & 415-433, (*****) Paul Stinson, speaking for Fred Meyer, Inc., Portland, Oregon, pp. 261-393. ' (******) Mr. Donn (initials not given), owner of the Fthical Pharmacy, a cut-rate drug store, New York City, pp. 433-471. 9726 - 102 - above 20fj and a, few over 30-o. (*) In- addition: to the witnesses upon this point, one written "brief (**) filed in the transcript stated that the code minimum price under the Larch amendment was 'ro'1. 15fo to 2Qja above the cost of goods to -large buyers,. Three witnesses 'urged that the Larch amendment was unenforceable and that, compliance under it was -bad. One (***) stated that large stores' prices were easy to cheel:, but those of .small stores './ere not, and no local retail drug code authority uas equipped to police thousands of stores' prices ujion thousands of items. This TTitness stated that SOfo to 90;o of the stores in ITew York City vrere violating the code price on sone item. His. client, he stated, had shopped two days and found 76 stores in violation of 194 items. Furthermore , he pointed out, the code price was subject to constant fluctuation as manufacturers changed their base prices or dozen-lot discounts and deals, and the trade was entitled to prompt notice of such changes. He alleged that the local code authorities were not performing this function satisfactorily, and that the code authority price lists were had. Another witness (****) (*) This testimony produced some controversy at the hearing. i."r Earl deans, vice-president of the Bristol-; 3rers Co., a manufacturer, arose on the side of the proponents, at the call of the presiding officer, to state that dr. Bonn's large discounts were loss leaders of wholesalers, plus manufacturers' free goods. Ho explained that wholesalers, as well as retailers, used loss leaders to attract, trade, and intimated that if ITdA corrected Loss leader selling throughout all branches of the industry, dr. Bonn's dis- counts would disappear. Another witness then arose on the side of the opponents, L'r. Li. Weissbard-, owning 3 cut- rate stores in Newark, IT. J., and denied dr. 'deans state- ments. Weissbard said that dr. Bonn's disco-ants were not wholesalers' loss leaders, but discounts of manufactur- ers, dr. deans testimony appears on pages 433-477, and dr. Weissbard' s on pages 466-471, of the June transcript. (**) Brief of Texas Lerchants Assn.,. and Leonard Bros., by Charles P. 'Swindler, Attorney. Page -32, Supplement do . 1 to transcript of June hearing. (***) The witness was Q. Forrest .Walker ,, economist of H. H. Lacy d- Co., New Yord, pp. 83-117. His reference to the failure of Code Authorities to give notice of price changes applied principally to the difficulties under the "last proviso", largely eliminated by the approval of the September amendment. See Chapter IV of this part, page 169 et. seq. (****) Paul Stinson, speaking for the Katz Brug Co., Kansas City, pp. 261-293 9726 #5< - 103 - testified that the Larch amendment was unenforceable because oi possibility of keeping track of the code price on thousands of items. Ke presented 32 letters sent to local ret3.il drug code authorities bjr his client complaining of violations under the Retail Drug and Retail food and Grocery codes in his client's territory. These letters con- tained 52 complaints under the drug code. The third witness (*) on this point testified that snail uotown druggists sold belo^ the code price with impunity while the dovmto'Tn stores stood in fear of investi- gation by the local code authority. He stated that in the parts of Ohio and Pennsylvania where he. operated, there was no compliance with the code price; and that, though he tried to comply at first, he was forced to rive it up as a bad job. This witness stated, in connection vith the policing of code prices by code authorities, that the local drug code authority for the 20th district of Ohio had been hand-picked by the drag trade associations without any election, and that he believed the same thing happened elsewhere. (**) Another witness (***) objected that the national Retail Dray Code Authority was not an elected body, and that one of its members was not even a member of the trade. She also objected to the representation of the Dray Institute of America on the Code Authority. (****) As in the case of the proponents, one of the most important issues to the opponents r/as the question of consumer price trends xuider the i.iarch amendment. One witness (*****) stated, without elaboration, that consumer nrices had advanced. T'.to others (******) argued that the lack of mairoik.cturers' price advances was misleading and did not mean that prices would not advance after the hearing. They argued that nanufac- ttirers would naturally not raise the prices 2jrior to a hearing on the t&) Frank kilne, pp. 619-634. (**) HRA regulations provided 1'^r an open election of each local code authority except in unusual cases, such as lie":.' York City, where local trade associations appointed the represen- t at ive s . (***) Frances Eneitel, vv- 204-235 & 415-433. (****) The code established the National Retail Drug Code Authority with two representatives from the IT.A.R.D. and one each from the A. Ph. A. , and the Drug Institute of America, Inc., and such other representation from any national trade associa- tion as might be approved by the Administrator. In November i; , h.