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Barriers Against Interstate Trade

( Originally Published 1939 )



The flood of state legislation restricting the free movement of goods between the states is a reflection of the world-wide trend toward economic provincialism which arose during the depression. Most of these laws have been passed by states in urgent need of additional revenue, or for the purpose of preserving home markets for home industry on the theory that by spending money at home local business and employment would benefit. The fundamental issue raised by these "buy-at-home" laws and by the resulting state legislative reprisals against them is whether the guarantee of free trade among the states contained in the commerce clause of the Constitution can or should be evaded.

As pointed out previously state laws evading this guarantee have taken a variety of forms. Some of them, such as "use tax" legislation, and motor vehicle taxes, have had as their immediate purpose the protection of state tax revenues, but most of them have been passed to promote local industry or to protect the industries of the state against the competition of foreign products-i.e., imports from other states. Examples of this type of state tariff are found in the misuse of quarantine regulations:

Since 1915, Florida has maintained a quarantine against citrus fruits from California for the declared purpose of preventing the introduction of brown rot, although California fruit has long been free from brown rot. In 1932 the Florida quarantine regulations were modified to permit the importation of California lemons throughout the year, and of California oranges from May 1 to October 1-when Florida has no oranges of her own. With even greater lack of logic, Florida citrus fruits are barred by quarantine from northern Texas except from April 1 to September 1, although very little citrus fruit is produced in northern Texas, and Florida has none to export at that time. The obvious intent of the regulation is to preserve the market for Texas fruit.

California has quarantine regulations barring the importation of citrus fruit, except from Arizona, for the alleged purpose of keeping out citrus canker and lemon disease, although neither is prevalent in Florida. The California state entomologist proposed lifting the quarantine in 1933, but pressure from California lemon growers succeeded in keeping the regulations in effect. Florida was barring citrus fruits from neighboring southern states at the same time on the basis of exactly the same diseases which were the excuse for barring Florida fruit from California.

State Preference Laws

The most direct and effective method of favoring local industry is found in laws requiring public authorities to purchase materials from firms within the state.

Such provisions are now contained in many appropriation bills, and in advertisements for bids on government work. Similarly, at least thirty states give preference to their own residents in public employment. About the same number have laws giving preference to domestic firms in the case of public purchases. The number of laws of this type doubled between 1930 and 1935.

The Council of State Governments reports that thirty-one states now have laws compelling preference for made-within-the-borders products and that several other states have passed retaliatory laws preventing any public official from buying supplies produced in states which discriminate in public purchases.

Somewhat similar in their purpose are restrictions adopted by Maine, New Hampshire, West Virginia, and Wisconsin forbidding the export of electric power in an effort to attract industries from other states.

The states have also been quick to take advantage of the exemption from the commerce clause granted by the Twenty-First Amendment to the Constitution to pass laws favoring their own liquor industries. Michigan imposed a special tax on out-of-state beer in 1933 and this precedent was promptly followed by other states. Indiana, Maryland, Nevada, Pennsylvania, and Washington now impose high taxes on importers of out-of-state beer; Arkansas, Michigan, Georgia, and New Mexico tax imported wine at a higher rate than that produced within the state; while several other states place special levies on liquor imported from states imposing discriminatory taxes.

Among the most annoying of state trade restrictions are laws regulating and taxing motor trucks. Originally intended to prevent tax avoidance, these regulations have become so serious as to "make interstate trucking virtually impossible in some sections of the country." Some states refuse to allow the entrance of out-of-state trucks without payment of the full registration fee, others impose a temporary registration fee, and some charge a ton-mile tax higher for foreign trucks than for those locally owned. In addition the states have adopted a multitude of varied regulations as to weight, height, width, length, safety devices, lighting, and other characteristics of trucks, which constitute a serious interference to interstate traffic. "Ports of entry," where all motor vehicles entering the state were stopped for inspection and usually taxed, were established by Kansas in 1933, and neighboring states soon retaliated by adopting similar regulations.

Effects of Interstate Barriers

The ultimate effects of allowing this trend toward nationalism on the part of the states to go unchecked are not hard to foresee. Although local firms, especially those unable to meet outside competition, may benefit temporarily from such protective legislation there can be no doubt that in the long run both the taxpayers and consumers will be penalized. The issue was clearly stated by Governor Lloyd C. Stark of Missouri, in an address before the Fourth General Assembly of the Council of State Governments:

Unable to establish tariff walls, a number of states have attempted to confer advantages upon their own citizens not enjoyed by those within other states. It is this type of legislation which we recognize as setting up vicious trade barriers which definitely impede the normal flow of products from state to state. Experience has shown that while a few minority groups reap the benefits of trade barriers, the great consuming public pays the bill once these barriers have been erected. In fact, these state barriers constitute a subsidy for organized minorities.

These state trade barriers are a clear example of one form of government intervention which, although it may afford transitory protection to local groups, can have no other ultimate effect than to penalize consumers by increasing distribution costs and raising prices. The Council of State Governments, in announcing plans for a National Conference on Interstate Trade Barriers, passed a resolution at its January meeting stating that "interstate trade barriers, under whatever guise, are detrimental to the economic welfare of the country." This action of the Council, coupled with a recent decision of the Supreme Court invalidating a Florida "inspection fee" of fifteen cents a hundredweight on cement, in which Justice Frankfurter said, "It would not be easy to imagine a statute more clearly designed . . . to circumvent what the commerce clause forbids," gives promise of a possible reversal of the trend of the last several years.

1. UNETHICAL PRACTICES

Business is honeycombed with practices that overstep strict standards of personal honesty. Immoral practices may do harm to other businessmen-as where a retailer is short-weighted by a wholesaler-or they may harm the consumer-as in the case of a patent medicine which contains poison or misrepresents its capacity to cure. In some cases it is difficult to make out a case against an immoral practice in such specific terms. Some practices, however, so violate our ethical sense that they call for restraint even though no tangible damage to others can be defined or measured.

The Courts and the Trade Commission

As originally planned, Section V of the Federal Trade Commission Act, forbidding unfair methods of competition, was intended to give the Commission rather broad powers of discretion. It was supposed to be elastic enough to reach not only outright fraud but also more obscure practices whose nature was not sufficiently developed or apparent for Congressional handling. The duty of policing fraud and dishonesty has come to absorb most of the Commission's time and energy. For example, of 624 stipulations to cease and desist executed during one fiscal year by parties against whom proceedings have been instituted by the Commission, 364 involved false and misleading advertising alone.

The Commission's discretionary powers, however, were soon challenged in several respects. In Sears, Roebuck and Co. v. Federal Trade Commission (1919) the court conceded that the "term `unfair methods of competition' was not restricted to the conception of unfair methods of competition defined by common law prior to September 26, 1914," and (in 1934) that the Commission's jurisdiction was not limited to "those types of practices which happen to have been litigated before this Court." But in Federal Trade Commission v. Gratz (1920)3' it said that these words "are clearly inapplicable to practices never heretofore regarded as opposed to good morals because characterized by deception, bad faith, fraud or oppression, or as against public policy because of their dangerous tendency unduly to hinder competition or to create monopoly." In the same decision it went on to say that "It is for the courts and not the commission, ultimately to determine as a matter of law what they (the words `unfair methods of competition') include."

This view was strengthened in the Raladam case (1931) 37 by a statement that the meaning of the words in question must be arrived at by "the gradual process of judicial inclusion and exclusion." In this case the court also undertook to define the three prerequisites on which the Commission's jurisdiction had to rest: (1) that the methods complained of were unfair; (2) that they were methods of competition in commerce; and (3) that a proceeding by the Commission to prevent the use of such methods appeared to be in the interest of the public.

To constitute unfair competition the practice must be shown, according to this decision, to have the tendency injuriously to affect the business of competitors. It has been argued that this dictum deprives the Commission of power to act wherever it develops that the offender has no competitor but has a monopoly in his field or that all competitors are equally guilty. In any event, no matter how deceptive a particular act might be per se, the Commission was obliged to go to the trouble and expense of proving injury to a competitor before it could act. Consumers, it was said, were left without protection.

It should be added, however, that in a number of cases the court did concede the right of the Commission to suppress a practice that affected injuriously a substantial part of the purchasing public even though no private right of either a competing trader or of a purchaser appeared to have been invaded.

A question also arose as to the proper definition of "public interest." In Federal Trade Commission v. Klesner, the court said that "to justify filing a complaint the public interest must be specific and substantial." This point is of course closely related to the preceding one.

Still another curb on the Commission's powers arose out of judicial qualification of a declaration in the act itself that the Commission's findings should be final as to fact. In Federal Trade Commission v. Curtis Publishing Co." the court said that "Manifestly the court must inquire whether the Commission's findings of fact are supported by evidence. If so supported, they are conclusive." The court's position on this issue, however, seems to have involved principally a question of degree.

