243 F.

2d 274

NORMAN M. MORRIS CORPORATION.

v.
HESS BROTHERS, Inc., Appellant.
No. 11966.

United States Court of Appeals Third Circuit.

Argued November 15, 1956.
Decided March 26, 1957.

Irving W. Coleman, Northampton, Pa., (Coleman & Kutler, Northampton,

Pa., on the brief), for appellant.
Thomas A. Rothwell, New York City, (Hirsh W. Stalberg, Shapiro,
Rosenfeld, Stalberg & Cook, Philadelphia, Pa., Lewis G. Bernstein, New
York City, on the brief), for appellee.
Before BIGGS, Chief Judge, and McLAUGHLIN and STALEY, Circuit
Judges.
STALEY, Circuit Judge.

Defendant has appealed from the issuance of a preliminary injunction

restraining it from selling trade-marked "Omega" watch products at prices
below those stipulated by plaintiff, such course of conduct being made
actionable by the Pennsylvania Fair Trade Act, 73 P.S. 7 et seq.

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

prices lower than the resale prices stipulated by plaintiff.

3

Appellant makes three salient contentions. First, it argues that the Pennsylvania
Fair Trade Act authorizes only the producer or owner of the trade-mark to
stipulate fair trade prices, and not an exclusive distributor. Next, it argues that if
a distributor is authorized to stipulate the resale price, then the Act contravenes
both the Constitution of the Commonwealth of Pennsylvania and that of the
United States. Third, it contends that the McGuire Act, 15 U.S.C.A. 45 (a),
which exempts nonsigner provisions from the effect of the Sherman AntiTrust
Act, is unconstitutional.

Brief allusion to the historical development of Fair Trade Acts is expedient at

the threshhold of this discussion. In 1911, the United States Supreme Court in
Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373, 407-408, 31
S.Ct. 376, 55 L.Ed. 502, struck down an agreement to maintain resale prices as
an unlawful restraint of trade violative of the Sherman Anti-Trust Act, 15
U.S.C.A. 1 et seq. It was decided that vertical price fixing between
manufacturer and retailer is equivalent in effect to horizontal price fixing
among the retailers themselves, and therefore against public policy. It was
intimated in the opinion that vertical price fixing might be valid if authorized by
statute.1

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

In Old Dearborn Distributing Co. v. Seagram-Distillers Corp., 1936, 299 U.S.

183, 198, 57 S.Ct. 139, 146, 81 L.Ed. 109, the Supreme Court upheld the
Illinois Fair Trade Act,2 including its nonsigner provision, as affording "a
legitimate remedy for an injury to the good will which results from the use of
trade-marks, brands or names * * *." As an appropriate exercise of state police

power in protecting the supplier's continuing property interest from pricecutting and "loss-leader" practices, the Court held that the act violated neither
the due process nor the equal protection clauses of the Fourteenth Amendment.
7

The Sherman Act was changed by the Miller-Tydings Amendment, 15

U.S.C.A. 1, which validated resale price maintenance contracts in interstate
commerce, thus placing them beyond the sanctions of the Sherman Anti-Trust
Act. It was thought that the amendment affected nonsigners as well as signers;
however, the Supreme Court in Schwegmann Bros. v. Calvert Distillers Corp.,
1951, 341 U.S. 384, 71 S.Ct. 745, 95 L.Ed. 1035, decided that the MillerTydings Amendment applied only to consensual contracts and not to nonsigner
provisions. In 1952, the McGuire Act, 15 U.S.C.A. 45(a) (3), specifically
exempted nonsigner provisions from the Sherman Act.

We proceed now to discuss the question of whether an exclusive distributor for

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

" 1. Sale of goods bearing, or vending equipment of which bears trade-mark,

etc., permissible provisions

10

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

11

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

*****
12
13

" 2. Unfair competition, defined

14

"Wilfully and knowingly advertising, offering for sale, or selling any

commodity at less than the price stipulated in any contract entered into pursuant
to the provisions of section one of this act, whether the person so advertising,
offering for sale, or selling is, or is not, a party to such contract, is unfair
competition and is actionable at the suit of such vendor, buyer or purchaser of
such commodity." Act of June 5, 1935, P.L. 266, 1 & 2, as amended June 12,
1941, P.L. 128, No. 66, 1, 73 Purdon's Pa.Stat.Ann. 7 & 8.
15