^1233., the Administrator approved a representative of the national Association of Chain Drug Stores, The code pro- vided for no omen election of these members, and since the cut-raters had no national trade association, they received no seat on the Code Authority. (*****) Maurice Singer, pp. 124-135 & 523-539. (******) Irving C. Fox, pp. 217-261; and Paul Stinson, pp. 261-393 S726 - 104 - effects of a provision favorable to their interests. One vitness (*) testified that in his or;n store he raised 300 or 400 items to the code --rice under the I larch an id ent. He admitted that he lowered some also. Another witness (**) testified that one of his clients had raised 129 itens to the code price, the average in- crease being 20.51)5, and that another client, by picking 7 stems at random found his average increase was 12.-. This witness also pointed to an article in Drug Trade Hews shoving that Hook's Drug Stores in Indianapolis had an average price increase on recount of the ! arch Amend- ment of 24-£$, the survey covering 15 items. Tour witnesses for the opponents warned IIBA to scrutinize eare- fully the motives behind the alliance of the chain drug store with the small independent. One witness (***) stater?, that uneconomic operation and topheavy managerial expense had driven the chains into the alliance. Three witnesses (****) alleged that the Larch amendments would tend toward a monopoly on the part of the chains because with standard brrnds kept high in price, the chains could take over the market with their pri- vate brands. They added that small druggists could not handle private brands, and in any event had not the advertising facilities of the chain for pushing them. One witness (*****) quoted from the federal Trade Commission's report on Chain Store Private Drands to show that sales of these products '-'ere increasing. In 1929, private brand sales rare 16.8 261-3S3. (********) This argument was some-hat inconsistent with previous arguments of the opponents that wholesalers' and manufac- turers' discounts to small druggists made the merchandise cost of these dealers lower than the code -nrice. 9726 - 156 ~ ' Perhaps realizing that they could not hope for complete abandon- ment of all price fixing clauses in the code, the opponents argued strongly for the re-establishment of the old "invoice cost plus a la- bor mark-up" provision. One witness (*) stated that this clause was better than the March amendment because it allowed the meeting of compet- itive prices below the code minimum, end was self-enforcing in that the store wishing to meet an offending price had to report it to the code authority. Another witness (**) suggested that a "cost plus 10^" clause would permit the small dealer more readily to sell above the code mini- mum since it would not be fixed or widely-known base price. The manu- facturer's wholesale list price per dozen, he urged, was so well-known and so inflexible that it tended to become the maximum as well as the minimum price. Six other witnesses (***) stated, without much elabora- tion, that, in spite of their opposition to pries fixing, they would not oppose a clause based on invoice cost plus a mark-up. Two of them spe- cifically mentioned 10f' as the proper mark-up; three mentioned no parti- cular mark-up; and one contended that o'o would be sufficient to cover labor costs upon some fast moving items because of their rapid turnover. (*) Q. Forrest Walker, pp. 89-117. (**) Irving C. Fox, pp. 247-261. (***) Frances Kneitel, pp. 204-235 & 415-433; Paul Stinson, pp. 261-393; i.Ir. Donn, pp. 433-477; II. TIeissbard, pp. 466-471; Samuel H. Lliller, pp. 599-614; and Pram: kilne, pp. 619-634. 