The Wheeler-Rayburn Bill

Rightly or wrongly the Commission, chafing under these judicial restrictions, has urged liberating amendments to its enabling act. During the last session of Congress its wishes were partly satisfied by the passage of the Wheeler-Rayburn Bill on March 21, 1938. In this amendment Congress yielded to the Commission's contention that the law should forbid "deceptive acts and practices in commerce" instead of merely "unfair methods of competition."

The House Committee report declared that "this amendment makes the consumer who may be injured by an unfair trade practice of equal concern before the law with the merchant or manufacturer injured by the unfair methods of a dishonest competitor." Not all observers are happy over the change, fearing that so generous a phrase puts too much discretionary responsibility on the human beings obliged to interpret and apply it.

Another very important change lay in the area of procedure, namely, that the Commission's cease and desist orders should be-come final if respondents failed to petition for court review within sixty days after orders were issued, and that a $5,000 civil penalty should be assessable for each violation of a cease and desist order after it became final. The Commission had always complained that respondents could play fast and loose with its orders, neither obeying them nor asking the court to set them aside. Both the Commission and Congressional Committees studying the subject cited the Stock Yards Act of 1921 and the Securities Exchange Act of 1934 as precedents for the imposition of time limits and penalties.

The Amendment also provides for effective control over false advertising of foods, drugs, devices, and cosmetics. This is new emphasis on old problems. The Commission's escape from the necessity of proving injury to a competitor is expected to be particularly helpful in this respect, as is the new liability to fine for violations of cease and desist orders. Gross offenses, such as those involving the advertising of articles injurious to health or of an intention to defraud, are now to be prosecuted as a crime and punishable by imprisonment or fine or both.

Even in those milder cases which are still subject to cease and desist orders only, the Commission is now empowered to secure an injunction against suspect advertising until its complaint is dismissed by its own action or set aside by the courts on review, or becomes final in default of appeal. In addition, the recently enacted Copeland Bill still further strengthens the powers of the Food and Drug Administration in this general area. Violations of the type under discussion have always been punishable with criminal penalties.

Difficulties of Administration

The appearance of simplicity in this problem is quite deceptive. Congress could never dispose of it merely by saying that after such and such a date harmful or fraudulent advertising would no longer be permitted. The crux of the issue is not whether fraud should be restrained but how it should be defined.

A quack nostrum need not contain rank poison to produce definitely harmful results. Sugar water advertised as a cure for cancer may cause the death of a buyer who postpones surgical treatment until it is too late. Nor should fraudulent advertising be confused with the advertising of harmful products. A fur coat may be made of rabbit skin; if it is advertised as seal the advertising is fraudulent although the product does not harm the purchaser physically.

In the same category is the advertising of seconds as firsts, of rebuilt as new, and adulterated products as unadulterated. The issue becomes particularly murky when it spreads into such matters as "clearance sale," "factory to you," "bankruptcy sale," "fire sale," "removal sale," and "going out of business sale." Both Senate and House spokesmen foresaw difficulties and uncertainties of interpretation, just as there have been in the case of the older pro-visions of the Federal Trade Commission Act, the Food and Drug Act, the anti-trust laws, and "other laws prescribing in general terms standards of conduct to be applied to innumerable factual situations."

Despite all the ringing phrases of its sponsors and the admitted sharpening of some of the Commission's weapons of offense, a Congressional minority felt that the part of the amendment regulating misleading advertising of foods, drugs, devices, and cosmetics fell far short of giving to the consuming public the protection it needed. It objected particularly to the exemption of so-called minor infractions from criminal penalties.

These critics felt that the cases of injury to health resulting from medicines themselves were unusual and that the great danger lay in the free circulation of products in themselves innocuous, such as the tuberculosis cure which was a simple liniment, or the diabetes cure which was a brew of horse tail weed. They disliked the necessity imposed upon the Commission to prove intent "to defraud or mislead," citing the difficulties encountered under other laws in proving a state of mind under the legal rules of evidence. Finally, they placed little faith in the Commission's new discretionary power to ask for an injunction and wanted the risk of penalties to be plain and definite for each offense.

Results Not Measurable

The effects of the multitude of controls set up over unfair or immoral business practices cannot even be guessed at. Assuming their success in curbing abuses, it does not always follow that the consumer will reap any benefit in lower prices.

