Mr. JOHN W. ANDERSON,

BERGSON & BORKLAND, Washington, D.C., March 20, 1963.

President, Quality Brands Associates of America, Inc.,
Gary, Ind.

DEAR MR. ANDERSON: You have requested my opinion as to the constitutional reach of the quality stabilization bill which was introduced in the House of Representatives on February 11, 1963, as H.R. 3669 of the 88th Congress, 1st session, and which differs substantially from the Federal fair trade bills introduced in earlier Congresses.1

It is my opinion that the provisions of the quality stabilization bill are fully within Congress' constitutional power to regulate commerce and that they comply with constitutional requirements relating to due process. The courts have consistently recognized that legislation authorizing a person to regulate the resale of goods identified by his distinguishing brand, name, or trademark is a reasonable exercise of legislative power.

The stated purpose of the quality stabilization bill is "to promote quality and price stabilization, to define and restrain certain unfair methods of distribution and to confirm, define, and equalize the rights of producers and resellers in the distribution of goods identified by distinguishing brands, names, or trademarks, and for other purposes." To accomplish this purpose, the bill would amend section 5(a) of the Federal Trade Commission Act by adding at the end thereof new paragraphs (7) to (17), inclusive. In substance, the bill provides that the owner of a brand, name, or trademark retains the property rights therein, and in the trade and public goodwill symbolized thereby, after the sale or transfer of the goods to which such brand, name, or trademark relates (par. 7); that he may revoke the right of persons to utilize such brand, name, or trademark in reselling identified merchandise where the seller engages in "bait merchandising practices," sells or offers to sell at other than the currently established resale price or at a price not within a currently established resale price range or publishes misrepresentations concerning the identified goods (par. 8); that the owner may sue in any U.S. District Court, regardless of the amount in controversy, for damages and injunctive relief where his brand, name, or trademark is utilized after the right to use it has been revoked (par. 10); and that the rights and remedies of the legislation shall be available to any owner even though he competes at any level of distribution with any reseller offering goods identified by the owner's brand, name, or trademark (par. 15).a The availability of the rights and remedies provided by the legislation is conditioned by the requirement that goods usable for the same general purpose be available to the public from sources other than the owner of such brand, name, or trademark and that such other goods be in free and open competition with the goods identified by the brand, name, or trademark (par. 8). The bill also provides a forum for suit by a bona fide purchaser of goods subject to the provisions of the act against any owner, not otherwise subject to process, who in utilizing the provisions of the act publishes any misrepresentation as to the size, capacity, quality, condition, model or age of the goods in question and upon which misrepresentation the purchaser has relied (par. 8).3

1 A companion bill, S. 774, was introduced in the Senate on Feb. 11, 1963, by Senator Humphrey. With the single exception that H.R. 3669 contains an exemption for the sale of prescription drugs, the two bills are the same.

Other provisions preserve the owner's right to bring actions otherwise provided by law for wrongful use of a brand, name, or trademark (par. 12); provide that the bill shall reach all acts and transactions in or affecting commerce which Congress may lawfully regulate (par. 13); define certain terms as used in the act and provide that an established resale price and resale price range shall be uniform at each level of distribution within each market area determined by the owner of the brand, name, or trademark (par. 14); and provide that a trademark owner may establish a resale price or price range for the resale of a combination of two or more items of goods different from the sum of the currently established prices for which the items are sold individually, and may engage in other promotional activities not made unlawful by any other statute (par. 14).

Other provisions protect resellers against any unfair or confiscatory consequences of revocation of their right to use a brand, name, or trademark (par. 9); and provide that (a) lack of due diligence by a trademark owner in revoking the right to use a trademark of offending resellers competing with a defendant or (b) sale by the trademark owner of the same kind of goods to another reseller under terms more favorable or at lower prices than those under which the owner has sold such goods to the reseller involved in the revocation proceeding, will constitute defenses (par. 11). The bill also contains exemption for certain types of sales (par. 16).