9726 - 107 - ADLmnSTRATIVl PROBLEMS ad ihhehbnt difficulties IN THE LOSS LIMITATION PROVISION CHAPTER VI I. Manipul- tion of Prices "by lianufacturers The September amendment omitted the "last proviso11 of the March loss limitation provision and added a paragraph, ccamonly called the "second paragraph" , empowering the Administrator to ju^per-d or modify the provision in instances of prijje manipulation by manufacturers. The principle of loss limitation in the retai] drug trade was to peg minimum prices at the cost of the goods to the snail dealer; and NRA chose the manufacturer's wholesale list price per dozen as the code price "because members of the Code Authority had insisted that this was the closest practical approach to the small dealer's cost. The small druggists naturally wanted a code price higher than the mere cost of their goods, as stated previously, and NRA received, during the existence of the Retail Drug Code many letters and t elegrams from small- druggists and associations of small druggists asking for mark-ups ranging from 10$ to 37$. The Deputy was definitely opposed to all suggestions for a mark-up; the Consumers' Advisory Board and Research and Planning Division opposed it consistently, end one or two members of the National Industrial Re- covery Board Questioned whether the provision was truly designed for loss limitation or for arbitrary r-rice-f ixing. The National Retail Drug Code Author! ty, while wanting more price protection for small druggists, realized the danger of asking for too much at one time. They felt it far better to keep what they had than to reach for more and lose all. NRA's opposition to a. mark-up extended also to attempts by manu- facturers to grant an indirect mark-up by discounts, free deals or re- bates to small-lot ourchasers. The fear that manufacturers might make •such attempts motivated NRA to include the- "last proviso" in the Karch amendment, requirin; the deduction of dozen-lot discounts, free deals and rebates in the computation of the code price. So long as this pro- viso remained in the code, only the existence of wholesalers ' discounts kept the code price from exactly equalling the cost of the goods to the small dealer. When NRA deleted the "last proviso" on September 21, 1934, there was real danger that the manufacturer's wholesale list price per dozen might become less than the small dealer's cost, not only by the amount of wholesales' discounts, but by the amount of manufacturers' discounts also. Wholesalers' discounts were limited by the amount wholesalers received from manufacturers; but there was hardly any limit on what manufacturers could, give away. The second paragraph of the September amendment was designed to check over-gencrou.s manufacturers and keep the code price reasonably equal to the small dealer's cost. NRA had hoped, through this para- graph to suspend or modify the loss limitation provision, promptly 9726 m - 108 ~ after its approval, as to all prod-acts having dozen- lot discounts or free deals. One official recommended that offending products be re- moved entirely from the operation of the clause and left open to price- cutting. Such a procedure, he felt, would be less confusing than re- quiring the deduction of the objectionable discounts in the computation of code prices.* The National P.etail Drug Code Authority, especially members re- presenting the National Association of Retail Druggists took a different position. The National Association of Retail Druggists militantly want- ed all the price protection it could secure for the small druggist, and fought hard for the indirect mark-up afforded by dozen-lot free deals, discounts and rebates. The misunderstanding between NRA and the Code Authority emerged at a meeting of the latter on October 5, 1934.** The Code Authority argued that NRA had known of the free deals and discounts available to small druggists and, having decided that their effect was negligible, had approved an amendment ignoring these deals in the computation of the code price. Consequently, NRA had placed its seal of approval on all manufacturer's deals existing as of September 21, 1934, and had power to curb only such manipulations as occurred after that date. There was technical reasonableness in the Code Authority's stand. The second paragraph of the loss limitation provision stated that the Administrator should act when a manufacturer was manipulating his prices "because of" the provision. Therefore, in spite of the fact that existing deals ranged between one free with a dozen and three free with a dozen, giving small druggists a mark-up of 8^ to 25^, NRA agreed to leave these deals f.lone. In return, the code authority agreed to search diligently for instances of manipulation occurring after Sept- ember 21 and the Legal Division of NRA devised an orderly procedure whereby the Code Authority was to send a mild letter to each offending manufacturer pointing out the objection to his policy and asking his future intentions. If the manufacturer failed to correct his prices, the Code Authority was to send a stronger