FTC v. Motion Picture Advertising Service Co., 344 U.S. 392 (1953), (the MPAS case), reversing 194 F.2d 633 (5th Cir. 1952), affirming 47 F.T.C. 378 (1950). was a 1953 decision of the United States Supreme Court in which the Court held that, where exclusive output contracts used by one company "and the three other major companies have foreclosed to competitors 75 percent of all available outlets for this business throughout the United States" the practice is "a device which has sewed up a market so tightly for the benefit of a few [that it] falls within the prohibitions of the Sherman Act, and is therefore an 'unfair method of competition' " under § 5 of the FTC Act.344 U.S. at 395. In so ruling, the Court extended the analysis under § 3 of the Clayton Act of requirements contracts that it made in the Standard Stations case to output contracts brought under the Sherman or FTC Acts.See Friedrich Kessler and Richard H. Stern, Competition, Contract, and Vertical Integration, 69 L.J. 1, 59-60 (1959), which argues that the MPAS and Standard Stations cases indicate a coalescence between the standards of unlawfulness under the Sherman and Clayton Acts and for forward and backward (downstream and upstream) integration by contractual exclusive dealing arrangements.
Background
The FTC brought an administrative proceeding against Motion Picture Advertising Service, asserting that its extensive exclusive dealing arrangements (of duration of from one to five years) with motion picture theaters foreclosed others from dealing with those theaters, and was therefore an unfair method of competition in violation of § 5 of the FTC Act. (The FTC could not have brought the case under § 3 of the Clayton Act, as the Standard Stations case had been brought, because of the narrow and specific language of the Clayton Act.First, sale of theater advertising time involves a service, not a commodity, to restrictive sales of which § 3 of the Clayton Act is limited. Second, there was no sale on condition that the buyer (here, MPAS) was not to deal in the goods of other sellers, as required for violations of § 3; rather, there was a purchase on a condition of not selling to others. Kessler, 69 L.J. at 53.)
MPAS's business is to enter into contracts with sellers of goods and services to produce short advertising motion picture films (so-called trailer ads) which depict and describe commodities offered for sale by these companies and then screen the films in the theaters with which it has contracts. (MPAS pays the theaters to make their customers watch the advertisements.A dissenting FTC Commissioner said that "the privilege of boring the public for pay is a theatre owner's inalienable right, provided he doesn't carry the thing too far." See ) MPAS and three other companies in the same business (against which the FTC also brought proceedingsThe FTC sued and entered similar orders against the other three companies. See Matter of Reid H. Ray Film Industries, 47 F.T.C. 326 (1950); Matter of Alexander Film Co., 47 F.T.C. 345 (1950); Matter of United Film Ad Service, Inc., 47 F.T.C. 362 (1950). See also 344 U.S. at 394.) together had exclusive arrangements for advertising films with approximately three-fourths of the total number of theaters in the United States which display advertising films for compensation.344 U.S. at 393.
The FTC found that MPAS's exclusive contracts limited the outlets for films of competitors and forced some competitors out of business because of their inability to obtain outlets for their advertising films. The FTC then entered a cease and desist order prohibiting MPAS from entering into or continuing in effect any such contract that grants an exclusive privilege for more than a year.344 U.S. at 394. The FTC found that an exclusive contract of a year or less "is not an undue restraint upon competition." Id. n.2.
MPAS appealed to the United States Court of Appeals for the Fifth Circuit, which reversed the FTC's order. It said that "we . . . have decided the case on its merits" and held that the challenged practice "was not unfair or unreasonable, but was rendered desirable and necessary by good-business acumen and ordinarily prudent management."Motion Picture Advertising Service Co., 194 F.2d at 637.
Ruling of the Supreme Court
In a 7–2 decision written for the Court by Justice Douglas, the judgment of the Fifth Circuit was reversed and the order of the FTC was reinstated.
Majority opinion
The Court began by pointing to Congress's intent to leave the concept of unfair competition "flexible" and "to be defined [by the FTC] with particularity by the myriad of cases from the field of business," and thus to let the FTC " supplement and bolster" the antitrust laws. Here, the FTC found that MPAS's "exclusive contracts unreasonably restrain competition and tend to monopoly." The market, as seen by the FTC, supported by substantial evidence, was highly constrained:
This is not a situation where, by the nature of the market, there is room for newcomers, irrespective of the existing restrictive practices. The number of outlets for the films is quite limited. And, due to the exclusive contracts, respondent and the three other major companies have foreclosed to competitors 75 percent of all available outlets for this business throughout the United States. It is, we think, plain from the Commission's findings that a device which has sewed up a market so tightly for the benefit of a few falls within the prohibitions of the Sherman Act, and is therefore an "unfair method of competition" within the meaning of § 5.344 U.S. at 395. The Court's reference to "the prohibitions of the Sherman Act" does not specify whether the prohibition is that of § 1 or § 2. The individual 40% market share of MPAS is insufficient for a monopolization under § 2 and even an attempted monopolization is doubtful. Perhaps the Court contemplates that the combination of different output contracts constitutes a restraint of trade under § 1. See Joseph J. Simons, Fixing Price With Your Victim: Efficiency and Collusion with Competitor-Based Formula Pricing Clauses, 17 599, 632-33 (1989) (stating that MPAS found § 5 violation based on violation of § 1 because "Court, in finding illegality, relied on the existence of similar contracts which foreclosed an additional thirty-five percent of the market). See also United States v. Parke, Davis & Co, 362 U.S. 29, 44 (1960) ("put together a combination in violation [of § 1] of the Sherman Act").