The central concept of the bill is that the brand, name, or trademark used to identify goods constitutes a separate property interest severable from the goods themselves, and, like other property interests, entitled to be protected by law. The Supreme Court in Old Dearborn Disturbing Company v. Seagram-Distiller's Corp. (299 U.S. 183, 194 (1936)), expressly recognized this concept, saying: "We are here dealing not with a commodity alone, but with a commodity plus the brand or trademark which it bears as evidence of its origin and of the quality of the commodity for which the brand or trademark stands. Appellants own the commodity; they do not own the mark or the goodwill that the mark symbolizes. And goodwill is property in a very real sense, injury to which, like injury to any other species of property, is a proper subject for legislation." Applying this concept, the Court held that the Illinois Fair Trade Act which proscribed "the sale of identified goods at less than the price fixed by the owner of the mark or brand * * *" was not "so arbitrary, unfair, or wanting in reason as to result in a denial of due process" (299 U.S. at 194-45). The principle was reiterated in the case of G.E.M. Sundries Co. v. Johnson & Johnson, Ine. (283 F. 2d 86 (9th Cir. 1960)), where the Court said:

"Since the owner of the trademark has a continuing and protectible interset in the property of trademarked goods owned by another, he has a right, in the protection of his interest, to impose a condition upon the resale of that property. Since the nonsigning retailer acquired the commodity with notice of the condition, enforcement did not violate due process. 283 F. 2d at p. 92.”

See also Parke, Davis & Co. v. Green Willow, Inc., (205 F. Supp. 346, 350 (S.D.N.Y. 1962).

The importance of protecting the property interest represented by the brand. name, or trademark, as this bill seeks to do, was clearly set forth in a recent opinion of the Supreme Court of Pennsylvania, Mead Johnson & Co. v. Martin Wholesale Distributors, Inc. (1962 CCH Trade Cases par. 70, 374 (S. Ct. Penna, 1962)). The court stated:

***** when a meritorious product acquires a certain good standing with the public, it is necessary to uphold its standard by prohibiting its sale at prices which presumably would be below or close to the cost price. If one dealer cuts prices below or close to the cost price, another dealer may cut even lower. This then, could be followed by still further lower cutting until the slashing would fall below the waterline, sinking completely the ship of good trade" (1962 Trade Cases at pp. 76, 544).

See also Schwegmann Bros. Giant Super Markets v. Eli Lilly & Co. (205 F. 2d 788, 791 (5th Cir. 1953), cert. denied, 346 U.S. 856, reh. denied, 346 U.S. 905); Youngs Rubber Corp. v. Dart Drug Corp. of Maryland (175 F. Supp. 832 (D. Md. 1959)). There would appear to be no difference in principle between unauthor ized price cutting in the resale of identified goods and the additional practices listed in paragraph 8.

Since paragraph 13 expressly limits the bill's application "to all acts and transactions *** in or affecting commerce, which Congress may lawfully regulate," it clearly is not subject to attack on the ground that it exceeds Congress' power to regulate commerce. In its jurisdictional scope, the bill is patterned after the Lanham Trademark Act, which grants remedies against persons who, in commerce, make unauthorized use of registered trademarks. Section 45 of the Lanham Act, paralleling paragraph 13 of the quality stabilization bill, defines commerce to mean "all commerce which may lawfully be regulated by Congress." Thus, both the Lanham Act and the quality stabilization bill contemplate the full exercise of Congress' commerce power; and neither can be said to go beyond constitutional limitations upon the exercise of that power.

To illustrate the manner in which the quality stabilization bill would operate if enacted, it will be helpful to consider a hypothetical situation. Suppose the XYZ company manufactures and sells throughout the United States a product identified by the trademark "XYZ." This identified product is resold through numerous retail outlets. Assume also that there are products produced by other than the XYZ company which are usable for the same general purpose as is "XYZ" and are in free and open competition therewith. Under such conditions, it will be optional with the trademark owner whether to use the act in the marketing of his products. If the XYZ company elects to use the act, the reseller will receive notice of the conditions under which his right to use the "XYZ" trademark will be revoked. When a reseller engages in "bait merchandising,"

publishes a misrepresentation or misrepresentations concerning the "XYZ" product, or sells it at unauthorized prices, the company notifies the reseller that his right to use the "XYZ" trademark in the resale of the product in question has been revoked. Should the reseller, after receiving proper notice of the revocation, continue to employ the "XYZ" mark in selling the product in question to the public, the XYZ company can bring suit without respect to the amount in controversy for damages and/or injunctive relief in any district court of the United States in the district in which the defendant resides or is found or has an agent.

Where a defendant has used the "XYZ" mark in interstate commerce, the court obviously has jurisdiction to entertain the action. Moreover, since paragraph 13 of the bill invokes the full sweep of Congress' power, there is no jurisdictional bar to a suit against persons selling wholly within a State, where such intrastate sales affect interstate commerce. Wickard v. Filburn (317 U.S. 111 (1942)); Mandeville Island Farms, Inc. v. American Crystal Sugar Co. (334 U.S. 219 (1948)).

The extent to which proprietors of brands, names, or trademarks can secure relief against intrastate resellers is made clear by cases arising under the Lanham Trademark Act, which, as indicated above, is parallel to the quality stabilization bill in its jurisdictional provisions. A case in point in Pure Foods, Inc. v. Minute Maid Corp. (214 F. 2d 792 (5th Cir. 1954), cert. denied, 348 U.S. 888). Plaintiff in that action owned the trademark "Minute Maid" which it used in interstate commerce to identify frozen fruit juice concentrate. Defendant sold frozen meats solely within the State of Florida under the designation "Minute Made." Referring to the all-embracing definition of "commerce" in the act, the court commented:

"It is too well settled to require citation of authority that an activity local in nature but which interferes with the free flow of interstate commerce or exercises a substantial economic effect on interstate commerce may be regulated by the Congress" (214 F. 2d 795).

Accordingly, the court held that the complaint, although it did "not charge that the defendant distributes its products in interstate commerce, *** [did] allege damage to plaintiff's goodwill established in interstate commerce" (214 F. 2d at 796). To like effect is Lyon v. Quality Courts United (249 F. 2d 790 (6th Cir. 1957). In that case defendant used plaintiff's registered trade and service marks for a motel which it operated in Ohio. Objection was raised on jurisdictional grounds because the infringing use occurred solely within the confines of a single State. The court rejected this contention, stating:

"Facts showing the plaintiff's own use of its mark in interstate commerce were clearly set out, as were facts alleging a substantial economic effect upon that use resulting from the defendants' intrastate infringement" (249 F. 2d at 795). In National Tuberculosis Ass'n. v. Summit County T. & H. Ass'n. (122 F. Supp. 654 (N.D. Ohio, 1954)), defendant was charged with infringing the plaintiff's trademark used in its campaign literature and on Christmas seals. Despite the fact that there was no proof that defendant ever transported or sold the infringing seals outside of the State of Ohio, the court held that there was jurisdiction to enjoin the local infringement. In so holding, the court asserted:

** it scarcely can be doubted that defendants' Christmas seal sale in Summit County has adversely affected and will aversely affect the plaintiff's fund solicitation there. The activities of these defendants multiplied in other places would seriously threaten plaintiff's national organization and its nationwide tuberculosis program" (122 F. Supp. at 657).

Still another pertinent authority is Admiral Corp. v. Penco, Inc. (106 F. Supp. 1015 (W.D.N.Y. 1952) affirmed, 203 F. 2d 517 (2d Cir., 1953)), where defendant had utilized the trademark “Admiral" in selling vacuum cleaners and other appli

4 The exercise of the right of revocation by the XYZ company must be within 90 days of the act of the reseller giving rise to such action. The revocation itself must be carried out by means of a "written and dated notice." Moreover, if revocation is caused by a sale at an unauthorized price, the reseller previous to the sale must have received written notice of the owner's currently established retail price or price range. It should additionally be noted that nothing in the bill can prevent the reseller from continuing to sell the "XYZ" product so long as he does not use the "XYZ" mark in so doing.

