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    "ocrText": "Ronald Reagan Presidential Library\nDigital Library Collections\nThis is a PDF of a folder from our textual collections.\nCollection: Roberts, John G.: Files\nFolder Title: JGR/Anti-Fleet Subsidy Legislation\nBox: 2\nTo see more digitized collections visit:\nhttps://reaganlibrary.gov/archives/digital-library\nTo see all Ronald Reagan Presidential Library inventories visit:\nhttps://reaganlibrary.gov/document-collection\nContact a reference archivist at: [email protected]\nCitation Guidelines: https://reaganlibrary.gov/citing\nNational Archives Catalogue: https://catalog.archives.gov/\nUNITED STATES DEPARTMENT OF COMMERCE\nUnited STATES of AMERICA\nWashington, D.C. 20230\nJAN 10 1984\nHonorable John D. Dingell\nChairman, Committee on Energy\nand Commerce\nU.S. House of Representatives\nWishington, D.C. 20515\nDear Mr. Chairman:\nThe Department of Commerce has reviewed H.R. 1415, a bill\n\"To protect franchised automobile. dealers from\nunfair price discrimination in the sale by the\nmanufacturer or importer of new motor vehicles,\"\nand we hereby submit our views on the legislation.\nUnder H.R. 1415, an automobile manufacturer would be prohibited\nfrom (a) selling or leasing any passenger car, truck or station\nwagon to any person at a price lower than that accorded to its\nfranchised dealers; (b) imposing upon a doaler any restrictions\nthat are not imposed upon all other purchasers; and (c) providing\nto a purchaser any rebate or discount that is not provided to all\npurchasers. In addition, a manufacturer would be unable to sell a\nvehicle to any person for resale to a unit of federal, state or\nlocal government at a price which is lower than the price at which\nthe vehicle is sold to a dealer during the same period for resale\nto a unit of government.\nWe oppose enactment of H.R. 1415. Despite its avowed intention\nto provide protection against \"unfair price discrimination, 11 in\nreality the bill would prohibit marketing practices that vehicle\nmanufacturers and their fleet customers have found highly\nefficient and mutually beneficial. We believe H.R. 1415 is\nanti-competitive and designed to benefit the special interests of\nfranchised automobile dealers at the expense of American\nconsumers.\nH.R. 1415 would eliminate competition in the fleet sales market by\nprohibiting large volume fleet purchasers, including the federal\ngovernment, from negotiating with automobile manufacturers for\nlower prices. We believe that large volume fleet purchasers,\nPrepared by: OAGC/L Lisa Lindeman 377-1328\nback EA (C. Miller)\nIPM Chron\nGC Chron\nFile H,R. 1415\nLisa Lindeman\n2\nincluding the federal government, should be allowed to negotiate\nwith manufacturers for lower prices in order to enhance\ncompetition and encourage efficient allocation of resources.\nWe understand that the Department of Justice is opposed to the\nbill because it would prohibit discounts on direct sales by\nmanufacturers both to governmental and commercial fleet purchasers,\nand that the Department intends to submit a report outlining its\nopposition to the bill which will focus on its undesirable effects.\nWe have been advised by the Office of Management and Budget\nthat there is no objection to the submission of this letter\nto the Congress from the standpoint of the Administration's\nposition.\nSincerely,\nthing I Mayals\nIrving P. Margulies\nActing General Counsel\nGENERAL COUNSEL OF THE\nUNITED STATES DEPARTMENT OF COMMERCE\nMOTRO STATES of AMERICA\nWashington, D.C. 20230\nJAN 10 1984\nHonorable Peter W. Rodino\nChairman, Committee on the Judici ry\nU.S. House of Representatives\nWashington, D.C. 20515\nDear Mr. Chairman:\nThe Department of Commerce has reviewed H.R. 1415, a bill\n\"To protect franchised automobile dealers from\nunfair price discrimination in the sale by the\nmanufacturer or importer of new motor vehicles,\"\nand we hereby submit our views on the legislation.\nUnder H.R. 1415, an automobile manufacturer would be prohibited\nfrom (a) selling or leasing any passenger car, truck or station\nwagon to any person at a price lower than that accorded to its\nfranchised dealers; (b) imposing upon a dealer any restrictions\nthat are not imposed upon all other purch sers; and (c) providing\nto a purchaser any rebate or discount that is not provided to all\npurchasers. In addition, a manufacturer would be unable to sell a\nvehicle to any person for resale to a unit of federal, state or\nlocal government at a price which is lower than the price at which\nthe vehicle is sold to a dealer during the same period for resale\nto a unit of government.\nWe oppose enactment of H.R. 1415. Despite its avowed intention\nto provide protection against \"unfair price discrimination, \" in\nreality the bill would prchibit marketing practices that vehicle\nmanufacturers and their fleet customers have found highly\nefficient and mutually beneficial. We believe H.R. 1415 is\nanti-competitive and designed to benefit the special interests of\nfranchised automobile dealers at the expense of American\nconsumers.\nH.R. 1415 would eliminate competition in the fleet sales market by\nprohibiting large volume fleet purchasers, including the federal\ngovernment, from negotiating with automobile manufacturers for\nlower prices. We believe that large volume fleet purchasers,\nPrepared by: OAGC/L Lisa Lindeman 377-1328\nbee: EA (C. Miller)\nIPM Chron\nGC Chron\nFile H.R. 1415\nLisa Lindeman\n2\nincluding the federal government, should be allowed to negotiate\nwith manufacturers for lower prices in order to enhance\ncompetition and encourage efficient allocation of resources.\nWe understand that the Department of Justice is opposed to the\nbill because it would prohibit discounts on direct sales by\nmanufacturers both to governmental and commercial fleet purchasers,\nand that the Department intends to submit a report outlining its\nopposition to the bill which will focus on its undesirable effects.\nWe have been advised by the Office of Management and Budget\nthat there is no objection to the submission of this letter\nto the Congress from the standpoint of the Administration's\nposition.\nSincerely,\nthing I Mayals\nIrving P. Margulies\nActing General Counsel\nTHE WHITE HOUSE\nWASHINGTON\nJune 6, 1984\nMEMORANDUM FOR BRANDEN BLUM\nLEGISLATIVE ATTORNEY\nOFFICE OF MANAGEMENT AND BUDGET\nFROM:\nJOHN G. ROBERTS 022\nASSOCIATE COUNSEL TO THE PRESIDENT\nSUBJECT:\nDOJ Draft Testimony on H.R. 5305 and\nH.R. 1415, Bills to Protect Franchised\nAutomobile Dealers and Consumers From\nUnfair Price Discrimination in Sale by\nManufacturers of New Vehicles\nCounsel's Office has reviewed the above-referenced draft\ntestimony, and finds no objection to it from a legal\nperspective.\nID #\nCU\nWHITE HOUSE\nCORRESPONDENCE TRACKING WORKSHEET\no OUTGOING\nH INTERNAL\nI . INCOMING\nDate Correspondence\nReceived (YY/MM/DD)\n/\n/\nName of Correspondent:\nJames murr\nMI Mail Report\nUser Codes: (A)\n(B)\n(C)\nSubject: DOJ draft testimony on H.R. 5305 and H.R. 1415, bills\nto protect franchised automolile dealersand Consumer from\nunfair price discrimination in pale by manufacturers\nof new vehicles\nROUTE TO:\nACTION\nDISPOSITION\nTracking\nType\nCompletion\nAction\nDate\nof\nDate\nOffice/Agency\n(Staff Name)\nCode\nYY/MM/DD\nResponse\nCode\nYY/MM/DD\nCUHOLL\nORIGINATOR 84,06,05\n/\n/\nReferral Note:\nCOAT 18\nK 84106.05\nS 84,06,06\nReferral Note:\n10:00 AM\n/\n/\n/\n/\n-\nReferral Note:\n/\n/\n/\n/\n-\nReferral Note:\n/\n/\n/\n/\nI\nReferral Note:\nACTION CODES:\nDISPOSITION CODES:\nA Appropriate Action\nI . Info Copy Only/No Action Necessary\nA Answered\nC Completed\nC - Comment/Recommendation\nR Direct Reply w/Copy\nB Non-Special Referral\nS Suspended\nD - Draft Response\nS For Signature\nF . Furnish Fact Sheet\nX Interim Reply\nto be used as Enclosure\nFOR OUTGOING CORRESPONDENCE:\nType of Response = Initials of Signer\nCode = \"A\"\nCompletion Date = Date of Outgoing\nComments:\nKeep this worksheet attached to the original incoming letter.\nSend all routing updates to Central Reference (Room 75, OEOB).\nAlways return completed correspondence record to Central Files.\nRefer questions about the correspondence tracking system to Central Reference, ext. 2590.