letter; and if he still main- tained his objectionable price structure, the Code Authority was to refer the case to NRA. NRA planned to take prompt action against one or two manufacturers as an example to the others. Unfortunately, the Code Authority's desire to preserve the bene- fits of free deals for the small druggist interfered with its duty to investigate manipulated prices. To the date of expiration of the Code, the code authority never, of its own initiative, discovered a single case of manipulation. NRA discovered a few and cut-rate druggists throughout the country reported a few. Tnere were doubtless many more cases in existence but NRA had no facilities for discovering them. (*) This recommendation is contained in a memorandum from Mark Merrell to Deputy Harry C. Carr, 10/9/34; folder marked "Memoranda"; Deputy' s files . (**) See Minutes of meeting, folder marked "Meetings"; Deputy's files. 9726 ■ - 109 - By the beginning" of 1935, NRA was anxious to get quick action on the three rrost flagrant cases of manipulation, and was willing to table all- - others temporarily, but the code authority did not want to turn the cases over to NRA for fear its action might displease the small drug- gists who enjoyed an indirect mark-up on these tnree products. The code authority requested a chance to see the manufacturers personally and tried to dissuade them from their manipulations. They succeeded in bringing 'one into line but the other manufacturers continued their methods. In the spring of 1935 the number of free deals and discounts on small quantities increased. The weekly drug trade papers began pub- lishing long lists of current deals for the benefit of small druggists. By that time NRA had taken the flagrant cases into its ore hands but was frustrated in its attempts to dispose of them quickly by a ruling of the legal division requiring a complicated, formal procedure, and a hearing in each case. NRA feared that the increasing number of free deals and discounts might jeopardize the drug trade's chance to retain its loss limitation provision if Congress extended NRA and the codes after June 16, 1935. The deals were rendering the manufacturer's wholesale list price on some products wholly fictitious. One of the most flagrant examples was a manufacturer who allowed the small druggist buying one dozen, another full dozen free. The little dealer selling this item at the code price received a mark-up of 100*3. Another bad example involved the 10' sizes of some drug and cosmetic products. Although 10^ was the highest possible selling price on these, it was also the minimum code price. The manufacturers had raised their wholesale list prices from 90^ to $1.20 and, by means of special discounts, had permitted the Small- drugcci'&t to ^x^- tfia products', foi? atfbufc -87$* per clbs!en \hvh ugh- whole- salers. The code authority, however, could not realize what a power- ful weapon such cases were in the hands of their opponents nor how difficult it would have been to uphold a provision based on an arbi- trary and shifting base, unrelated to anyone's cost. Meanwhile, the existence of manufacturers' dozen-lot deals was causing trouble in courts. In preparing one case for trial in the fed- eral courts, NRA discovered that 9 out of the 15 items sold below the code price bore dozen lot deals. Realizing the danger of placing such a condition before the court, the officials eliminated these nine and brought the case only upon the remaining six items. Thus the loss lim- itation provision became practically unenforceable upon all products with fictitious manufacturer's wholesale list prices. In one case, the question of deals actually came before a court in New York City and the magistrate ruled that the code minimum price, in his opinion, was the net cost of the goods in dozen lots. In this case, the manufacturer had given one item free with a dozen and the court held that the code price per unit was the manufacturer's wholesale list price per dozen divided by thirteen instead of by twelve. The respondent, not having sold be- low that price, went free. In April 1935, NRA decided that the number of deals offered the trade was so large and increasing so rapidly that the original plan of 9726 . ~ 110 - handling therr. individually ras impractical. It therefore decided to inoua a biantot order to correct them all at once; and drafted such an order, in tentative, form, for submission to the core authority. _' j The order ^astTe signed to eliminate eacn product from the loss limitation provision automatically as soon as the manufacturer offered an objection- able deal and to reinstate the product automatically when the manu- facturer rescinded the deal. This time the code authority was more friendly to the idea and agreed to consider it. They objected, however, that no druggist could keep track of v/hetner a given product was in or out of grace; and suggested that, though the suspension of products should be automatic, the reinstatement should be done by separate NRA action in each case. The code authority also agreed that the order should apply to deals on quantities of less than two dozen, instead of one dozen, in order that all deals available to small druggists might be covered . The order was drafted' and redrafted several times during May, 193U considerable difficulty arising in making it legally accurate. Before it could be approved, however, the Supreme Court's decision in the Schechter case brought an end to all code work.* II . ' Clearance Sales Article VIII, Section 2(a) of the Retail Trade Code permitted deal- ers to sell at less than the code price merchandise sold as a "bona fide" clearance, if advertised, marked and sold as such.** The provision was inherently difficult of administration and formed a convenient loop- hole for tne price-cutter. The need for such a provision appeared first at the public hearing of August, 1935*** from the testimony of the cut- rate group, who stated that no merchant, unless he were a, prophet, could escape errors in judgment in the operation of his business; and that the merchant's welfare depended on his right to clear his shelves of over- stocked or slow-moving goods. Some of the proponents of the loss limi- tation provision believed '.that clearance sales were unnecessary in the drug business because of the steady, foreseeable demand for its stan- dard goods; but most of those who held this belief were small merchants, thinking in terms of hand-to-mouth operations. Few of them could compre- hend the problems of carload, or even gross-lot, buying. The trouble with clearance sales lay in their abuse. It was easy for the cut-rater to overstock with the intention of cutting prices; or simply to cut prices, mark the goods as clearance merchandise, and defy the authorities to disprove his assertions that he was acting in good faith. The problem was not susceptible of a clear-cut solution, since any (*) From s concise exposition of the problem of manipulation, see the memorandum from Assistant Deputy Mark Merrell to Division Admin- istrator Harry C. Carr, 4/5/35; folder marked "Orders";- Deputy's files. For cot>ies of the proposed stay order, see documents head- ed by a memorandum from Mark Merrell to legal adviser, G. 3. G-oldin, 5/13/35, same folder. (**) This clause appears in full in Chapter III of this Part page 58 (***) See testimony of Q. F. Walker, pp. 260-270; M.M. Cohen 283-293; and M. Singer, pp 356-365. 9726 - Ill - restrictions practical enough to stop abuses inevitably reacted to the hardship of the merchant. The true test of a valid clearance sale was the good, faith of the dealer conducting it, and the ways in which a sale might he conducted in good faith were too numerous and varied to admit of a universal definition. Each case, therefore, had to rest on its own merits. Where a law imposes a burden on one party to prove the mental state of another, it raises a difficult task. The code being a criminal law, the burden of proof of violation was on the Government, yet neither NRA nor the code authorities had any right under the law to examine the invoices, books, and papers of stores suspected of con- ducting illegal clearance sales. Without such objective information, the Government could not establish the subjective fact of good or bad faith. An amendment requiring merchants to submit in advance to some administrative body full information concerning projected clearance sales might have prevented abuses; and such a regulation would have caused no hardship if the machinery set up was able to render prompt decisions. Such machinery existed in the nation-wide organization of local code authorities, but these bodies, consisting largely of compet- itors antagonistic to the price-cutters, were not proper repositories of the power. The NRA field offices could have supplies disinterested judges, but these offices lacked facilities for covering every city and town in the country. In August , 1934 the Deputy drafted a proposed amendment attempting to define valid clearance sales, but the legal division promptly dis- approved it.* On October 23, 1934, NRA held a public hearing on another proposed amendment requiring dealers to submit to their local code au- thorities, within 48 hours after the beginning of a clearance sale, full facts concerning the amount of goods on hand, the date they were pur- chased, and such other matters as the National Retail Drug Code Au- thority might, from time to time, prescribe. Only four speakers at this hearing discussed the proposed amendment in any substantial detail.