The Pennsylvania Act, in providing that the "Vendor" may initiate the pricing
program, is similar to the statutes of twenty-four other states. See 1 CCH Trade
Reg.Rep. 3003. The "new-type" statutes provide, typically, that the resale
price may be stipulated only by the owner of the trade-mark or by a distributor
specifically authorized to establish said price by the owner of such trademark.
Twenty-two states have adopted the "new-type" statute. Our research discloses
no Pennsylvania case deciding whether the word "vendor" includes an
exclusive distributor. Several other jurisdictions with statutes similar to
Pennsylvania have discussed the problem. Appellant urges for our
consideration a lower court opinion from New York, Automotive Electric
Service Corp. v. Times Square Stores Corp., 1940, 175 Misc. 865, 24 N.Y.S.2d
733, in which it was held that a distributor of spark plugs may not stipulate fairtrade prices. The holding of that case must be confined to its factual situation; it
appeared that plaintiff was only one of more than a dozen distributors for the
State of New York alone. It was the fear that each might stipulate a different
price which prompted this decision.3 There are indications that the court would
have reached a different result if the plaintiff were an exclusive distributor over
a large area.4 In Bourjois Sales Corp. v. Dorfman, 1937, 273 N.Y. 167, 7
N.E.2d 30, 110 A.L.R. 1411, plaintiff was exclusive distributor for the State of
New York and defendant was a nonsigner who sold below prices stipulated by
plaintiff. The lower court had dismissed the complaint, although the Supreme
Court of the United States at its October Term had decided Old Dearborn
which, as we have said, held that a distributor may stipulate resale prices
binding upon nonsigners with knowledge without constitutional violation. The
New York Court of Appeals, feeling bound by Old Dearborn, reversed the
lower court judgment. It would seem that in New York an exclusive distributor
may stipulate resale prices, at least where he was authorized to do so by the
owner of the trade-mark.5 Continental Distilling Sales Co. v. Famous Wines &
Liquors, Inc., 1948, 273 App.Div. 713, 80 N.Y.S.2d 62.

16

The position of New Jersey, which also has a similar statute, is made clear by
the court syllabus in Frank Fischer Merchandising Corp. v. Ritz Drug Co.,
Ch.1941, 129 N.J.Eq. 105, 19 A.2d 454, 455:

17

"1. Price maintenance contracts made under the Fair Trade Act * * by a

distributor of products sold under the trade-mark of a manufacturer or producer

are valid although the distributor acts without the authority or consent of the
owner of the trade-mark. Schenley Products Co. v. Franklin Stores Co., 124
N.J. Eq. 100, 199 A. 402, followed."
18

In New Jersey, then, any distributor may stipulate resale price regardless of
whether he was authorized to do so by the owner of the trade-mark.6

19

One of the ostensible purposes of a Fair Trade Act is to protect the good will
inherent in a trade-marked brand from what is considered uneconomic
practices, deemed in one way or another to lessen the value of the commodity
in the eyes of the public. This being so, its provisions inure to the benefit of
those persons affected by the diminution in the value of the good will. In most
situations, this will be the producer or owner of the trade-mark. However, it is
quite apparent that an exclusive distributor for a large geographic area would be
affected quite seriously by the value of the good will inherent in the
trademark.7 In the case under consideration here, for example, plaintiff is the
exclusive distributor of "Omega" watches over the entire United States. This is
plaintiff's only business, and the annual sales run to several million dollars. It
spends approximately $750,000 a year in advertising, designed to enhance the
value of the good will attached to the "Omega" name. Certainly, any lessening
of the value of this good will affects plaintiff adversely.

20

We do not consider it of any importance that the owner of the trade-mark here
did not initiate the resale price maintenance contracts, or that the record does
not disclose that the owner specifically authorized plaintiff to do so, for the
Pennsylvania statute, unlike the "newtype" act, does not require specific
authorization. We are of the opinion that an exclusive distributor over the entire
United States,8 by virtue of his very franchise, is impliedly authorized by the
owner of the mark to set the resale price (see 1 Callmann, Unfair Competition
and Trade-Marks, 2d ed. 1950, 24.1(b), pages 468-469), and that the term
"vendor" in the Pennsylvania Fair Trade Act is broad enough to embrace the
plaintiff.

21

The second principal contention urged by appellant is that if the Pennsylvania

Fair Trade Act is interpreted to authorize one who is not the producer or owner
of the mark to stipulate a resale price binding upon a nonsigner, then the Act
violates the Constitutions both of Pennsylvania and the United States.

22

The Pennsylvania Supreme Court in Burche Co. v. General Electric Co., 1955,
382 Pa. 370, 115 A.2d 361, held the Pennsylvania Fair Trade Act

constitutional, and insofar as Pennsylvania's highest court interprets its own

constitution, we are bound by that determination. It is contended, however, that
in both the Burche case and the Old Dearborn case the owner of the mark set
the resale price. That is accurate as to the Burche case; it is not accurate as to
the Old Dearborn case, for in the latter it was the distributor who set the price.
299 U.S. at pages 186-187, 57 S.Ct. at page 141.9 The distinction nonetheless is
without significance for Old Dearborn decided that a distributor had a
proprietary interest in the trade-mark and could stipulate the resale prices
against non-signers without violating the due process or equal protection
clauses of the Fourteenth Amendment, and it was the existence of such a
proprietary interest which was the basis of the Burche decision.
23

Appellant intimates that Schwegmann invites us to restudy the economic

foundation of Fair Trade Acts.10 It is true that the Schwegmann case used
strong language in criticizing the nonsigner provisions in interstate
commerce,11 but until Old Dearborn is overruled it remains the law and we are
bound by it. See Sunbeam Corp. v. Wentling, 3 Cir., 1950, 185 F.2d 903.

24

The constitutionality of the McGuire Act is also challenged by appellant. The

attack is based on reasoning expressed in the case of Sunbeam Corp. v.
Richardson, D.C.W.D.Ky.1956, 144 F. Supp. 583, 592. There the court held:

25

"* * * [N]either the McGuire Act nor the Fair Trade Statute of Kentucky is a
lawful exercise of the police power. The portion of the McGuire Act which
seeks to impose fixed prices upon nonsigners of contracts contravenes these
constitutional provisions [the Fifth and Fourteenth Amendments] and is
invalid."

26

The court felt free to hold this, because it was of the opinion that Old Dearborn
was concerned only with the signers of fair trade contracts, and therefore not
controlling as to nonsigners. With this we do not agree. Although Old Dearborn
concerned a defendant who did in fact sign a resale contract, the defendant
questioned the contract's validity, and the Supreme Court assumed, for
purposes of decision, that he was a nonsigner. It said, at 299 U.S. 187, 57 S.Ct.
142:

27

"* * * The contract was assailed by appellant below [defendant] as ineffective,

and for present purposes we accept that view. It is plain enough, however, that
appellant had knowledge of the original contractual restrictions and that they
constituted conditions upon which sales thereafter were to be made."

28

This quotation, attended by the over-all rationale of the opinion based upon a
continuing property right in the goodwill proprietor, not dependent upon
contract, indicates to us that the case decided the question of constitutionality as
to both signers and informed dealers alike.12 See Sunbeam Corp. v. Wentling, 3
Cir., 1950, 185 F.2d 903, 905, vacated and remanded on other grounds, 1951,
341 U.S. 944, 71 S.Ct. 1012, 95 L.Ed. 1369, 3 Cir., 1951, 192 F.2d 7.

29

We do not now consider the problem which confronted us in Sunbeam Corp. v.

Wentling, 3 Cir., 185 F.2d 903, that is, the applicability of the Pennsylvania
statute to interstate transactions, for the injunction in question is limited to
"intrastate transactions."

30

For the foregoing reasons, the issuance of the preliminary injunction will be
affirmed.

Notes:
1

"Nor can the manufacturer by rule and notice,in the absence of contract or
statutory right, even though the restriction be known to purchasers, fix prices
for future sales." Dr. Miles Medical Co. v. John D. Park & Sons Co., 1911, 220
U.S. 373, 405, 31 S.Ct. 376, 383, emphasis supplied.

Old Dearborn construed the Illinois Fair Trade Act, Ill.Rev.Stat.1935, p. 3091,
c. 140, 8 et seq., Smith-Hurd Ann.Stat. c. 121, 188 et seq. It is
substantially identical to the Pennsylvania Fair Trade Act

The court stated the rationale of the case at 24 N.Y.S.2d 740: To permit the
distributor to establish the retail price "would produce intolerable confusion
and very largely defeat the purpose of the statute, for if a person other than
such owner can do it then a hundred others may do it and each may fix different
prices. Under such a holding the owner of the trade-mark might find his prices
fixed for him by the very cut-raters against whom the statute aims to protect
such owner."

The court found it necessary to distinguish the opinion of Bourjois Sales Corp.
v. Dorfman, 1937, 273 N.Y. 167, 7 N.E. 2d 30, 110 A.L.R. 1411, in which the
New York Court of Appeals reversed the dismissal of a fair trade complaint. At
24 N.Y.S.2d 739, the court said the case being considered differed from
Bourjois in that there "the plaintiff had the sole and exclusive right to use in the
State of New York the trade-marks, * * * and also that the plaintiff was the
owner of the business and good will in the State of New York associated with

the sale and distribution of said articles. Record on Appeal, fols. 29, 30."
5

It will be observed that this result reads into an "old-type" act the "new-type"
provision that a distributor may establish resale prices if he is specifically
authorized by the owner of the mark. A lower court in Wisconsin reached the
same conclusion. Hiram Walker, Inc. v. Goldman (Wisc.Cir., Milwaukee
County, 1938), 1 CCH Trade Reg.Rep. 3172.53

This broad interpretation of the "vendor" who may stipulate fair trade prices is
shared by a lower court in California. Parrott & Co. v. Somerset House, Inc.
(Calif.Super. for Los Angeles, 1937), 1 CCH Trade Reg.Rep. 3170.05. The
court there said: "The statute is sufficiently broad to include any contract made
by any owner with any vendee."

The Supreme Court in Old Dearborn alluded to the fact that a distributor has a
proprietary interest in the good will created by the trade-mark: "* * * Good will
is a valuable contributing aid to business sometimes the most valuable
contributing asset of the producer or distributor of commodities." 299 U.S. at
page 194, 57 S.Ct. at page 145. By way of comparison, see also Scandinavia
Belting Co. v. Asbestos & Rubber Works, 2 Cir., 257 F. 937, certiorari denied
1919, 250 U.S. 644, 39 S.Ct. 494, 63 L.Ed. 1186, where the court decided that
an exclusive United States distributor for a foreign manufacturer had enough
interest to register the trade-mark as its own

There is no basis here for the fear expressed in some decisions that various
distributors may stipulate different prices and thereby render a fair trade act a
travesty of its purpose. Here the plaintiff is the exclusive and sole distributor

Old Dearborn decided two cases considered together. The reports in the Illinois
Supreme Court discuss the facts more fully and indicate clearly that it was the
distributor who fixed the resale price and not the producer or owner of the
trade-mark. See Joseph Triner Corp. v. McNeill, 1936, 363 Ill. 559, 2 N.E.2d
929, 930-931, 104 A.L.R. 1435. At page 937 of 2 N.E.2d the court said: "* * *
Vertical price maintenance merely enables a producer, or his distributor, to set a
price at which the trade-marked commodity shall be sold to the consumer." See
also Seagram-Distillers Corp. v. Old Dearborn Distributing Co., 1936, 363 Ill.
610, 2 N.E.2d 940, 941, as an indication again that it was the distributor, and
not the producer, who stipulated the resale price

10

The Report of the Attorney General's National Committee to Study the

Antitrust Laws (March 31, 1955), page 154, concluded that the Miller-Tydings
and McGuire Act amendments should be repealed:

"* * * [T]he throttling of price competition in the process of distribution that

attends `Fair Trade' pricing is, in our opinion, a deplorable yet inevitable
concomitant of federal exemptive laws. Moreover, whatever may be the
underlying legislative intent, any operative `Fair Trade' system facilitates
horizontal price-fixing efforts on the manufacturing and each succeeding
distributive level. And the prominent existence of a federal price-fixing
exemption not only symbolizes a radical departure from National antitrust
policy without commensurate gains, but extends an invitation for further
encroachment on the free-market philosophy that the antitrust laws subserve.
"We therefore recommend Congressional repeal both of the Miller-Tydings
amendment to the Sherman Act and the McGuire amendment to the Federal
Trade Commission Act, thereby subjecting resale-price maintenance, as other
price-fixing practices, to those Federal anti-trust controls which safeguard the
public by keeping the channels of distribution free." See also Note, 16 U. of
Pitt.L.Rev. 50 (1954).
11

"* * * If a distributor and one or more retailers want to agree, combine, or

conspire to fix a minimum price, they can do so if state law permits. Their
contract, combination, or conspiracy hitherto illegal is made lawful. They
can fix minimum prices pursuant to their contract or agreement with impunity.
When they seek, however, to impose price fixing on persons who have not
contracted or agreed to the scheme, the situation is vastly different. That is not
price fixing by contract or agreement; that is price fixing by compulsion. That
is not following the path of consensual agreement; that is resort to coercion
"* * * Therefore, when a state compels retailers to follow a parallel price
policy, it demands private conduct which the Sherman Act forbids. See Parker
v. Brown, 317 U.S. 341, 350, 63 S.Ct. 307, 313, 87 L.Ed. 315. Elimination of
price competition at the retail level may, of course, lawfully result if a
distributor successfully negotiates individual `vertical' agreements with all his
retailers. But when retailers are forced to abandon price competition, they are
driven into a compact in violation of the spirit of the proviso which forbids
`horizontal' price fixing. A real sanction can be given the prohibitions of the
proviso only if the price maintenance power granted a distributor is limited to
voluntary engagements. * * *." Schwegmann Bros. v. Calvert Distillers Corp.,
1951, 341 U.S. 384, 388-389, 71 S.Ct. 745, 747, 95 L.Ed. 1035. (Italics in
original.)

12

On the general question of the constitutionality of the Fair Trade Acts and the
McGuire Act, see Schwegmann Bros. Giant Super Markets v. Eli Lilly & Co., 5
Cir., 205 F.2d 788, certiorari denied 1953, 346 U.S. 856, 74 S.Ct. 71, 98 L.Ed.

369