The Court rejected the Fifth Circuit's determination to "decide[] the case on its merits." It said: "The precise impact of a particular practice on the trade is for the Commission, not the courts, to determine." The Court concluded that it could not say "that the Commission exceeded the limits of its allowable judgment."344 U.S. at 396.
Dissent
Justice Frankfurter, joined by Justice Burton, dissented. He faulted the conclusory and insufficiently explanatory FTC order:
My primary concern is that the Commission has not related its analysis of this industry to the standards of illegality in § 5 with sufficient clarity to enable this Court to review the order. Although we are told that respondent and three other companies have exclusive exhibition contracts with three-quarters of the theaters in the country that accept advertising, there are no findings indicating how many of these contracts extend beyond the one-year period which the Commission finds not unduly restrictive. We do have an indication from the record that more than half of respondent's exclusive contracts run for only one year; if that is so, that part of respondent's hold on the market found unreasonable by the Commission boils down to exclusion of other competitors from something like 1,250 theaters, or about 6%, of the some 20,000 theaters in the country. The hold is on about 10% of the theaters that accept advertising. . . . [T]he Commission merely states a dogmatic conclusion that the use of these contracts constitutes an "unreasonable restraint and restriction of competition."344 U.S. at 398-99.
He recognized that the other major companies had similar exclusive output contracts and that a total of "75% of the market is shut off." He recognized also that "the existence of the other exclusive contracts is, of course, not irrelevant in a market analysis," citing to the Standard Stations case (in which Justice Frankfurter wrote the opinion for the Court and Justice Douglas dissented).Standard Oil Co. v. United States (Standard Stations), 337 U.S. 293 (1949. But that case was brought under § 3 of the Clayton Act, not under a Sherman Act legal theory, as here, he said, and "this Court has never decided that they [the other contracts] may, in the absence of conspiracy, be aggregated to support a charge of Sherman Law violation."344 U.S. at 399-400.
As for the fact that the FTC acted here under § 5 of the FTC Act, concededly § 5 "comprehends more than violations of the Sherman Law" and was intended "to nip in the bud practices which, when full blown, would violate the Sherman or Clayton Act." But the FTC and its record below do not "explain to us how these practices, if full blown, would violate one of those Acts." Moreover, the FTC has not shown to the Supreme Court "that the exclusive feature here should be considered the economic equivalent of that in" the Standard Stations case. Finally, as for defining "the content of the prohibition of 'unfair methods of competition,' to be applied to widely diverse business practices," Congress did "not entrust[ it] to the Commission for ad hoc determination within the interstices of individualized records, but . . . left [it] for ascertainment by this Court."344 U.S. at 400-05.
Subsequent developments
du Pont-GM case
In United States v. E. I. du Pont de Nemours & Co., 353 U.S. 586 (1957), the Court found that du Pont's acquisition of stock in GM had become unlawful because of its resulting control by du Pont of GM's automotive finish and fabric purchases (about half of the automobile industry's requirements)—with the consequence "that du Pont purposely employed its stock to pry open the General Motors market to entrench itself as the primary supplier of General Motors' requirements for automotive finishes and fabrics. In deciding whether a violation was shown, the Court instructed that "in order to establish a violation of § 7, the Government must prove a likelihood that competition may be 'foreclosed in a substantial share of' " the relevant market. That GM represented about half of that market satisfied the Standard Stations case's test of likelihood of competitive harm, and therefore there was sufficient market foreclosure to allow the inference of injury to competition. While this opinion does not address the MPAS case directly, it has nonetheless been argued that its use of the Standard Stations case in the same way that MPAS uses that case's approach suggests a "coalescence" of legal standards for judging antitrust legality of different vertical integration arrangements.See Kessler, 69 L.J. at 68-70, arguing that the Court's approach in this case shows its tendency to coalesce the legal standards under various antitrust laws when analyzing legality of different types of vertical integration.
Philadelphia Bank case
In United States v. Philadelphia Nat'l Bank, 374 U.S. 321 (1963), the Court explained what it considered the holding in the MPAS case. It explained that in both the MPAS and Standard Stations cases the Court based its finding of unlawfulness on the collective, total market foreclosure resulting from the charged company's plus its major competitors' market shares, which it found comparable to the market shares of the case before it: