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UNITED STATES v. MCKESSON & ROBBINS

July 1, 1954

UNITED STATES
v.
McKESSON & ROBBINS, Inc.



The opinion of the court was delivered by: MURPHY

On this motion for summary judgment by plaintiff under Rule 56, Fed.Rules Civ.Proc., 28 U.S.C.A., in an action under Section 4 of the Sherman Act *fn1" seeking adjudication of illegality and injunction, a question of first impression in the courts is presented: Is a manufacturer, who is also a wholesaler and a limited retailer of his own products, as well as a wholesaler of products of other manufacturers, privileged to fix resale prices on his own products with competing wholesalers under federal fair trade statutes? Both the Miller-Tydings *fn2" and the McGuire *fn3" acts make lawful 'contracts or agreements prescribing minimum * * * prices, for the resale of a commodity which bears, or the label or container of which bears, the trademark, brand, or name of the producer or distributor of such commodity and which is in free and open competition with commodities of the same general class produced or distributed by others, * * *.' Both acts make this exception to the privilege in these terms:

'[Nothing quoted above shall] make lawful [any] contracts or agreements providing for the establishment or maintenance of minimum * * * resale prices on any commodity * * * between manufacturers, or between producers, or between wholesalers, or between brokers, or between factors, or between retailers, or between persons, firms, or corporations in competition with each other.' *fn4"
On this motion it is plaintiff's contention that the 'contracts or agreements providing for the establishment or maintenance of minimum * * * resale prices on any commodity', concededly made by defendant through its wholesale drug divisions with competing wholesalers, are ones 'between wholesalers * * * or between persons, firms, or corporations in competition with each other.' Consequently, not privileged under either fair trade act, they are illegal per se as price fixing agreements under the Sherman Act.
 
Defendant takes the position that the fair trade acts privilege vertical price fixing at different levels, between a manufacturer as seller and wholesalers as buyers, or at least between a manufacturer-wholesaler as seller and other wholesalers as buyers. The explicit exception to this privilege continues the Sherman Act prohibitions against horizontal price fixing by competitors at the same functional level. If this construction of the fair trade acts is not a valid one, defendant alternatively contends that genuine issues of material facts remain for resolution before plaintiff may prevail.
 
The facts, contested and conceded both in the pleadings and in the admissions of facts and answers to interrogatories by defendant, must be considered in order to determine whether or not the principal question posed may be summarily resolved without trial, and if so how.
 
Defendant is a corporation organized and existing under the laws of the State of Maryland and has its general offices in this judicial district where it transacts business. Defendant is one of the largest wholesalers of drug store merchandise in the United States. It conducts a nation-wide wholesale drug business, operating 74 wholesale drug divisions located in 35 states. Most of its wholesaled drug store merchandise consists of products manufactured, or supplied to it, by other concerns. In addition, at its plant at Bridgeport, Connecticut, the defendant itself manufactures a line of drugs, pharmaceuticals, cosmetics and toilet preparations, or 'McKesson products.' This case relates solely to restraints on the sale, resale, and distribution of the 'McKesson' products manufactured by defendant.
 
In the conduct of its wholesale drug business the defendant sells drug store merchandise, including McKesson products, to drug stores and other retailers located throughout the United States, for resale to ultimate consumers, and in the conduct of its wholesale drug business the defendant's wholesale drug divisions compete with other wholesalers. The defendant also sells McKesson products through wholesalers other than its own wholesale divisions for resale to drug stores and other retailers.
 
Neither the defendant's manufacturing division located at Bridgeport, Connecticut, nor its 74 wholesale drug divisions located in 35 states, are separately incorporated.
 
Based on admissions and answers of the defendant its sales of McKesson products to other wholesalers fall into four categories: (1) sales of McKesson products by the manufacturing division of the defendant to wholesalers whose trading areas are substantially the same as those of wholesale drug divisions of the defendant of whose trading areas, if not the same as those of wholesale drug divisions of the defendant, materially overlap the trading areas of the defendant's wholesale divisions; (2) sales of McKesson products by the manufacturing division of the defendant to other wholesalers whose trading territories do not substantially overlap the trading territories of the wholesale drug divisions of the defendant but in whose trading territories the manufacturing division of the defendant sells McKesson products direct to retailers; (3) sales of McKesson products by the wholesale drug divisions of the defendant to other wholesalers located in the same city or the same trading territory as a wholesale drug division of the defendant; (4) sales of McKesson products by the manufacturing division of the defendant and by the wholesale drug divisions of the defendant to a few wholesalers with respect to whom the present state of the record is inadequate to establish that the wholesaler competes with either the manufacturing division of the defendant or a wholesale drug division of the defendant.
 
With respect to category No. 1, although defendant's answer to the complaint denied 'existence of substantial competition with other wholesalers with respect to McKesson products', subsequent answers to interrogatories disclosed sales of such products during the fiscal year 1951-2 by defendant's manufacturing division to such wholesalers amounting to $ 283,462. In an admission of facts, it is stated that 'wholesale drug divisions of the defendant compete in the sale of McKesson products and other drug products with [such] wholesalers * * * in those places where the trading areas of such wholesalers overlap the trading areas of these wholesale drug divisions: New York, N. Y., Brooklyn, N. Y., Cairo, Illinois, Pittsburgh, Pa., Detroit, Mich., Huntington, W. Va., Akron, Ohio.'
 
Under category No. 2, i. e., sales by defendant's manufacturing division to wholesalers in areas which do not overlap those traded in by defendant's wholesale division but in which sales are made by defendant's manufacturing division direct to retailers, defendant's answers to interrogatories indicate some sales under such conditions direct to retailers who were parties to defendant's manufacturer-wholesaler fair trade agreement.
 
In category No. 3 covering sales of McKesson products by defendant's wholesale division to wholesalers, defendant's answers to interrogatories indicate that its wholesale drug divisions were requested by a vice-president of the defendant in charge of drug merchandising, to forward to the manufacturing division a list of the wholesalers to whom they sold McKesson products, and the wholesale drug divisions were instructed not to sell McKesson products to any other wholesaler until they had word from the defendant's manufacturing division that such wholesaler had signed a fair trade contract on those products. The defendant's wholesale drug divisions complied with these instructions and forwarded to the manufacturing division a list of wholesalers, upon receipt of which the manufacturing division requested each such wholesaler to execute a fair trade contract with the manufacturing division of the defendant.
 
There were 73 such wholesalers located in the same city or near a city or town where defendant's wholesale drug division traded. The annual aggregate of such sales is estimated by defendant to be about $ 200,000.
 
Various forms of defendant's manufacturer-wholesaler and manufacturer-retailer fair trade agreements were used in connection with these sales. Defendant has admitted that in the conduct of its business as a drug manufacturer it sells and ships McKesson products in interstate trade and commerce to wholesalers and retailers of drug store merchandise. The defendant's wholesale drug divisions, except the ones in New York and Brooklyn, sell and ship McKesson ...

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