have patience with manufacturers who intend to make a series of small price increases rather than one large one.

The eventual effect of the program upon retail prices must depend upon such questions as the degree to which private brands are substituted for manufacturers' brands, the efficiency with which systems for discovering and suing violators of the contracts can be worked out, the extent to which manufacturers are willing to reduce their own profit margins in order to keep retail prices low, and the degree to which retail costs are raised by a shift of sales emphasis from price to other forms of appeal.

The direct effect of resale price contracts upon the level of retail prices is probably not the most significant aspect of these contracts. The contracts necessarily destroy the opportunity for leadership by any distributor in reducing prices and operating margins. Ostensibly striking at loss-leader selling tactics by mass distributors, they are ill adapted to check such tactics; for mass distributors can readily develop private brands as leaders. The contracts are well adapted, however, to prevent the general price policy of a distributor from reflecting his relative efficiency and to prevent competitive pressure from pushing distributors toward greater efficiency and lower operating margins. In the words of the vice-president of E. R. Squibb & Sons,

"If some large retailer or wholesaler is more efficient than his smaller competitors as he claims he is-then he should certainly be able to operate even more successfully on a basis of parity in price, and not set up a hue and cry for advantage over his smaller competitors."

On contract goods, distributors who come to a dead level in price must turn to other forms of sales appeal; and hence we may expect an increase of the costs of selling in trades in which contracts are prevalent.

In industries in which manufacturers want to agree upon prices, resale price contracts afford a ready means; for in a series of resale price contracts with the same distributors at the same prices the effect of direct collusion may be secured through the distributors as intermediary, and a breach of the maintained price by any distributor may be forbidden. Indeed, the effort of the law to distinguish resale price maintenance from horizontal price agreement is probably untenable. In industries in which coercive pressure cannot be exerted upon the competing manufacturers, producers have been reluctant to issue resale price contracts for fear that competing products would obtain the advantage of a lower price at retail. Thus the very existence of a system of resale prices in fields where products are enough alike for price competition becomes possible only by tacit understanding that all producers will act alike. Similarly, only producers of goods for which sales effort can overcome price differences are in a position to raise prices under such a contract without knowing that other producers will do likewise. Though the law ostensibly applies only to products which are in open competition, it can be used effectively only for products sold collusively or possessing substantial attributes of monopoly.

It appears probable that resale price contracts can be adapted to only a minority of our total retail sales. In some industries products are not identifiled by trademark or brand. In others, an effort to maintain prices would lead to buying on specification, the victory of distributors' private brands, direct sale from manufacturer to user, or some other means of escaping the contracts. At present such contracts are general in the sale of drugs, cosmetics, cigars, books, and liquor, and occasional in a number of other industries. Professor Grether estimates that not more than 15% of the trade of the country will come to be done under such contracts. If such an estimate is correct, the dangers just discussed arise in a limited field; but a further danger arises because of the limitation. The sheltered distributive trades will necessarily be more attractive than those exposed to the risks of price competition, and will attract an unduly large number of new concerns. Hence the logical next step for the retail groups will be to prevent the sale of pricemaintained products outside their trade and to limit entry to the trade. Already the National Association of Retail Druggists has begun to complain of the sale of package drug items by others than druggists. The probable future is indicated by a statement concerning the situation in the English drug industry, where prices have long been maintained, by the secretary of the British National Pharmaceutical Union:

"In our country all proprietary medicine vendors have to be licensed and we woke up to the fact that the number of those vendors was increasing at the rate of eight to nine thousand per year.

"It is a fact that owing to the success of the price maintenance movement initiated by the P. A. T. A. 38 years ago, the prices of proprietary medicines are in fact maintained and the 20 to 30 per cent profit which those articles yield has proved a tremendous temptation to other shopkeepers to invade the proprietary medicine business. Grocers and other traders with large turnovers in household goods are accustomed to a gross profit of 12%% to 15%; hence any goods selling at a protected price which yield 25% gross are regarded as extremely profitable merchandise lines to be cultivated.

"Hence you will see that the success of our own war to prevent price cutting within our own ranks has produced an army of competitors in our own business. . . .

"My organization decided that it would be reasonable to ask manufacturers of proprietary medicinal and surgical goods to restrict their channel of distribution to the chemists' trade.

"We ask the proprietors of these articles to sign an agreement for seven years undertaking only to sell these goods through chemists. In return we, on behalf of the chemists, undertake to give those goods a free market and the utmost possible sales assistance, plus a really friendly atmosphere in the shops.

"On the other side, we ask all our members to refrain from giving window, counter or other displays of any kind to the goods or advertising material of any article within our specification which is not upon our list. The method of working the scheme is simply that of requiring the manufacturer to sell his goods, whether direct to the retail chemist or to the wholesaler, with a condition attached that these goods are accepted on condition that they are for retail sale in a chemist's shop in the one case and that the wholesaler will only resell them to retail chemists." Both the minimum price laws and the resale contract laws express the resistance of established distributors to change. Economists have often pointed out that progress in distribution has not kept pace with manufacturing, and that costs of distribution should come down. New types of distributive enterprise which offer promise of such a development are the targets of this restrictive legislation. Thus these laws are the distributional prototypes of the earlier statutes by which a handicraft society sought to limit or prevent the growth of modern manufacture. Public bodies have no doubt been more receptive to such legislation because some of the new distributional forms are large enterprises, which, it is thought, may become monopolistic. A vigorous antitrust policy could have dealt with the danger of monopoly, and still can; whereas the resale price statutes themselves create new chances for collusive restraint of trade. Antitrust action to meet any danger of distributional monopoly would raise fewer problems and involve fewer risks than the efforts to remedy a past neglect of the antitrust laws by the development of elaborate public and private controls over retail prices.

EXHIBIT No. 2794

RECOMMENDATIONS CONCERNING PATENTS'

The Department of Justice suggests:

The record before the Temporary National Economic Committee abundantly demonstrates that patent practices now current, under the assumed protection of existing statutes and judicial decisions, greatly exceed the measure of privilege which might presumably be deemed necessary "to promote science and useful arts," and seriously invade the deep-rooted national policy against monopoly and restraints of trade, of which the antitrust laws are the most popular reflection. It seems clear that:

1. It should be made unlawful for any person to sell or assign a patient, or to grant any right or license under a patent, on any condition which restricts the assignee or grantee in respect of the amount of any article which he may pro

* Extract from Senate Document No. 95, 76th Cong., 1st sess.

duce under the patent, the price at which he may sell any such article, the purpose for which or manner in which he may use the patent or any article produced thereunder, or the geographical area within which he may produce or sell such article. The foregoing prohibitions should be supplemented by a further prohibition against any other restriction embodied in a condition to any such assignment or license, which would tend substantially to lessen competition or to create a monopoly, unless such restriction is necessary to promote the progress of science and useful arts. These prohibitions, however, should not apply to any assignment of a patent or any grant of a license under a patent for use exclusively outside the United States and its territories and possessions.

In short, the owner of a patent would enjoy the full patent monopoly if he elected to retain the exclusive privilege of producing or selling under the patent himself. He would be free to assign the patent; to grant an exclusive license; and to grant licenses to anyone he pleased. But, if he grants a license, the license must be general and unrestricted, unless he is prepared to demonstrate that a particular restriction (other than restrictions in respect of price, production, use or geographical area) is necessary to promote science and useful arts. Restrictions in respect of price, production, use, or geographical areas would be unconditionally outlawed.

2. It should be made unlawful for any person to whom a patent had been issued or who has in any other way acquired any patent or any interest in or right or license under a patent, to sell, lease, or otherwise dispose of any article produced or sold under such patent or any such right or license on any restrictive condition of the kind described in paragraph 1.

3. It should be made mandatory for any sale, assignment, or other disposition of any patent or of any interest in or right or license under a patent to be evidenced by an instrument in writing. Similarly, any condition, agreement, or understanding relating to any sale or other disposition of any article produced or sold under a patent by a person to whom such patent has been issued or who has in any other way acquired such patent or any interest in or right or license thereunder, should be required to be evidenced by an instrument in writing. The seller or assignor in such case would be required to file a copy of such written instrument with the Federal Trade Commission within 30 days after execution. A register of these copies should be kept by the Federal Trade Commission, and both the register and the copies should be held available for inspection by the Attorney General, the Commissioner of Patents, or any officer designated by either.

4. No action based upon a charge of infringement of any patent, whether for damages, for an injunction, or for any other relief, should be permitted against any licensee under a patent or against any purchaser or lessee of any article unless either (a) the plaintiff has previously prosecuted to successful judgment an action against the grantor of the license or the seller or lessor of the article, as the case may be, for infringement arising out of or in connection with the granting of such license or the sale or lease of such article; or (b) jurisdiction over the grantor, seller, or lessor cannot be obtained in any court of the United States.

A provision to the foregoing effect would help meet one of the most serious abuses in the patent field: The use of litigation as a deliberate weapon of business aggression, rather than as an instrument for adjudicating honest disputes. 5. If any pereson who owns a patent or an interest in or exclusive right under a patent, violates any of the prohibitions described in paragraphs 1 and 2 above, he should forfeit his patent or his interest in or right under a patent to the United States, and such forfeiture should be recoverable in a civil action against such person by the United States. It should be provided that, upon a proper showing in such an action, a judgment should be entered requiring the defendant to assign his patent, or interest in, or right under a patent, to the United States, such assignment to be received by the Secretary of the Treasury in the name of the United States. Thereafter, the patent or patent right would be offered for sale under the direction of the Secretary of the Treasury in the manner prescribed by law.

A provision to the foregoing effect would adapt to the patent situation a familiar principle of law: That the abuse of a privilege granted by the Statee. g., public-utility franchises, licenses to sell securities, etc.-should result in forfeiture of that privilege. In this case, it seems wise to provide that the patent should be seized and resold, and so kept alive for useful exploitation, rather than to provide for its cancelation.

6. It should be made clear that the provisions described in paragraphs 1 to 5 shall be applicable to any extension, renewal, or modification of any existing license, contract of assignment, or contract of sale or other disposition, with the same force and effect as to any new license, sale, assignment, or other disposition.

EXHIBIT No. 2795

A SUMMARIZED REPORT OF THE LEGAL SUBCOMMITTEE OF THE INTERDEPARTMENTAL COMMITTEE ON INTERSTATE TRADE BARRIERS

FOREWORD

Following the trade barrier hearings before the Temporary National Economic Committee held in Washington in March 1940. The Interdepartmental Committee on Interstate Trade Barriers (Note No. 1) felt that the next logical step in an approach to a solution of this question would be:

1. To survey existing Federal legislation in order to determine how far such legislation can be used either directly to set aside or indirectly to influence the modification of state laws and local ordinances which are barriers to trade, and 2. To formulate, so far as constitutional limitations permit, drafts of such additional legislation, Federal and State, as may be needed.

A Legal Subcommittee (Note No. 2) was set up and assigned this task; part one of which has been completed and is herewith summarized.

December 1940.

PAUL T. TRUITT, Chairman Interdepartmental Committee on Interstate Trade Barriers.

REPORT OF THE LEGAL SUBCOMMITTEE OF THE INTERDEPARTMENTAL COMMITTEE ON INTERSTATE TRADE BARRIERS

Subject: Report of the legal subcommittee with respect to administrative action which may be taken to combat interstate trade barriers pursuant to existing Federal legislation. (Note No. 3).

I. Through the cooperative action of interested Federal agencies, the Interdepartmental Committee on Interstate Trade Barriers and the Council of State Governments, considerable pursuasive pressure could be exerted in forestalling the enactment of trade barrier legislation and in combating trade barrier legislation which has been enacted.

II. State and local laws may, on their faces, constitute a restraint on interstate trade or they may sanction administrative action which can be used to this end. Also, State or municipal officers may act ultra vires to suppress or restrain interstate commerce. The filing of briefs amicus curiae, by the Department of Justice, injunction suits under the theory of the Debs case, and antitrust prosecutions are techniques which may be effective in combating these restraints of trade practices.

III. Concerted policy on the part of Federal agencies, of bringing cases before the United States Supreme Court which would clarify and possibly broaden the existing judicial concept of interstate commerce, might materially aid litigants who are burdened by trade-restricting State laws.

IV. The Federal Trade Commission is empowered to undertake an investigation of interstate trade barrier problems.

V. A uniform seed law is now being prepared by the Department of Agriculture and the standard milk ordinance of the Public Health Service has been adopted by many communities. The Interdepartmental Committee on Interstate Trade Barriers might effectively assist in advancing this type of administrative action.

VI. The Surgeon General may call special conferences of State health boards and of State health officers. Moreover, he is authorized to detail personnel to cooperate in activities such as are being carried out by the Interdepartmental Committee on Interstate Trade Barriers.

VII. Under the Federal Food, Drug and Cosmetic Act, the existence of trade barriers with respect to any commodity might well be taken under consideration in prescribing regulations. In this connection, reference is made to State labeling laws, to State laws specifying sizes of containers and to State laws governing the quality of milk and cream. Moreover, it is believed that administrative action publicizing the situations in which barriers to interstate shipments have developed in this field might be possible under the Federal Food, Drug and Cosmetic Act.

VIII. Under the Agricultural Marketing Agreement Act of 1937, it is believed that the Secretary of Agriculture has sufficient discretion in setting up administrative conditions precedent to needed Federal cooperative action that he could require that State regulations relative to State Marketing Agreements with respect to milk and its products be promulgated with a view toward eliminating trade barriers.

IX. As a general proposition it would seem that whenever a specific trade barrier exists in the States, the operation of which materially interferes with or hampers a project financed in whole or in part by Federal funds, those administering the expenditure of such funds may attach conditions to the granting of these funds that will operate to remove these objectionable trade barriers.

X. Under Section 3 of the Animal Industry Act, the Secretary of Agriculture is authorized to cooperate in execution and enforcement of provisions of the act working toward the suppression of dangerous, contagious, infectious, and communicable animal disease.

MEMORANDUM FOR THE INTERDEPARTMENTAL COMMITTEE ON INTERSTATE TRADE

BARRIERS

Re: Report of the Legal Subcommittee with Respect to Administrative Action Which May Be Taken to Combat Interstate Trade Barriers Pursuant to Existing Federal Legislation.

The Subcommittee, at the outset of its activities, discovered that it had undertaken a difficult task. The volume and range of Federal legislation is such that a full analysis is impossible within any reasonable length of time. Therefore, the Subcommittee, in the beginning, was confronted with the problem of making an intelligent selection within the legislative field. An effort has been made to examine the Federal legislation which, upon consideration, appears to have direct relationship to the trade barrier problem. It is possible that some legislation which is, in fact, relevant has been overlooked.

In presenting the following list of administrative actions which, in the opinion of the Subcommittee, could possibly be taken to combat interstate trade barriers, it must be emphasized that the Subcommittee is not concerned with matters of policy or expediency. The Subcommittee has attempted to discover power. It has not attempted to pass judgment on the wisdom of using such power.

I. PERSUASIVE ACTION

Various departments and agencies of the Federal Government have, from time to time, submitted legal briefs to the enforcement agencies or attorneys general of States having trade barrier legislation of a type which presented a conflict with Federal legislation. This technique has proved successful in some instances. For example, the Subcommittee understands that the Interstate Commerce Commission has had considerable success in persuading States to forego the enforcement of or abolish State laws requiring types of motor truck lighting inconsistent with that required by the Commission.

It is believed that the coordination of this type of persuasive action with the work of the Committee and the Council of State Governments (Note No. 1) would materially increase its effectiveness. A protest, with attendant publicity, by the Committee and the Council of State Governments, issued co-extensively with the filing of a legal brief by the Federal department or agency administering the Federal law with which the complained-of State law conflicts, would normally have considerably more effect upon the decision of State enforcement officers and upon State legislatures than would the independent action of a single Federal bureau. In this connection, it is the opinion of the Subcommittee that the Committee might wish to consider the advisability of notifying appro