departure from existing practice, which at times has based "secondary line"
violations upon nothing more than substantial price differentials.
Subsection (b) (iii) deals with instances of "primary line" injury in similarly
stringent fashion. Where the claim is that the discrimination is adversely
affecting a competitor of the discriminator, there is the distinct possibility that
the competior is really seeking relief from competition. Accordingly, it is desir-
able that the .scope of liability be narrowly circumscribed. This is accomplshed
by requiring that there be a signficant disparity between the areas served by
the discriminator and the smaller competitors ; that the discrimination be limited
to a small part of the discriminator's area of operation ; that the lower price
be less than reasonably anticipated long-run average costs; and that the dis-
crimination threaten the imminent adver.se effects upon competition described
in connection with subsection (b) (ii). Among other things, this revision would
clearly reverse the result in Vtah Pie Co. v. Continental Baking Co., 87 S.Ct.
1326 (1967).
In the ease of the cost standard, consideration was given to suggesting tliat
some variation of marginal costs be employed as the measure. This approach
was rejected, despite its considerable appeal, because of the controversy it would
assuredly arouse and the great confusion that would attend its definition and
application. Instead, average costs (including capital costs) were employed in
conjunction with two qualifications: (1) relevant costs are tho.se reasonably
to be anticipated, i>ermitting some degree of experimentation: and (2) relevant
costs are long-run costs, so that price reductions designed to build volume may
be justified if the volume would bring costs down to price. A price which meets
this standard is consistent with the goal of long-term eflBciency and should not
be held to be unlawful. Hopefully the other limitations on liability will obviate
the need to examine costs in a great many instances.
No reference is made to "predatory intent," and none of the standards speci-
fied calls for a finding on the issue of "predatory intent." Interpretations of
320
intent are particularly perilous in this area and, as illustrated by the Utah Pie
case, the concept may be manipulated to support improper results.
(c) It shall be a defense to a charge of discrimination that the lesser exaction
of consideration was made in good faith to meet an equally low exaction of a com-
petitor. The defense shall be allowed even though the equally low exaction of
the competitor is unlawful, except in a suit seeking prospective relief against
all or substantially all of the competitors practicing the discrimination ; in the
latter event, a discrimination otherwise unlawful may not be justified as meeting
an equally low exaction of a competitor if the latter's exaction is unlawful.
Comment: The "meeting competition" defense is patterned after section 2(b)
of the Robinson-Patman Act. The changes of language in the first sentence are
for the sole purpose of conforming this subsection to the jurisdictional scope
of subsection (a).
The remainder of subsection (c) is intended to deal with the difficult problems
presented where a discrimination is sought to be justified by reliance on a com-
petitive offer which is, or may be, unlawful. The existing law on this point is
not wholly consistent. There is some suggestion that the competitive prices being
met must be lawful, FTC v. Staley Mfg. Co., 324 U.S. 746 (1M5) : or at least
that the seller must not have knowledge of their illegality. Standard Oil Co.
V. Brmcn, 238 F .2d 54 (5th Cir. 1956). But Callaway Mills Co. v. FTC, 362 F .2d
435 (5th Cir. 1966), allowed the meeting competition defense without regard
to the apparent illegality of the competitive prices being met (evidentaly be-
cause the FTC had not passed on the issue). None of these solutions is entirely
satisfactory.
If sellers are permitted to meet unlawful prices, without limitation, it may
be impossible to remedy an industry-wide pattern of discrimination.
The enforcement agencies would be compelled to identify the initiator of
the pattern and this could well be an impossible task. Moreover, from the van-
tage point of obtaining prospective relief, the identity of the initiator is ir-
relevant.
On the other hand, if a seller is not permitted to meet unlawful prices, he
is placed in an unenviable position. If the illegality of the competitive price is
clear, the seller is precluded from competing effectively at a time when he
is exposed to the worst kind of competitive assault; and presumably the un-
lawful competitive price will impair competition whether or not it is met by
the seller. If the illegality of the competitive price is unclear, the seller must
make a judgment as to its legality — which may be extremely difficult given the
information available to the discrimination. Nor does it suffice to say that
all doubts will be resolved in favor of the seller. For that merely raises the
other horn of the dilemma, and poses a major obstacle to remedying wide-spread
patterns of discrimination.