Injunctive relief, when granted, shall remain in effect 1 year from the date it is granted unless it is the 2d or a subsequent such injunction issued against the same defendant in favor of the same plaintiff, in which case it shall be a permanent injunction. Any injunction upon petition of such plaintiff may be vacated unconditionally by the court granting it.

ances through retail stores which it operated in New York State. In upholding jurisdiction under the Lanham Act, the court observed:

**** if defendant's use of the mark Admiral is allowed to continue such use by defendant, even if wholly intrastate, would result in a falling off of plaistiff's sales in the area where defendant operates" (106 F. Supp. at 1018).

In Time, Inc. v. Life Television Corp. (123 F. Supp. 470 (D. Minn. 1954)), the publishers of Time magazine sued for infringement of the trademark "Life" by defendent, which advertised and sold television sets in Minnesota under a mark closely imitating the trademark "Life." In upholding jurisdiction under the Lanham Act, the court declared:

"It is clear that Congress may constitutionally regulate wholly intrastate activity if it has a substantial economic effect upon interstate commerce. There fore, this court has jurisdiction of the claim for trademark infringement thoug the defendants' business is wholly intrastate-since the infringement, if substantiated, will undoubtedly affect the interstate business of plaintiff" (123 F. Supp. at 473-474).

And in S. C. Johnson & Son, Inc. v. Drop Dead Co. (201 F. Supp. 442, 443 (S.D. Cal. 1961)), the court stated that:

***** it is a misconception that actual sales by an infringer must be made in interstate commerce before the Lanham Act applies. It is not the actual sales made in interstate commerce, but the effect of them which is the norm to be applied."

See also Iowa Farmers Union v. Farmer's Education and Cooperative Union of America (247 F. 2d 809, 815-16 (8th Cir. 1957)); Stauffer v. Erley (184 F. 21 962, 967 (9th Cir. 1950)); Nielson v. American Oil Co. (203 F. Supp 473, 476 (D. Utah 1962)); Liberty Mutual Insurance Co. v. Liberty Insurance Co. of Teras (185 F. Supp. 895, 902-3 (E.D. Ark. 1960)); Cf. Peter Pan Restaurants v. Peter Pan Diner (150 F. Supp. 534 (D. R.I. 1957)).

The Supreme Court has never had occasion to interpret and apply the Lanham Act to infringing use occurring within the borders of a single State. In Steele v. Bulova Watch Co. (344 U.S. 280, 283 (1952)), however, the Court observed that the Lanham Act "confers broad jurisdictional powers upon the courts of the United States." In the light of this broad jurisdictional grant, the Court held that an infringing use occurring in Mexico but adversely affecting the interstate and foreign commerce of plaintiff could be enjoined under the act.

Since an equally broad jurisdictional grant is contemplated by the quality stabilization bill, I conclude that decisions thereunder would conform to those under the Lanham Act. It follows, therefore, that the owner of a brand, name, or trademark used in interstate commerce could invoke the judicial remedies created by the quality stabilization bill against the use in intrastate commerce of any act or practice enumerated in paragraph 8 of the bill where such use adversely affects the interstate business of the owner by impairing the goodwill inhering in his brand, name, or trademark.

Sincerely yours,

HERBERT A. BERGSON.

Mr. DINGELL. The record will remain open for a period of 10 days for any additional information that any interested party desires to place therein.

And with that, unless there is another witness present who desires to be heard, the committee will stand adjourned at the call of the Chair.