** Only one of these*** was on the side of- the proponents, and he, sur- prisingly, objected strongly to the amendment on the ground that it did not define a "bona fide clearance", nor designate who had power to rule upon the validity of a given sale. He also objected that a cut-rater could do much damage during the 48-hour leeway period. This witness (*) See memorandum from N.T. Raymond, legal adviser to Mark Merrell, Assistant Deputy, 8/31/34; folder narked "Amendments"; Deputy's files. (**) Other speakers concentrated on other amendments and questions up for discussion at this hearing. (***) Samuel A. Weiss, executive-secretary, Hew York City local retail drug code authority, pp. 26-34, transcript of hearing on Retail Drug Code, O.tober 23, 1934. 9726 - 112 - recommended that NRA out lav all clearance sales except those upon damaged goods or manufacturers' discontinued lines. The other three speakers were on the side of the opponents, and two of them,* like- wise to NRA' s surprise, favored the proposed amendment. Questioning by NBA brought out the reason why the witness for the proponents ob- jected to his own code' authority's amendment, and why two witnesses on the other side favored it. Both of the cut-rate witnesses testified that in New York the local code authority had interpreted the term "bona fide clearance" to mean only discontinued lines of merchandise. The aforementioned witness for the proponents, who was secretary of the New York code authority, denied this, but when asked what he consid- ered a "bona fide clearance", replied with a definition so strict that it actually covered little more than discontinued lines, furthermore, he stated, his local code authority had to be "pretty ironclad to pre- vent subterfuges". It seemed probable that the New York code authority had overstepped its authority in restricting clearance sales, and this witness' objection to the proposed amendment was based on the realiza- tion that the amendment would disclose his code authority's lack of power. The amendment received no further consideration after the hearing; and NRA instructed each local code authority to handle its own clear- ance sale cases. The only rules laid down were that the local code authority, wherever it suspected illegality in a clearance sale, was to notify the dealer involved and request him to submit facts bearing in his good faith. If he acceded to the .request and the code authority decided that the sale was not bona fide, it was to submit all the facts to the NRA Regional Compliance Council for removal of the merchant's Blue Eagle, and for reference to a court. If the dealer refused to submit facts, the code authority was to try to get them itself.** A refusal to submit facts, would, naturally, be evidence of bad faith. This process was tedious and- akin to closing the stable after the' horse was gone; but NRA hoped that one or two Blue Eagle removals, or penalties' inflicted by a court, might dissuade the cut-rate element from future abuses of the clearance privilege. It turned out that NRA was unduly optimistic, for no clearance sale case over reached a Compliance Council. III. Premiums, Prize Contests and Outright G-ifts Article VIII, Section 2(c) of the Retail Trade Code provided that where a premium or certificate representing a share in a premium was given with any article, the base on which the minimum price of the ( *) Frances Kneitel, attorney for the National . Independent Pharmacists, Inc., New York City, pp. 54-67 of the transcript; and M. Weissbard, cut-rate druggist, Newark, IT-. J. , pp. 67-71. The Third, Irving C. Fox of the National Retail Dry 3-oods Association spoke mainly in general terms in favor of clearance sale privileges. (**) See letter to Dr. E. F. Kelly from Mark Merrell, 2/28/35; "Explanations" folder, Deputy's filies. -i 113 - article was calculated should include the cost of the premium or share thereof.* This rule was definite-, hut .sometimes difficult to apply. Authors of the code designed the premium clause originally to apply to the "cost plus lCw' provision but it continued to apply. to drugs and cosmetics after these products came under the manufacturer's whole- sale list price clause. Simplified examples will best describe the premium clause's operation. If a retailer sold a suit of clothes costing him $15 net, the lowest price he could charge was $15 plus 10%, or $16.50. Clothing was subject to the Retail Trade loss limitation provision (cost plus 10^) • If he offered to give with e.^ch suit a pair of suspender-, cost- ing him bO