Fraud and dishonesty themselves can make for lower prices. The extreme example is stolen goods, which will normally be sold at nominal prices. But if the theft happens to be of an intangible value, as the imitation of some one else's established trade mark, merchandise of fully equal or even superior quality may be sold at lower prices without winning the forgiveness of the court. Should a manufacturer falsely claim affiliation with a competitor whose similar goods may be higher-priced because of expensive promotional methods, the public does not condone the moral offense be-cause of the lighter burden on its pocketbook. Passing off one's goods as those of a competitor has for centuries been held unlawful without much attention being paid to relative values. The pilfering of a competitor's trade secrets is very likely to sharpen price competition on the goods involved, but the maintenance of ethical standards is considered more conducive to the public good in the long run. The public does not insist on lower prices if they are to be had only at the expense of standards of honesty.

Departing from such solid ground, it is upon a distinction between immediate and long-term values that higher prices often resulting from fair trade and similar laws are considered less important than the protection of competing efficiencies. It can even be argued that dishonesty to the point of stealing, results in no net loss to the public, for the reason that what one man loses another gains. The answer to such sophistry as this fortunately can be al-lowed to rest on common sense.

j. COMMERCIAL BRIBERY

Commercial bribery may take a variety of forms, from the lavish entertainment of buyers and the purchase of fur coats or other costly gifts for women buyers, to the payment of an outright cash "commission." Extending favors to proprietary buyers, of course, does not come under the head of commercial bribery-it is simply a part of what the proprietor gets for his money. It is when an employee is induced by means of gratuities to accept an offer that is not the most advantageous to his employer that bribery exists. Because it brings about purchases for reasons other than quality or price, bribery interferes with the free play of competition and constitutes an unfair trade practice.

The payment of bribes is not limited to payments to purchasing agents of possible customers. The same principle is also involved when manufacturers give the sales representatives of wholesalers and retailers a special commission for selling their products. This is a bribe that does not necessarily operate against the interests of the employer, but it is clearly a form of unfair competition and may result in payments greater than should be necessary to distribute the product.

Since sales through agents or employees, rather than principals, have increased in number with the increasing growth in size of business, the sphere of bribery has widened in modern times. Commercial bribery, however, is primarily a managerial problem. Correction must come from within rather than by law from without.

Its existence proves that the higher management is not checking up on the activities of purchasing agents to see that they are driving the best bargains possible.

When once it gains a foothold, the practice spreads very rapidly through an industry. If one manufacturer offers a bribe his competitors frequently feel that they must do the same thing or lose the business. Not only is the amount of the bribe included in the price of the product, but there is a tendency to add still more be-cause it is relatively easy to obtain a higher price when there is a friend on the inside of the customer's organization who has a financial interest in the purchase of a particular product. Eventually the consumer pays the cost.

Because commercial bribery preys on legitimate business in an underhanded fashion it is obviously impossible to estimate the toll it exacts. The various rough estimates which have been made, however, point to its excessive cost. John T. Flynn in Graft in Business, quotes Commerce and Finance as estimating that commercial bribery in the United States costs a billion dollars a year.

Laws Against Bribery

The common law has long recognized the illegal nature of commercial bribery and has traditionally permitted recovery or rescinding of the contract by anyone whose agent accepted the bribe. The Federal Trade Commission found that the practice was too common for cease and desist orders. In any case they found they could only proceed against the person who gave the bribe inasmuch as he was the only one guilty of unfair competition.

Seventeen states have statutes aimed at the general practice of commercial bribery. A common provision makes it a misdemeanor for a third party to "give, offer or promise any commission, gift or gratuity whatever . . . with intent to influence the action of an agent, employee or servant in relation to his principal's, employer's or master's business, or for such an agent to request or accept any commission." Juries, however, are inclined to condone the offense if evidence shows that it is customary in the industry.

Only a few of the state laws prevent admission of evidence as to whether or not such a bribe is customary.

A federal law was suggested in 1918 and again in 1920 by the Federal Trade Commission. Bills making commercial bribery a federal offense have been periodically introduced into one or both houses of Congress. One of these introduced into the 67th Congress by Representative Volstead passed the House but died in the Senate Committee.

Upon the passage of the National Industrial Recovery Act many industries attempted to legislate against commercial bribery on a nation-wide scale. One hundred and eighty-one of the first three hundred NRA codes contained provisions making commercial bribery a form of unfair trade practice. Almost universally standards adopted by trade associations ban the practice, and this attitude, coupled with the activities of the Federal Trade Commission and the Better Business Bureau, has tended to halt the spread of the evil.

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