(The following material was submitted for the record :)

STATEMENT OF RANDOLPH J. SEIFERT IN SUPPORT OF QUALITY STABILIZATION

BILL, H.R. 3669

As an attorney engaged in the general practice of law in New York City, and as a member of the firm of Russell, Seifert & Norton, I represent several manufacturers and organizations interested in the protection of trademarks, and thus vitally interested in the quality stabilization bill, H.R. 3669.

However, the issue goes much deeper than the moderate trademark protection afforded the manufacturer, the reseller, and the consumer by the quality stabilization bill.

The more fundamental issue is, Shall Congress reassert its constitutional power to make economic policy-particularly antitrust policy-or shall Congress continue to permit the usurpation of its power of policymaking by the Government's enforcement agencies and by the courts?

Viewed broadly, the quality stabilization bill, if enacted, will be an assertion by Congress of its basic constitutional power to fashion and define national economic policy. This measure relates to the legality or otherwise of certain intrabrand restrictions. This bill says it will be lawful for a trademark owner to announce conditions governing the use of his property, his trademark; that it will be lawful for a brand name owner to prevent his own brand from being forced to compete with itself.

This bill will establish the type of distribution system a producer may lawfully employ in presenting his own trademarked product to consumers. This is not a simple area, either in business or in the law, especially as we have moved from an agrarian to a largely industrial society, and brand names, trademarks and Government-imposed limitations on distribution practices seem now to be an essential and inevitable part of the business process.

Representatives of the Department of Justice and the Federal Trade Commission have appeared and condemned this proposed legislation as being a restraint of trade, and an interference with the free play of economic forces. It is my earnest conviction that just the opposite is true that the enactment of this measure will liberate businessmen as well as channels of distribution from arbitrary, capricious, inconsistent, and illogical restrictions, imposed unilaterally, by the two coordinate branches of Government. Enactment of this legislation will enable a brand name owner to create something of value-a quality product marketed through a soundly operated distribution system.

Let me point out that in today's confused morass of antitrust law, as it relates to marketing, the only thing certain is that a restraint of trade is a restraint of trade simply because the U.S. Supreme Court says so. The reading of the recent opinions of the divided court in the White Motor case should dispel the last doubt as to who is making economic policy for American business. The time-honored franchise system of White Motor's was under attack, and three Justices of the Supreme Court thought that the White Motor franchise arrangement should be declared illegal per se-meaning that the court would not consider any evidence in justification, explanation, or vindication of White Motor's franchise system.

Please note that not even homicide is a per se offense-it can be justified. There are many mitigating circumstances, such as self-defense or accident. It is submitted that only Congress has the facilities, and only Congress has the constitutional power to condemn business practices as undesirable restraints, and impose the sanction of illegality threon.

The next matter that should be highlighted is the so-called States rights amendment proposed by the opponents of the quality stabilization bill. The judicial-legislative contest over this delicate area of economic policy also exists on the State level. It is State courts, not State legislatures, who are defining their economic policy in the most restrictive manner by declaring illegal and invalid sound and creative business practices of long standing. The proposed amendment therefore should be called a State court rights amendment.

However, there is another reason that makes the so-called States rights amendment specious in this context. It is Federal legislation, the Sherman Act as well as the Federal Trade Commission Act, that is creating the problems in this area. It is Federal law that establishes national antitrust policy, one that is hostile to any kind of planning or controlling of distribution. It is restrictive interpretations of the Sherman Act and the FTC in its application to the distribution of a product that makes orderly marketing well nigh impossible today.

As an example of restrictive interpretations, the Chairman of the FTC recently told a group of appliance manufacturers in New York that a manufacturer's interest in the distribution of his products should terminate as a matter of law at the shipping platform. In other words, the manufacturer produces the product, gets paid for it, and at that point loses all legal or justifiable business interest therein-despite the fact his trademark, his own property, is on the product.

So the proposing of a so-called States rights amendment would only serve to frustrate and defeat the purpose of this legislation. The States right banner is always most attractive, and it certainly was most astute of the opposition