The proposed solution is to distinguish in terms of the relief sought. Where
the only issue is prospective relief, all doubts will be resolved in favor of the
prompt termination of the discriminatory pattern. By contrast, where dam-
ages are sought, the plaintiff will be obliged to track down the culprit whose
initial unlawful discrimination is the ultimate cause of the plaintiff's difficulties.
The proposed revision also requires that the enforcement agency proceed
against all or substantially all of the competitors practicing the discrimination
if it wishes to avoid the "meeting competition" defense.
The proposed revision does not attempt to deal v,'ith other aspects of the
"meeting comi)etition" defense in the hope and exi>ectation that the Courts
of Appeals will follow existing trends in removing encumbrances attached to
the defense by a hostile Federal Trade Commission. See, for example :
Sunshine Biscuits, Inc. v. FTC, 306 F. 2d 48 (7th Cir. 1962) (rejecting FTC
view that defense was available only for retaining old customers and was not
applicable to obtaining new customers).
Forster Mfg. Co. v. FTC, 335 F. 2d 47 (1st Cir. 1964), cert, denied, 380 U.S.
906 (1965) (rejecting FTC position that seller must have "proof positive . . .
of the amount of the competitive offers and the names of the bidders who
made them").
CalloAimy Mills Co. v. FTC, 362 F. 2d 435 (5th Cir. 1966) (rejecting FTC posi-
tion that seller could not meet competitor's "system" of price discrimination ;
several other limiting qualifications also were invalidated).
(d) It shall be a defense to a charsre of discrimination that the lesser exaction
of consideration makes an appropriate allowance for differences in the cost of
321
manufacture, distribution, sale, or delivery resulting from the differing methods
or quantities involved in the transactions in question. An allowance is appro-
priate where the difference in consideration does not substantially exceed the
difference in cost ; where the difference in consideration does not exceed a rea-
sonable estimate of the difference in cost ; or where the difference in consid-
eration is the result of a reasonable system of classifying transactions which is
based on characteristics affecting cost of manufacture, distribution, sale or
delivery, under which differences in consideration between classes approximate
differences in cost. If a system of classification is held to be unlawful, the
court or agency so ruling should indicate either (i) that the seller's customers
are so similar in pertinent characteristics that no system of classification would
be valid, or (ii) that a system of classification described by the court or agency
may properly be employed in lieu of the one held to be unlawful.
Comment: The proposed revision makes a number of changes in the cost justi-
fication defense.
First, it includes differences in the cost of distribution among those which may
justify a difference in the consideration exacted.
Second, it eliminates the power of the Federal Trade Commission to impose
quantity limits upon price differentials justified by cost.
Third, it permits differences in consideration which make "appropriate" allow-
ances for differences in cost. Appropriate allowances include those which (1)
approximate the difference in consideration exacted; (2) are based on reason-
able estimates; or (3) are based on a reasonable system of classification.
It is important that discriminations which reflect differences in cost be per-
mitted. But if excessive exactitude is required in the proof of cost differences,
sellers will be reluctant to charge different prices even though they reasonably
believe that such price differences are justified by differences in cost. Moreover,
it is vital that price differences be permitted as between different classes of
transactions, for this is often the only practical means by which differences in
costs may be translated into differences in prices. When a court or agency invali-
dates price differences based on classifications, it should be prepared to say
either: (a) that all of the seller's customers are so similar to one another that
no system of classification is permissible; or (b) that some defined system of
classification may be used in place of the one held to be defective. See FTC v.
Standard Motor Products, Inc., 371 F. 2d 613 (2d Cir. 1967) ; of. United States
v. Borden Co., 370 U.S. 460 (1962).
(e) It shall be a defense to a charge of discrimination that the lesser exaction
of consideration was in resjwnse to changing conditions affecting the market for
or the marketability of the commodities or services involved, such as but not
limited to actual or imminent deterioration of perishable goods, obsolescence of
seasonal goods, distress sales under court process, or sales in good faith in
discontinuance of business in the goods concerned. A charge of discrimination
also may be rebutted by proof that the lesser exaction of consideration was
available, on reasonably practicable conditions, to the person or persons alleg-
edly discriminated against.
Comment: The first sentence of subsection (e) carries forward the "changing
conditions" defense from section 2(a) of the Robinson-Pa tman Act.
The second sentence of this subsection makes explicit a defense which is
probably implicit in the present Act. See Tri-Valley Packing Ass'n. v. FTC, 329
F. 2d 6^, 703-704 (9th Cir. 1964). If an alleged discrimination is available to
both favored and disfavored buyers on reasonable grounds, and the latter choose
not to take steps to obtain the benefit of the discrimination, the seller should
not l>e held responsible. Thus, discounts for prompt payment are widely granted
and have not been challenged as unlawful discriminations.
The defense of availability is important in another context. The jurisdictional
scope of the proposed revision is limited to commodities or services of "like
grade and quality". This is a vague concept and susceptible to broad or narrow
interpretation by the courts and enforcement agencies. When in doubt, the
seller can i)rotect himself against an overly broad interpretation by offering
the allegedly distinctive items to all customers on comparable terms. Under the
proposed revision, such an offer would protect the seller against any charge
based on "secondary line" injury and might prove to be of value in a "primary
line" ca.se as well. See Borden Co. v. FTC, 381 F. 2d 175 (5th Cir. 1967), on
remand from 383 U.S. 637 (1966).
(f ) Nothing herein contained shall prevent any person from refusing to deal
with any other person. Provided, however, that the offer to deal on discriminatory
3^1i38 O — 69— pt. 1 ^22
322
terms shall be treated as a completed transaction for the puriK>se of according
relief under this section.
Comment : The first sentence of proposed subsection (f) is derived from sec-
tion 2(b) of the Robinson-Patman Act: "nothing herein contained shall prevent
persons engaged in selling goods, wares, or merchandise in commerce from
selecting their own customers in bona fide transactions and not in restraint of
trade." The language is substantially modified to take accout of the broadened
jurisdictional scope of subsection (a). The reference to "restraint of trade" is
omitted, since the Sherman Act provides a more appropriate fram^e of reference
for such conduct.
The second sentence, which is a proviso to the first, is intended to remedy a
possible jurisdictional defect in the present Act. Some courts have held that two
completed transactions are required to constitute a violation, and it is possible
that a buyer quoted a discriminatory high price may have to complete the trans-
action in order to have a right to relief. This requirement has no merit and is
here expressly negatived. The seller's right to refuse to deal is maintained, since
the proviso comes into play only when where the seller chooses to quote terms to
a prospective customer.
(g) That it shall be unlawful for any person knowingly to induce or receive
a discrimination which is prohibited by this section.
Comment: Subsection (g) of the proposed revision is based on section 2(f)
of the Robinson-Patman Act. The language pertaining to commerce has been
omitted as unnecessary. The discrimination induced or received must be "pro-
hibited by this section", which means that the jurisdictional requirements of
subsection (a), including the commerce requirement, must be met. This should
suffice.
The "knowingly" requirement has been retained with the view that the buyer,
in order to be charged with a violation, should have actual or constructive knowl-
edge that he is the recipient of an illegal discrimination. See Automatic Canteen
Co. V. FT(7, 346U.S. 61 (1953).
Even though the provision for buyer's liability has been retained in substan-
tially its present form, the practical scope of the provision has been narrowed
considerably. First, a violation by the buyer depends upon a showing that there
has been a violation by the seller ; and various revisions in the earlier subsections
make it less likely that sellers will violate the section. Second, and more im-
portantly, the revisions relative to seller liability make it more difficult to predict
when a seller will be found to be in violation of the section and thus make it
less likely that the buyer will have actual or constructive knowledge of those
seller violations that actually occur. In effect, the buyer is liable only when he
becomes a knowing accomplice to a clear violation by the seller.
Whether this constriction of buyer liability is desirable or not depends upon
the view one takes of hard bargaining between seller and buyer. The proposed
revision is based on the premi.se that such bargaining is generally desirable, and
that the undesirable instances, where a buyer's bargaining power is pushed to
extreme lengths, are the exceptions. The limited scope of buyer liability reflects
this judgment, as well as the fact that most of the relevant information for dis-
tinguishing proper from improper justifications is more accessible to the seller
than to the buyer.
(h) Section 5 of the Federal Trade Commission Act shall not be held to
prohibit any discrimination in the exaction of consideration for the sale, lease,
transfer or provision of commodities or services, or the receipt of any such
discrimination.
Comment : At various points in drafting the preceding provisions, limitations
have been imposed on the scope of liability under the anti-discrimination law.
These limitations reflected a variety of factors and a balancing of considerations
pro and con. If, however, the Federal Trade Commission remains free of chal-
lenge discriminatory practices under section 5 of the Federal Trade Commis-
sion Act, it can overturn any judgment against liability in a particular case by
the simple expedient of bringing suit under section 5. See FTC v. Broicn Shoe Co.,
384 U.S. 316 (1966). Proposed subsection (h) eliminates this option.
(i) Any order issued to enforce this section shall remain in effect for a limited
time, stipulated at the time of entry^and reasonably related to the nature of the
violation. In no case shall an order remain in effect more than five years after the
date of is.sue.
Comment : Cease and desist orders issued by the FTC, and injunctions issued
by the courts, apparently can remain in effect in perpetuity, or at least until the
323
party subject to their terms can secure their modifications. In the case of pricing
practices, this is an undesirable state of affairs. Violations of either kind of
decree can subject the seller to severe penalties, and the decrees therefore inhibit
flexibility in pricing. Presumably such inhibition was warranted at the time
the order was entered, but there is no reason to believe that the order must
remain in effect forever.
Proposed subsection (i) provides for the imposition of time limits, and sets
five years as the maximum period of effectiveness for an antidiscrimination
order.
APPENDIX D. PROPOSED PATENT LEGISLATION
Section 1. Filing of License Agreements.
(a) Every person who has granted a license with respect to any patent shall,
within — — ■days, file with the Commissioner of Patents a copy of such license
and the name and address of the person granting such license, unless a license
substantially identical in all respects except the name of tbe licen'-ee has been
previously filed by such person with the Oommissioner of Patents. The Commis-
sioner of Patents shall promptly publish a list of such licenses and addresses,
and shall make available copies of such licenses (deleting the names of li-
censees).
(b) If any license required by subsection (a) to be filed with respect to any
patent is not timely filed, then (i) the owner of such patent may not, prior to
filing such license, bring or maintain any action for infringement of such patent ;
(ii) the owner of such patent may not obtain any damages or injunctive or other
relief with respect to any act of infringement of such patent occurring prior to
the filing of such license; (iii) the owner of such patent may not collect any
royalties or other consideration under any license with resi)ect to such jjatent
for the use or practice of .such patent, and any person who has paid such royal-
ties or other consideration may maintain an action in any court of competent
jurisdiction for the recovery of such royalties or considerations or their value,
together with the costs of maintaining such action (indluding reasonable counsel
fees.)
Section 2. Failure to Enforce Patents.
In any action for infringement of a patent in which the defendant establishes
that the owner of the patent knew of activities of a third person which the
owner of the patent had reason to believe constituted an infringment of such
patent in the same field and area of use as the defendant's alleged infringement,
and that the owner of such ]>atent has not taken diligent action reasonable in
light of the commercial importance of the infringement and other circumstances
to enforce the patent against such third person, no relief shall be allowed.
Section 3. Nondiscriminatory Grant of Licenses.
(a) Except as provided in .subsection (d) of this section 3, every person who
has granted any license with respect to any patent shall, within 30 days of the
receipt of a demand therefor from any person, grant to such person a license
with respect to such patent, which license shall be neither more restrictive nor
less favorable in any respect than any license previously issued by such person
with respect to such patent ; provided, however, that the obligations required to
be performed by such i)erson shall not include or reflect (i) the grant to the
owner of the patent, by a person previously granted a license with respect to such
patent, of a license with respect to any industrial property right; (ii) any per-
formance or undertaking to the owner of the patent by a person previously
granted a license with respect to such patent of any other obligation or under-
taking that is uniquely within the capability of such person; (iii) any restric-
tion which has the effect of making the prior license exclusive; or (iv) any
obligation, performance, grant or undertaking in lieu of any of the foregoing;
provided, further, that nothing herein shall affect the validity of any license
or group of licenses requiring any of the foregoing obligations to be performed.
(b) Notwithstanding any provision to the contrary in any law or agreement,
the enforceability or invalidity of a license with re.?peet to any industrial prop-
erty right or of any obligations therein which the owner of a patent could require
to be performed by a qualified applicant shall not affect or be affected by the
unenforceability or invalidity of any other such license.
(c) Notwithstanding any provision to the contrary in any license or agreement
and notwithstanding any other provision of law, no license or agreement shall
preclude the grant of subsequent licenses required by subsection (b) of this
section 3 to be granted.
324
(d) A patent owner need not grant a license pursuant to subsection (a) of
this section 3
(i) to a person who, the i)atent owner establishes in an action pursuant to
section 4, is not a qualified applicant because he may prove financially unable,
or because of business reputation may prove uhlikely, to comply with the terms
of the license demanded ; provided, however, that the court may order the license
to be issued subject to such conditions as the court may find adequate to protect
the financial interest of the patent owner ;
(ii) with respect to any patent if the patent owner establishes, in a proceeding
before the Federal Trade Commission, prior to the grant of any license with re-
spect to such patent in the field of use and area which is the subject of such
license, that the grant of an exclusive license or licenses in a field or fields of
use and an area or areas is necessary in order to obtain commercial exploitation
of the patent and will not tend substantially to lessen comi)etition.
Section 4- Action to Obtain License.
Any person who has demanded a license in accordance with the terms of sec-
tion 3 and who has not received such a license within 30 days after serving such
demand on the patent owner may enforce the rights created by this Act by suit
in any court of competent jurisdiction. Pending the outcome of such suit, the
patent owner may not obtain injunctive relief against such person with respect
to any alleged infringement which would not be an infringement if such person
had received the license demanded.
Section 5. Definitions.
As used in this Act
(a) the term "license" shall mean every license, assignment or agreement of
any kind, express or implied, including a covenant not to sue or a settlement of
litigation or interference proceedings, entered into or extended after the effec-
tive date of this Act or expiring after , 1{> — , by which a patentee, the
original owner by any industrial property right, or anyone acquiring a patent
or industrial property right in a transaction of the kind referred to in the second
proviso to this, subsection (a) directly or indirectly authorizes or ijermits an-
other to make, use, sell or otherwise practice such patent or industrial property
right or any invention embodied therein ; provided, hoicever, that the term
"license" shall not include an implied license obtained by a person who purchases
or leases or otherwise acquires a patented product from, or who manufactures
a patented product for, a patent owner ; and provided, further, that the term
"license" shall not include any license, assignment, or agreement pursuant to
which a patentee, original owner of an industrial property right or any trans-
feree from either of them in a transaction of the kind referred to in this proviso
transfers to another the entirety of such patentee's or owner's right, title and
interest in any patent or industrial property right, including a transfer the con-
sideration for which is measured in whole or in part by use of the patent.
(b) The term "industrial property right" shall mean any right with respect
to any invention and the use thereof within the United States, whether or not
such invention is subject to a patent.
(c) The term "patent" shall mean any United States patent, whether issued