\n5/81\nEXECUTIVE OFFICE OF THE PRESIDENT\nOFFICE OF MANAGEMENT AND BUDGET\nWASHINGTON, D.C. 20503\nSPECIAL\nJune 5, 1984\nLEGISLATIVE REFERRAL MEMORANDUM\nTO:\nLEGISLATIVE LIAISON OFFICER\nDepartment of Commerce (LRM only)\nDepartment of Defense - Werner Windus - : 697- 1305\nFederal Trade Commission (LRM only)\nDepartment of Transportation - John Collins - 426-4694\nGeneral Services Administration - Ted Ebert - 566-1250\nDOJ draft testimony on H.R. 5305 and H.R. 1415, bills to protect\nSUBJECT:\nfranchised automobile dealers and consumers from unfair price\ndiscrimination in sale by manufacturers of new vehicles\nThe Office of Management and Budget requests the views of your\nagency on the above subject before advising on its relationship\nto the program of the President, in accordance with OMB Circular\nA-19.\nPlease provide us with your views no later than\n10:00 A.M. Wednesday, June 6, 1984. (NOTE: A hearing is scheduled for Thursday\nJune 7. Also agency reports opposing H.R. 1415 have been previously circulated\nfor review and cleared.)\nDirect your questions to Branden Blum (395-38,02), the legislative\nattorney in this office.\nJames C. Muri for\nAssistant Director for\nLegislative Reference\nEnclosure\nCC: K. Wilson\nJ. Dyer\nR. Howard\nM. Uhlmann\nJ. Cooney\nK. Schwartz\nL. Li\nF. Fielding\nDRAFT\nSTATEMENT\nOF\nCHARLES F. RULE\nDEPUTY ASSISTANT ATTORNEY GENERAL\nANTITRUST DIVISION\nBEFORE\nTHE\nCOMMITTEE ON ENERGY AND COMMERCE\nSUBCOMMITTEE ON COMMERCE, TRANSPORTATION AND TOURISM\nHOUSE OF REPRESENTATIVES\nCONCERNING\nAUTO MANUFACTURER'S PRICING POLICY - H.R. 5305\nON\nJUNE 7, 1984\nMr. Chairman and Members of the Committee: I am pleased to\nhave the opportunity to provide you with the views of the\nDepartment of Justice on H.R. 1415 and H.R. 5305, bills \"to\nprotect consumers and franchised automobile dealers from unfair\nprice discrimination in the sale by the manufacturer of new\nmotor vehicles.\" For the reasons I will discuss, the\nDepartment of Justice strongly recommends against enactment of\nthis legislation.\nI.\nDescription of the Bills and the Existing Motor\nVehicle Distributional System\nWhile these bills are similar in that their essential\nfeature is to prohibit price differentials to different classes\nof motor vehicle purchasers, they are different in certain\nrespects. H.R. 1415 would substantially expand the \"Automobile\nDealers' Day in Court Act,\" 15 U.S.C. 1221 et seq., which\ngoverns certain relations between automobile manufacturers and\ntheir dealers. Section 1 (a) of H.R. 1415 provides that each\nfranchise agreement between a motor vehicle dealer and\nmanufacturer shall be deemed to prohibit the manufacturer\nfrom: (1) selling or offering to sell any vehicle to any\nperson (including any other dealer) during any period of time\nat a price lower than that charged to its franchised dealers\nfor the same, similarly equipped model during the same period\nof time; (2) imposing or enforcing any restriction on its\ndealers not imposed or enforced against any other purchaser;\nand (3) providing ultimate purchasers with any rebate,\ndiscount, refund, promotional service, additional equipment, or\nany other inducement or benefit not provided to all other\nultimate purchasers of the same model during the same time\nperiod. An exception to prohibition (1) above permits the\nmanufacturer to sell a vehicle to any person (including any\nother dealer) for resale to any unit of federal, state, or\nlocal government, but only if the manufacturer does not sell or\noffer to sell the same, similarly equipped model to any other\nperson for resale to any unit of government at any period of\ntime at a price lower than that charged to the franchised\ndealer.\nH.R. 5305, on the other hand, takes a somewhat different\napproach to achieve essentially the same result. Section 2 of\nthat bill provides that no motor vehicle manufacturer may sell\nor lease any new vehicle to any person (including a dealer)\nduring any sales period at a price higher than the lowest price\nat which any other vehicle of the same model, similarly\nequipped, is sold or leased, or offered for sale or lease, by\nthe manufacturer during that sales period. Section 3 provides\nan exception allowing the manufacturer to sell or lease, or\noffer to sell or lease, any new vehicle to (1) a non-dealer\nemployee of the manufacturer; (2) any department, agency, or\ninstrumentality of the United States or of a State or local\ngovernment; (3) or the American Red Cross. A further exemption\nin Section 3 permits the sale or offer to sell any new vehicle\nto any purchaser, if such sale or offer to sell by the\n-2-\nmanufacturer is part of a qualified regional incentive sales\nprogram for a designated region. To 60 qualify, all vehicles\nof the same model, similarly equipped, sold or offered for sale\nby the manufacturer in the region during the period, must be\nsold and offered at the same price, and all vehicles sold in\nsuch region during such period must be delivered by the\nmanufacturer to the purchaser in such regions.\nBoth bills would permit persons to bring actions against\nmotor vehicle manufacturers for damages and injunctive relief\nbased upon violations of the prohibitions contained in the\nrespective bills. In addition, H.R. 5305 permits awards of\npunitive damages and attorneys fees in the discretion of the\ncourt.\nBoth bills would substantially alter motor vehicle\nmanufacturers' existing relationships with their dealers and\nthe present distribution system for such vehicles. As such,\nthey appear to be based upon some belief that the existing\ndistribution system for motor vehicles is not efficient and is\nflawed in ways that ultimately harm consumers. However, it is\nin the manufacturers' interest to choose the most efficient\ndistribution system possible, so as to minimize the costs of\ndistributing motor vehicles to ultimate consumers and thereby\nmaximize their profits. We are aware of no evidence that the\nexisting distributional system is inefficient, nor are we aware\nof any reasons why manufacturers would choose an inefficient\ndistribution system.\n-3-\nCurrently, manufacturers distribute the great majority of\ntheir motor vehicles to franchised dealers, who provide\nparticular services as desired by individual consumers and\nother low-volume purchasers. Manufacturers also distribute\nsome of their vehicles directly to high-volume purchasers, such\nas governmental units, taxi fleet operators, and rental car\ncompanies, who use those vehicles to provide products or\nservices to consumers. Information we have seen indicates\nthat, at present, high-volume sales account for only\napproximately 20% of the current motor vehicle market. The\nremaining 80% of such sales are made through franchised\ndealers.\nDifferent groups of vehicle users value particular\ndistribution services differently and are, therefore, willing\nto pay different amounts for those services. Thus, for\nexample, an individual who desires to purchase an automobile\nfor personal (or even business) use from a franchised dealer\nwill demand a certain mix of services. Some of those services\nwill be provided by the manufacturer (e.g., installation of\ncertain options, warranty terms, and delivery to the dealer).\nwhile other services will be provided by the dealer (e.g.,\nsales efforts, demonstrators, road preparation, and repair work\nunder the warranty).\nHigh-volume purchasers, on the other hand, may be willing\nto forego certain services or perform them themselves, saving\nmanufacturers those costs and enabling them to charge such\n-4-\npurchasers less than the price charged to franchised dealers.\nIn addition, there may be some benefits to manufacturers as a\nresult of use of their vehicles by high-volume purchasers that\nalso benefit franchised dealers. For example, consumers get\nvaluable information about the operation of vehicles they rent\nthat may factor in their purchase decisions, and rental car\ncompany advertisements about the cars they lease likewise\nbenefit both the manufacturers of those cars and their\nfranchised dealers. The imporant point, however, is that\nthrough whatever channel the vehicles are distributed,\nconsumers ultimately must bear the costs of the distribution\nsystem as purchasers of vehicles, as ultimate users of\ntransportation services, and as taxpayers.\nThe ability of manufacturers to adjust their charges\naccording to different services provided enables them to\nsatisfy the varying demands of their different classes of\npurchasers at prices that reflect the costs of the services\nprovided. If, as we believe, the existing system is efficient,\nthen enactment of H.R. 1415 or H.R. 5305 may require some\ncustomers to pay for services they do not desire, some to\npurchase desired services from a less efficient and more costly\nsystem, and others to forego services for which they would be\nwilling to pay. These price differences most likely reflect\ndifferences in consumer demands for vehicle services and the\ncosts of providing them efficiently. If price differences are\nno longer permitted fully to reflect the costs associated with\n-5-\ndifferent distribution methods because of governmental\nintrusion into existing market mechanisms, then prices will\nrise to cover the higher-cost distribution methods. By\nnegating existing efficiencies, these bills will raise the\noverall costs of the motor vehicle distribution system, thereby\nadversely affecting the interests of consumers.\nAn efficient distribution system enables both manufacturers\nand dealers to compete most effectively against their\nrespective rivals and benefits consumers through the lowest\npossible prices. Because tailoring a distribution system to\nthe diverse needs of different classes of customers can have\nthese beneficial effects, multiple distribution systems\nfrequently exist for other manufactured goods. For example,\nfood, hardware, household goods, and other products are offered\nby large \"no frills\" stores, which may purchase directly from\nthe manufacturer, as well as by small \"mom and pop\" stores that\nprovide substantial services and which generally purchase\nthrough intermediaries. Similarly, products such as appliances\nand electronic and photographic equipment are distributed\nthrough service-oriented department stores, as well as through\ndiscount stores and mail-order catalog outlets that provide\nfew, if any, services. By precluding manufacturers from\ncharging different classes of purchasers different prices,\nH.R. 1415 and H.R. 5305 totally ignore the value of services\nprovided and effectively would destroy the manufacturers'\nincentives and abilities to tailor different distributional\n-6-\nsystems to different needs. Consumers thereby would be denied\nthe benefits of the most efficient distribution system for\nmotor vehicles.\nII. The Bills Are Unnecessary\nProponents of H.R. 1415 and H.R. 5305 have labeled them as\nbills to prevent \"unfair price discrimination.\" We are not\naware that any price discrimination is occurring, and hence, we\nbelieve this characterization to be erroneous. Price\ndiscrimination occurs when prices charged do not reflect the\ncosts of doing business with particular customers or groups of\ncustomers. Thus, price discrimination may occur when different\nprices are charged to persons for whom the cost of doing\nbusiness is the same; conversely, it may occur when the same\nprice is charged to persons for whom the costs of doing\nbusiness are different. Because proponents of these bills have\nnot shown that any differences in prices charged do not reflect\nthe different costs of doing business with franchised dealers\nand high-volume purchasers, the existence of price\ndiscrimination has not been established. Even if there were\nsome price differences not fully accountable by cost\ndifferences among different customer classes, these bills\nunnecessarily go far beyond existing prohibitions against price\ndiscrimination as prohibited by the Robinson-Patman Act, 15\nU.S.C. S 13a et seq. Unlike that statute, H.R. 1415 and\nH.R. 5305 would prohibit essentially all price differences,\neven where no anticompetitive effect is observed and without\n-7-\nregard to other legitimate business justifications recognized\nby the Robinson-Patman Act, such as good faith meeting of\ncompetition or the reasonable availability of lower prices to\nother customers.\nIt has been argued by proponents of H.R. 1415 and H.R. 5305\nthat this legislation is necessary to prohibit manufacturers\nfrom \"subsidizing\" fleet sales. However, neither bill defines\nthe term \"subsidization\" or contains any proposed Congressional\nfindings as to precisely what conduct is alleged to be\noccurring. Accordingly, we are unaware of the specific basis\nupon which such a claim has been made. Moreover, any\nconsideration of so-called \"subsidization\" requires careful\nidentification and consideration of the common and overhead\ncosts associated with producing vehicles for each group of\npurchasers, as well as the incremental or marginal costs of\nproducing for each group. Without going into the technical\ncomplications, subsidization essentially requires that the\ngroup receiving the subsidy is paying less than the incremental\ncost of serving it, and that the group providing the subsidy is\npaying more than it would pay if the first group were not being\nserved. Proponents of this legislation have not cited, nor are\nwe aware of, any evidence that would tend to establish that any\nsuch conduct is occurring. Accordingly, the case for enactment\nof this legislation simply has not been made.\n-8-\nIII. The Bills Will Lead To Inefficient Distribution\nAnd Higher Prices For Motor Vehicles\nRather than reflecting any so-called \"subsidy\" strategy, it\nis far more likely that any differences between prices charged\nhigh-volume purchasers and franchised dealers reflect\ndifferences in the relative costs of serving the different sets\nof customers. For example, scheduling production, credit,\nfinancing, delivery and road preparation services may be easier\nand less costly to provide to high-volume purchasers than to\nfranchised dealers, thereby offering manufacturers scale and\nother economies in their sales to the former group. Second,\nrecalls and other after-sale services requiring consumer\nnotification are likely to be simpler and less costly with\nrespect to high-volume purchasers. These factors can be\nexpected to reduce manufacturers' costs of dealing with\nhigh-volume purchasers, thus enabling them to sell to such\ncustomers at prices lower than they must charge their other\ncustomers for whom such cost savings are not available.\nMoreover, manufacturers' advertising expenditures intended\nto generate sales to individual consumers purchasing through\nfranchised dealers should properly be attributed to vehicles\nsold through those dealers and not to vehicles whose sales are\nnot affected by such advertising. Thus, proper allocation of\nadvertising and other promotional services may also indicate\nthat manufacturers' costs of dealing with high-volume\npurchasers are lower than their costs of dealing with\n-9-\nfranchised dealers. These examples suggest the range of\npotential cost differences in serving the different sets of\nvehicle purchasers that are likely to account for any price\ndifferences that may exist. The ability to price in accordance\nwith such differences is fully consistent with rational sales\nwho could be expected to gain at the expense of\nconsumers policies in a competitive environment, and benefits\nconsumers by providing them the goods and services they desire\nat the lowest possible cost.\nOur opposition to these bills is not mitigated by the\nexceptions they contain to the general rule that\nmanufacturerers must charge the same prices for similar\nvehicles. That general rule will have serious adverse effects,\nwhich will not significantly be alleviated by the bills'\nnarrow, limited and rigid exceptions. Rather, enactment of\nH.R. 1415 or H.R. 5305 would tend to rigidify manufacturer\npricing decisions, and may also make it easier for\nmanufacturers to collude on prices because price cutting to\nparticular service outlets would be prohibited by law.\nFurthermore, since price differences among service outlets\nwould not be permitted irrespective of the costs of providing\nmotor vehicles to those outlets, in situations where the costs\nof supplying vehicles differ, competition among manufacturers\nmust take the form of costly and inefficient service\ncompetition much like that observed in regulated industries\n-10-\nwith fixed rates, such as experienced in the airline industry\nprior to deregulation.\nI should also point out that enactment of H.R. 1415 or H.R.\n5305 will undesirably increase litigation through creation of a\nnew federal cause of action. Moreover, such litigation is\nlikely to be expensive, time-consuming and complex due to the\nvarious possible standards for identifying vehicle models and\ntheir respective prices. In addition, manufacturerers faced\nwith the requirements contained in these bills can be expected\nto seek to avoid their effects by further differentiating their\nmodels, particularly in light of the ease with which they could\nmodify them by altering standard equipment or the options that\nare designated as standard. Such attempts will not only further\nincrease the likelihood of litigation, but will also add to\nmanufacturers' costs and make the bill largely unenforceable.\nIV. Conclusion\nProponents of H.R. 1415 and H.R. 5305 have not shown that\nany price discrimination or \"subsidization\" of fleet purchasers\nis occurring, or that consumers are suffering any economic harm\nfrom the present method of sales to commercial and governmental\nhigh-volume purchasers. Rather, the dual distribution system\nemployed by motor vehicle manufacturers appears to be\nefficient, to reflect the costs of dealing with different\nclasses of customers, and to meet those customers' different\nneeds at the lowest possible costs. Thus, to impose new, rigid\nregulations on manufacturers that would prohibit continuation\n-11-\nof existing pricing practices that are not alleged to be\nunlawful, as these bills would do, is against the public\ninterest. The bills would destroy an efficient distribution\nsystem, increase costs to consumers and increase government\nregulation of private contracts in furtherance of the\nfranchised dealers' special interest. For all these reasons,\nthe Department of Justice strongly recommends against enactment\nof this legislation.\nMr. Chairman, that concludes my prepared remarks. I would\nbe happy to respond to any questions that you or other members\nof the Committee may have.\n-12-\nT4-8/831\nOMB\nHR 530:\nU.S. Department of Justice\nBlun\nHR 1415\nOffice of Legislative and Intergovernmental Affairs\nOffice of the Assistant Attorney General\nWashington, D.C. 20530\n08 JUN 1984\nHonorable Peter W. Rodino, Jr.\nChairman\nCommittee on the Judiciary\nHouse of Representatives\nWashington, D.C. 20515\nDear Mr. Chairman:\nThis letter responds to your request for the views of the\nDepartment of Justice on H.R. 1415 and H.R. 5305, bills \"to\nprotect consumers and franchised automobile dealers from unfair\nprice discrimination in the sale by the manufacturer of new motor\nvehicles.\" For the reasons set forth below, the Department of\nJustice strongly recommends against enactment of this legislation.\nI. Description of the Bills and the Existing Motor\nVehicle Distributional System\nAlthough these bills are similar in that their essential\nfeature is to prohibit price differentials to different classes\nof motor vehicle purchasers, they are different in certain\nrespects. H.R. 1415 would substantially expand the \"Automobile\nDealers' Day in Court Act,\" 15 U.S.C. 1221 et seq., which governs\ncertain relations between automobile manufacturers and their\ndealers. Section 1 (a) of H.R. 1415 provides that each franchise\nagreement between a motor vehicle dealer and manufacturer shall\nbe deemed to prohibit the manufacturer from: (1) selling or\noffering to sell any vehicle to any person (including any other\ndealer) during any period of time at a price lower than that\ncharged to its franchised dealers for the same, similarly\nequipped model during the same period of time; (2) imposing or\nenforcing any restriction on its dealers not imposed or enforced\nagainst any other purchaser; and (3) providing ultimate\npurchasers with any rebate, discount, refund, promotional\nservice, additional equipment, or any other inducement or benefit\nnot provided to all other ultimate purchasers of the same model\nduring the same time period. An exception to prohibition (1)\nabove permits the manufacturer to sell a vehicle to any person\n(including any other dealer) for resale to any unit of federal,\nstate, or local government, but only if the manufacturer does not\nsell or offer to sell the same, similarly equipped model to any\nother person for resale to any unit of government at any period\nof time at a price lower than that charged to the franchised\ndealer.\nH.R. 5305, on the other hand, takes a somewhat different\napproach to achieve essentially the same result. Section 2 of\nthat bill provides that no motor vehicle manufacturer may sell or\nlease any new vehicle to any person (including a dealer) during\nany sales period at a price higher than the lowest price at which\nany other vehicle of the same model, similarly equipped, is sold\nor leased, or offered for sale or lease, by the manufacturer\nduring that sales period. Section 3 provides an exception\nallowing the manufacturer to sell or lease, or offer to sell or\nlease, any new vehicle to (1) a non-dealer employee of the\nmanufacturer; (2) any department, agency, or instrumentality of\nthe United States or of a State or local government; or (3) the\nAmerican Red Cross. A further exemption in Section 3 permits the\nsale or offer to sell any new vehicle to any purchaser, if such\nsale or offer to sell by the manufacturer is part of a qualified\nregional incentive sales program for a designated region. To\nqualify, all vehicles of the same model, similarly equipped, sold\nor offered for sale by the manufacturer in the region during the\nperiod, must be sold and offered at the same price, and all\nvehicles sold in such region during such period must be delivered\nby the manufacturer to the purchaser in such regions.\nBoth bills would permit persons to bring actions against\nmotor vehicle manufacturers for damages and injunctive relief\nbased upon violations of the prohibitions contained in the\nrespective bills. In addition, H.R. 5305 permits awards of\npunitive damages and attorneys fees in the discretion of the\ncourt.\nBoth bills would substantially alter motor vehicle manufac-\nturers' existing relationships with their dealers and the present\ndistribution system for such vehicles. As such, they appear to\nbe based upon some belief that the existing distribution system\nfor motor vehicles is not efficient and is flawed in ways that\nultimately harm consumers. However, it is in the manufacturers'\ninterest to choose the most efficient distribution system\npossible, so as to minimize the costs of distributing motor\nvehicles to ultimate consumers and thereby maximize their\nprofits. Moreover, automobile manufacturers must compete among\nthemselves for dealers and for sales to ultimate consumers. We\nare aware of no evidence that the existing distributional system\nis inefficient, nor are we aware of any reasons why manufacturers\nwould choose an inefficient distribution system.\nCurrently, manufacturers distribute the great majority of\ntheir motor vehicles to franchised dealers, who provide\nparticular services as desired by individual consumers and other\nlow-volume purchasers. Manufacturers alsò distribute some of\n-2-\ntheir vehicles directly to high-volume purchasers, such as\ngovernmental units, taxi fleet operators, and rental car\ncompanies, who use those vehicles to provide products or services\nto consumers. Information we have seen indicates that, at\npresent, high-volume sales account for only approximately 20% of\nthe current motor vehicle market. The remaining 80% of such\nsales are made through franchised dealers.\nDifferent groups of vehicle users value particular\ndistribution services differently and are, therefore, willing to\npay different amounts for those services. Thus, for example, an\nindividual who desires to purchase an automobile for personal (or\neven business) use from a franchised dealer will demand a certain\nmix of services. Some of those services will be provided by the\nmanufacturer (e.g., installation of certain options, warranty\nterms, and delivery to the dealer), while other services will be\nprovided by the dealer (e.g., sales efforts, demonstrators, road\npreparation, and repair work under the warranty).\nHigh-volume purchasers, on the other hand, may be willing to\nforego certain services or perform them themselves, saving\nmanufacturers those costs and enabling manufacturers to charge\nsuch purchasers less than the price charged to franchised\ndealers. In addition, there may be some benefits to\nmanufacturers as a result of use of their vehicles by high-volume\npurchasers that also benefit franchised dealers. For example,\nconsumers get valuable information about the operation of\nvehicles they rent that may factor in their purchase decisions,\nand rental car company advertisements about the cars they lease\nlikewise benefit both the manufacturers of those cars and their\nfranchised dealers. If fleet car sales for some reason reduce\nthe willingness of franchised dealers to provide services that\nmost consumers want, then the manufacturer will lose sales and\nprofits and, therefore, will have the incentive to restructure\nits fleet sales in a way that ensures that these services will be\nprovided. The important point, however, is that through whatever\nchannel the vehicles are distributed, consumers ultimately must\nbear the costs of the distribution system as purchasers of\nvehicles, as ultimate users of transportation services, and as\ntaxpayers.\nThe ability of manufacturers to adjust their charges\naccording to different services provided enables them to satisfy\nthe varying demands of their different classes of purchasers at\nprices that reflect the costs of the services provided. If, as\nwe believe, the existing system is efficient, then enactment of\nH.R. 1415 or H.R. 5305 may require some customers to pay for\nservices they do not desire, some to purchase desired services\nfrom a less efficient and more costly system, and others to\nforego services for which they would be willing to pay. These\nprice differences most likely reflect differences in consumer\ndemands for vehicle services and the costs of providing them\n-3-\nefficiently. If price differences are no longer permitted fully\nto reflect the costs associated with different distribution\nmethods because of governmental intrusion into existing market\narrangements, then prices will rise to cover the higher-cost\ndistribution methods. By negating existing efficiencies, these\nbills will raise the overall costs of the motor vehicle\ndistribution system, thereby adversely affecting the interests of\nconsumers.\nAn efficient distribution system enables both manufacturers\nand dealers to compete most effectively against their respective\nrivals and benefits consumers through the lowest possible\nprices. Because tailoring a distribution system to the diverse\nneeds of different classes of customers can have these beneficial\neffects, multiple distribution systems frequently exist for other\nmanufactured goods. For example, products such as appliances and\nelectronic and photographic equipment are distributed through\nservice-oriented department stores, as well as through discount\nstores and mail-order catalog outlets that provide few, if any,\nservices. By precluding manufacturers from charging different\nclasses of purchasers different prices, H.R. 1415 and H.R. 5305\ntotally ignore the value of services provided and effectively\nwould destroy the manufacturers' incentives and abilities to\ntailor different distributional systems to different needs.\nConsumers thereby would be denied the benefits of the most\nefficient distribution system for motor vehicles.\nII. The Bills Are Unnecessary\nProponents of H.R. 1415 and H.R. 5305 have labeled them as\nbills to prevent \"unfair price discrimination.\" We are not aware\nthat any price discrimination is occurring, and hence, we believe\nthis characterization to be erroneous. Price discrimination\noccurs when prices charged do not reflect the costs of doing\nbusiness with particular customers or groups of customers. Thus,\nprice discrimination may occur when different prices are charged\nto persons for whom the cost of doing business is the same;\nconversely, it may occur when the same price is charged to\npersons for whom the costs of doing business are different.\nBecause proponents of these bills have not shown that any\ndifferences in prices charged do not reflect the different costs\nof doing business with franchised dealers and high-volume\npurchasers, the existence of price discrimination has not been\nestablished. Even if there were some price differences not fully\naccountable by cost differences among different customer classes,\nthese bills unnecessarily go far beyond existing prohibitions\nagainst price discrimination as prohibited by the Robinson-Patman\nAct, 15 U.S.C. $ 13a et seq. Unlike that statute, H.R. 1415 and\nH.R. 5305 would prohibit essentially all price differences, even\nwhere no anticompetitive effect is observed and without regard to\nother legitimate business justifications recognized by the\nRobinson-Patman Act, such as good faith meeting of competition or\nthe reasonable availability of lower prices to other customers.\n-4-\nIt has been argued by proponents of H.R. 1415 and H.R. 5305\nthat this legislation is necessary to prohibit manufacturers from\n\"subsidizing\" fleet sales. However, neither bill defines the\nterm \"subsidization\" or contains any proposed Congressional\nfindings as to precisely what conduct is alleged to be\noccurring. Accordingly, we are unaware of the specific basis\nupon which such a claim has been made. Moreover, any\nconsideration of so-called \"subsidization\" requires careful\nidentification and consideration of the common and overhead costs\nassociated with producing vehicles for each group of purchasers,\nas well as the incremental or marginal costs of producing for\neach group. Without going into the technical complications,\nsubsidization essentially requires that the group receiving the\nsubsidy is paying less than the incremental cost of serving it,\nand that the group providing the subsidy is paying more than it\nwould pay if the first group were not being served. Proponents\nof this legislation have not cited, nor are we aware of, any\nevidence that would tend to establish that any such conduct is\noccurring. Accordingly, the case for enactment of this\nlegislation simply has not been made.\nIII. The Bills Will Lead To Inefficient Distribution\nAnd Higher Prices For Motor Vehicles\nRather than reflecting any so-called \"subsidy\" strategy, it\nis far more likely that any differences between prices charged\nhigh-volume purchasers and franchised dealers reflect differences\nin the relative costs of serving the different sets of\ncustomers. For example, scheduling production, credit,\nfinancing, delivery and road preparation services may be easier\nand less costly to provide to high-volume purchasers than to\nfranchised dealers, thereby offering manufacturers scale and\nother economies in their sales to the former group. Second,\nrecalls and other after-sale services requiring consumer\nnotification are likely to be simpler and less costly with\nrespect to high-volume purchasers. These factors can be expected\nto reduce manufacturers' costs of dealing with high-volume\npurchasers, thus enabling them to sell to such customers at\nprices lower than they must charge their other customers for whom\nsuch cost savings are not available.\nMoreover, manufacturers' advertising expenditures intended to\ngenerate sales to individual consumers purchasing through\nfranchised dealers should properly be attributed to vehicles sold\nthrough those dealers and not to vehicles whose sales are not\naffected by such advertising. Thus, proper allocation of\nadvertising and other promotional services may also indicate that\nmanufacturers' costs of dealing with high-volume purchasers are\nlower than their costs of dealing with franchised dealers. These\nexamples suggest the range of potential cost differences in\nserving the different sets of vehicle purchasers that are likely\nto account for any price differences that may exist. The ability\n-5-\nto price in accordance with such differences is fully consistent\nwith rational sales policies in a competitive environment, and\nbenefits consumers by providing them the goods and services they\ndesire at the lowest possible cost.\nOur opposition to these bills is not mitigated by the\nexceptions they contain to the general rule that manufacturers\nmust charge the same prices for similar vehicles. That general\nrule will have serious adverse effects, which will not\nsignificantly be alleviated by the bills' narrow, limited and\nrigid exceptions. Rather, enactment of H.R. 1415 or H.R. 5305\nwould tend to freeze manufacturer pricing decisions and may also\nmake it easier for manufacturers to collude on prices because\nprice cutting to particular service outlets would be prohibited\nby law. Furthermore, since price differences among service\noutlets would not be permitted irrespective of the costs of\nproviding motor vehicles to those outlets, in situations where\nthe costs of supplying vehicles differ, competition among\nmanufacturers must take the form of costly and inefficient\nservice competition much like that observed in regulated\nindustries with fixed rates, such as experienced in the airline\nindustry prior to deregulation.\nI should also point out that enactment of H.R. 1415 or\nH.R. 5305 will undesirably increase litigation through creation\nof a new federal cause of action. Moreover, such litigation is\nlikely to be expensive, time-consuming and complex due to the\nvarious possible standards for identifying vehicle models and\ntheir respective prices. In addition, manufacturers faced with\nthe requirements contained in these bills can be expected to seek\nto avoid their effects by further differentiating their models,\nparticularly in light of the ease with which they could modify\nthem by altering standard equipment or the options that are\ndesignated as standard. Such attempts will not only further\nincrease the likelihood of litigation but will also add to\nmanufacturers' costs and make the bill largely unenforceable.\nIV. Conclusion\nProponents of H.R. 1415 and H.R. 5305 have not shown that any\nprice discrimination or \"subsidization\" of fleet purchasers is\noccurring, or that consumers are suffering any economic harm from\nthe present method of sales to commercial and governmental\nhigh-volume purchasers. Rather, the dual distribution system\nemployed by motor vehicle manufacturers appears to be efficient,\nto reflect the costs of dealing with different classes of\ncustomers, and to meet those customers' different needs at the\nlowest possible costs. Thus, to impose new, rigid regulations on\nmanufacturers that would prohibit continuation of existing\npricing practices that are not alleged to be unlawful, as these\nbills would do, is against the public interest. The bills would\ndestroy an efficient distribution system, increase costs to\n-6-\nconsumers and increase government regulation of private\ncontracts. For all these reasons, the Department of Justice\nstrongly recommends against enactment of this legislation.\nThe Office of Management and Budget has advised this\nDepartment that there is no objection to the submission of this\nreport from the standpoint of the Administration's Program.\nSincerely,\n(Signed Robert A. McConnel\nRobert A. McConnell\nAssistant Attorney General\nFinal\nDEPARTMENT OF COMMERCE\nHE\n5305,\nHR 1415\nGENERAL COUNSEL OF THE\nUNITED STATES DEPARTMENT OF COMMERCE\nUNITED STATES OF AMERICA\nWashington, D.C. 20230\nJUL 17 1984\nHonorable John D. Dingell\nChairman, Committee on Energy\nand Commerce\nU.S. House of Representatives\nWashington, D.C.- 20515\nDear Mr. Chairman:\nThis is in response to your request for the views of the Department\nof Commerce concerning H.R. 5305, a bill\n\"To protect consumers and franchised automobile dealers from\nunfair price discrimination in the sale by the manufacturer\nof new motor vehicles.\"\nH.R. 5305 would prohibit an automobile manufacturer from selling\nor leasing any new automobile, or offering to sell or lease any\nnew automobile, to any person (including an automobile dealer) at\na price that is higher than the lowest price for which any other\nautomobile of the same model is sold or offered during a\nparticular sales period. The bill would provide exceptions for\nsales to employees of an automobile manufacturer, agencies of the\nUnited States or any state or local government, the American\nRed Cross, and sales under regional sales incentive programs. The\nprohibitions in the bill would be enforceable by private action.\nThe Department of Commerce opposes enactment of H.R. 5305. The\nlegislation effectively would prohibit marketing practices that\nvehicle manufacturers and their fleet customers have found highly\nefficient and mutually beneficial. By requiring that the\n\"lowest price\" be the only selling price for a vehicle,\nH.R. 5305 would, despite its avowed intention to protect consumers\nand automobile dealers against \"unfair price competition, = be\nanti-competitive.\nH.R. 5305 would eliminate or reduce competition in the fleet sales\nmarket by prohibiting large volume fleet purchase discounts. We\nbelieve that large volume fleet purchasers should be allowed to\nnegotiate with manufacturers for lower prices. Fleet sales are an\nimportant factor in automobile manufacturing. Automobile companies\ncan offer discounts on direct volume sales because such sales\nhelp reduce the per vehicle cost of manufacturing and thereby\nincrease overall profits without raising prices to dealers. Fleet\nsales are often made in advance of initial vehicle production and\nthereby encourage the marketing of new products.\n-2-\nWe have been advised by the Office of Management and Budget that\nthere is no objection to the submission of this letter to the\nCongress from the standpoint of the Administration's position.\nSincerely,\nthing\nIrving P. Marqulies\nGeneral Counsel\nEXECUTIVE OFFICE OF THE PRESIDENT\nOFFICE OF MANAGEMENT AND BUDGET\nROUTE SLIP\nTake necessary action\nTO\nJohn Roberts\nApproval or signature\nComment\nPrepare reply\nDiscuss with me\nFor your information\nSee remarks below\nFROM\nBranden Blum\nBB\nDATE 9/17/84\nREMARKS\nH.R. 1415 and H.R. 5305, bills to\nprotect consumers and franchised auto-\nmobile dealers from unfair price\ndiscrimination in the sale by\nmanufacturers of new motor vehicles\nPer your request attched are copies of\nagency reports or testimony on the bills.\nI will forward to you upon receipt a copy\nof the signed Commerce report opposing\nS. 2770.\nOMB FORM 4\nRev Aug 70\nAPPROVED\nStatement of Barbara A. Clark\nDeputy Director\nBureau of Competition\nFederal Trade Commission\nbefore the\nSubcommittee on Commerce,\nTransportation and Tourism\nUnited States House of Representatives\nJune 7, 1984\nMr. Chairman, members of the subcommittee. Thank you for\nthe opportunity to comment on H.R. 5305, a bill intended to\nprotect consumers and franchised automobile dealers from unfair\nprice discrimination in the sale of new motor vehicles by\nmanufacturers. H.R. 5305 is a successor to H.R. 1415. While the\nbills address many of the same issues, H.R. 5305 is in part a\nreaction to Federal Trade Commission criticisms of H.R. 1415.\nWhile we appreciate the attempt to meet some of our concerns, we\nstill have fundamental problems with the proposed legislation.\nEssentially, H.R. 5305 requires a car manufacturer to sell\n(or lease) all similarly equipped cars of the same model to all\ndirect purchasers, including dealers, at the same price. Where a\nmanufacturer gives rebates or other benefits to indirect\npurchasers, the manufacturer's price to the direct purchasers\ngenerally cannot be higher than the effective price to the\nindirect purchasers.\nI believe an analysis of the key provisions in H.R. 5305\nreveals that this bill, like its predecessor, should not be\nenacted into law. In fact, this bill raises some legal problems\nnot present in the earlier bill in addition to the probable\nanticompetitive consequences we pointed out in our comments on\nH.R. 1415. I would like to briefly discuss our concerns with the\nspecific sections of the bill.\nSection 1: Definitions\nA major definitional problem occurs in Section 1(5), which\ndefines \"sales period\" as \"any period of time during which a new\nautomobile is sold or leased\" at a specified price. This is the\nperiod to which the court would look to determine whether\ndiscriminatory prices are being offered in violation of Section\n2. Section 1(5) may undermine the whole bill in large part\nbecause this section could be read to mean that the pertinent\nsales period ends as soon as a different price is instituted.\nUnder this interpretation, a car manufacturer's new lower price\nto one purchaser could not violate Section 2, because the\nmanufacturer's lower price institutes a new sale period, which\nterminates as soon as the manufacturer charges a new price to\nsomeone else. Although courts would try to interpret the law so\nthat it would not be a nullity, they would have a difficult time\ndetermining what is meant by Section 1(5).\nSection 1(6), with its broad \"any\n...\ninducement or\nbenefit\" language, coupled with Section 2, presumably would end\nthe manufacturers' present practice of delivering cars directly\nto large-volume purchasers. It would also presumably eliminate\nnumerous other practices by which manufacturers presently\n-2-\ndifferentiate between consumers purchasing one car at a time and\nfirms (such as automobile rental and leasing firms) purchasing\nthousands of cars each year. Thus, manufacturers would be\ninhibited from, for example, passing along savings in selling or\ndelivery costs to large-volume purchasers.\nFinally, Section 1(2) defines \"automobile manufacturer\" so\nbroadly that it would potentially subject to liability companies\ntotally unconnected to the manufacture of automobiles.\nSection 2\nSection 2, the heart of the bill, would outlaw price\ndifferences. Unlike the Robinson-Patman Act, this section does\nnot allow for a cost-justification or meeting competition\ndefense, typically used in price discrimination cases. There is\nno requirement that a dealer who pays a higher price than anyone\nelse be injured by the price difference. In fact, there is no\nrequirement that the dealer be in competition with the favored\npurchaser. Thus, a Hawaii dealer could win a price\ndiscrimination case because it paid a higher price for a certain\ncar than a Michigan dealer located near the factory or than a\nPennsylvania office supply firm purchasing cars for its salesmen.\nSection 2 poses other problems. Couched in terms of \"sell\nor lease,\" it could be read to prohibit a car manufacturer from\nselling a car to one person for a different price than the\nmanufacturer's lease price to another person. In other words,\nthe sales price and lease price of a particular type car may have\n-3-\nto be identical. This requirement could damage or end leasing\nprograms that the public currently finds to be a worthwhile\nalternative to buying.\nSection 3: Exceptions\nSection 3 is an attempt to exempt sales at discriminatory\nprices to, among others, car factory workers, government\nagencies, and the American Red Cross. By restricting special\ntreatment to these groups only, the bill would make it difficult\nfor car manufacturers to modify their car distribution systems in\nthe future to achieve more direct sales to non-dealers at\ncompetitive prices. Moreover, there is a non-profit institution\nexemption to the Robinson-Patman Act that is considerably broader\nthan the exemption contained in H.R. 5305. There is no apparent\nreason for the Red Cross, as opposed to any other charitable\norganization, to be singled out for favorable treatment.\nSection 4: Enforcement\nSection 4, the enforcement section, could well subsidize\nbarely-injured plaintiffs (and countless lawyers). Under this\nsection, \"[a]ny person may bring action\n...\nto require\ncompliance\" and seek punitive damages. The section does not\nrequire that the plaintiff be injured or that he even be a car\npurchaser. Section 4 goes considerably beyond the treble-damage\nremedy of the antitrust laws, since a plaintiff can recover the\n-4-\namount of his injury many times over and plaintiffs need not even\nbe injured, in an economic sense, to collect damages.\nUnder Section 4, if a manufacturer favored Hertz Corporation\nby giving it a $500 rebate on each of 60,000 cars purchased by\nHertz, a dealer or other plaintiff could sue for punitive\ndamages. The court would have discretion whether to grant the\ndamages; however, if the court does decide in favor of damages,\nit \"shall take into account\" under Section 4 (a) (3) the amount of\nthe rebate times those 60,000 cars. Thus, injured (or uninjured)\nplaintiffs in the Hertz situation might be allowed to recover up\nto $30,000,000. Complications will inevitably result because the\ncourts are given no direction on the limits of the damages that\ncould be awarded or on proper damage apportionment. Any windfall\ndamages defendant car manufacturers pay to uninjured plaintiffs\nmay well be recouped at a later date through higher car prices to\nconsumers.\nConclusion\nThe preceding analysis suggests a number of defects that\nmake effective enforcement of H.R. 5305 problematic. In contrast\nto the proposed bill, the Robinson-Patman and Federal Trade\nCommission Acts are fully-formed statutes with established\ninterpretations that are sufficient to handle the anticompetitive\nprice discrimination problems this legislation is intended to\naddress.\n-5-\nEven assuming that the bill's many serious interpretational\nproblems are resolved, enactment of the bill may have\nanticompetitive consequences. For example, because the bill\ndeparts radically from traditional price discrimination law,\nlawful competitive price cuts and entry into new markets may be\ndeterred. Manufacturers may fear testing the legal waters and\nmay reasonably feel that the cost of litigation, even if\nsuccessful, would be greater than the benefits of granting\npermissible discounts.\nNext, discounts made to meet competition may help bring down\nhigh, \"sticky\" list prices in oligopolistic industries. A seller\nis particularly susceptible to hard bargaining from a variety of\nsources when the seller believes the buyer has gotten a special\ndiscount from one of the seller's competitors. Once price\nconcessions are made, they will most likely become known\nthroughout the industry and others will demand the same\ndiscount. Eventually, the high list price structure breaks down.\nIn addition, the bill may encourage the manufacture of\nautomobiles that contain accessories not desired by consumers.\nThe price discrimination prohibition in the act applies only to\n:\n\"similarly equipped\" automobiles. A manufacturer wishing to\nevade the rigid confines of the act could market the most\ndesirable autos to some buyers and then differentiate the product\nin some spurious way to other buyers. While product\ndifferentiation used as an evasion tactic is also possible under\n-6-\nthe Robinson-Patman Act the bill under consideration leaves so\nlittle room for price differences (i.e., no cost justifications\nor meeting competition defenses are allowed) that manufacturers\nwill be more likely to resort to devices to circumvent the law.\nH.R. 5305, if enacted into law, can be expected to result in\nhigher prices for consumers, price rigidity, or both. It would\nalso inhibit car manufacturers from instituting pro-competitive\nand cost-justified changes in their pricing and car distribution\nsystems. To the extent that price discrimination in automobile\nsales is causing significant competitive injury, the Robinson-\nPatman and Federal Trade Commission Acts provide better means for\ndealing with the problem Moreover, those Acts have well-known\ncontours, whereas H.R. 5305 takes discrimination law into\nuncharted (and possibly dangerously anticompetitive) territory.\nThe Commission therefore opposes enactment of this bill.\nI will be happy to answer any questions you may have.\n1/\nThat Act applies to the sale of commodities of like grade and\nquality.\n2/\nIn response to an inquiry by Rep. Florio, the Chairman\nrecently transmitted to the Bureau of Competition for further\ninvestigation and analysis allegations of unfair practices of\na type that H.R. 5305 is intended to address.\n-7-\nSEPARATE STATEMENT OF COMMISSIONER PERTSCHUK\nCONCERNING H.R. 5305\nJune 6, 1984\nI agree with most of the points made in the Commission's\nstatement, but I wish to add two others. First, a significant\nissue relating to the need for H.R. 5305 is whether harmful price\ndiscrimination that is not technically prohibited by the\nRobinson-Patman Act can still be addressed under the FTC Act. I\nbelieve that the answer is certainly yes if the conduct falls\nwithin the standards of Grand Union Co. and related cases. 1/\nUnfortunately, the majority declined to state this principle\nexpressly in the testimony even though they were requested to do\nSO. Consequently, the Committee may wish to question the\nCommission's representative on this point.\nSecond, the statement repeats the proposition included in\nthe Commission's earlier letter to the Committee on H.R. 5305:\n\"To the extent that price discrimination in automobile sales is\ncausing competitive injury, the Robinson-Patman and Federal Trade\nCommission Acts provide better means for dealing with the\nproblem.\" As I said in my separate statement accompanying that\nletter, this point only has meaning if the Robinson-Patman Act\nand analogous principles under the Federal Trade Commission Act\nare enforced. Not only has the current Commission failed to\nbring any new price discrimination cases during the entire period\n1/ Grand Union Co. V. FTC, 300 F.2d 92 (2d Cir. 1962).\nof the administration, while nevertheless professing a commitment\nto enforcement in this area, the senior staff recently\nrecommended closing two major investigations despite good\nindications that violations have occurred. In one case, the\nBureau is apparently pursuing settlement negotiations, though the\nultimate result is uncertain. In the other case, I moved in\nAugust 1983. to reject the Bureau's recommendation and to complete\nthe investigation. Nevertheless the motion remains \"on hold\"\nbecause all Commissioners have still not voted.\nEven more remarkably, perhaps, the current Commission\nperiodically claims that Robinson-Patman Act enforcement has not\ndiminished. While I admire the sheer exuberance of this\ndenial of reality, the facts are that the only price\ndiscrimination orders issued by the Commission have been\nsettlements of cases brought prior to this administration.\nAlthough the Chairman points frequently to the large number of\ninvestigations that are recorded as technically active on our\ncomputer lists, so far none of these investigations has resulted\nin an enforcement action.\n2/ \"[T]he Commission's current Robinson-Patman enforcement\npriorities are consistent with the trends and lessons of the\nlast decade.\nWe definitely have not abandoned\nenforcement of the Robinson-Patman Act.\" Testimony of\nChairman Miller to the Subcommittee on Commerce,\nTransportation and Tourism of the House Committee on Energy\nand Commerce, February 22, 1984, P. 5. \"During the past four\nadministrations, [Commissioner] Calvani observed, public\nsector Robinson-Patman Act enforcement has not changed\nappreciably.\" Antitrust and Trade Regulation Report, May 24,\n1984, P. 1007.\n-2-\nDEPARTMENT\nHR 1415\nFinal\nOF\nDepartment of Justice\nHR SATS 5305\nBranden\nSTATEMENT OF\nCHARLES F. RULE\nDEPUTY ASSISTANT ATTORNEY GENERAL\nANTITRUST DIVISION\nBEFORE THE\nSUBCOMMITTEE ON COMMERCE, TRANSPORTATION\nAND TOURISM\nCOMMITTEE ON ENERGY AND COMMERCE\nUNITED STATES HOUSE OF REPRESENTATIVES\nCONCERNING\nPRICE DIFFERENTIALS TO DIFFERENT CLASSES OF PURCHASERS\nOF NEW MOTOR VEHICLES AND H.R. 1415 AND H.R. 5305,\nBILLS \"TO PROTECT CONSUMERS AND FRANCHISED\nAUTOMOBILE DEALERS FROM UNFAIR PRICE DISCRIMINATION\nIN THE SALE BY THE MANUFACTURER OF NEW MOTOR VEHICLES\"\nON\nJUNE 7, 1984\nMr. Chairman and Members of the Subcommittee:\nI am pleased to have the opportunity to provide you with the\nviews of the Department of Justice on H.R. 1415 and H.R. 5305,\nbills \"to protect consumers and franchised automobile dealers\nfrom unfair price discrimination in the sale by the manufacturer\nof new motor vehicles.\" For the reasons I will discuss, the\nDepartment of Justice strongly recommends against enactment of\nthis legislation.\nI.\nDescription of the Bills and the Existing Motor\nVehicle Distributional System\nAlthough these bills are similar in that their essential\nfeature is to prohibit price differentials to different classes\nof motor vehicle purchasers, they are different in certain\nrespects. H.R. 1415 would substantially expand the \"Automobile\nDealers' Day in Court Act,\" 15 U.S.C. 1221 et seq., which governs\ncertain relations between automobile manufacturers and their\ndealers. Section 1 (a) of H.R. 1415 provides that each franchise\nagreement between a motor vehicle dealer and manufacturer shall\nbe deemed to prohibit the manufacturer from: (1) selling or\noffering to sell any vehicle to any person (including any other\ndealer) during any period of time at a price lower than that\ncharged to its franchised dealers for the same, similarly\nequipped model during the same period of time; (2) imposing or\nenforcing any restriction on its dealers not imposed or enforced\nagainst any other purchaser; and (3) providing ultimate\npurchasers with any rebate, discount, refund, promotional\nservice, additional equipment, or any other inducement or benefit\nnot provided to all other ultimate purchasers of the same model\nduring the same time period. An exception to prohibition (1)\nabove permits the manufacturer to sell a vehicle to any person\n(including any other dealer) for resale to any unit of federal,\nstate, or local government, but only if the manufacturer does not\nsell or offer to sell the same, similarly equipped model to any\nother person for resale to any unit of government at any period\nof time at a price lower than that charged to the franchised\ndealer.\nH.R. 5305, on the other hand, takes a somewhat different\napproach to achieve essentially the same result. Section 2 of\nthat bill provides that no motor vehicle manufacturer may sell or\nlease any new vehicle to any person (including a dealer) during\nany sales period at a price higher than the lowest price at which\nany other vehicle of the same model, similarly equipped, is sold\nor leased, or offered for sale or lease, by the manufacturer\nduring that sales period. Section 3 provides an exception\nallowing the manufacturer to sell or lease, or offer to sell or\nlease, any new vehicle to (1) a non-dealer employee of the\nmanufacturer: (2) any department, agency, or instrumentality of\nthe United States or of a State or local government; or (3) the\nAmerican Red Cross. A further exemption in Section 3 permits the\nsale or offer to sell any new vehicle to any purchaser, if such\n-2-\nsale or offer to sell by the manufacturer is part of a qualified\nregional incentive sales program for a designated region. To\nqualify, all vehicles of the same model, similarly equipped, sold\nor offered for sale by the manufacturer in the region during the\nperiod, must be sold and offered at the same price, and all\nvehicles sold in such region during such period must be delivered\nby the manufacturer to the purchaser in such regions.\nBoth bills would permit persons to bring actions against motor\nvehicle manufacturers for damages and injunctive relief based upon\nviolations of the prohibitions contained in the respective bills.\nIn addition, H.R. 5305 permits awards of punitive damages and\nattorneys fees in the discretion of the court.\nBoth bills would substantially alter motor vehicle manufac-\nturers' existing relationships with their dealers and the present\ndistribution system for such vehicles. As such, they appear to be\nbased upon some belief that the existing distribution system for\nmotor vehicles is not efficient and is flawed in ways that\nultimately harm consumers. However, it is in the manufacturers'\ninterest to choose the most efficient distribution system\npossible, so as to minimize the costs of distributing motor\nvehicles to ultimate consumers and thereby maximize their\nprofits. Moreover, automobile manufacturers must compete among\nthemselves for dealers and for sales to ultimate consumers. We\nare aware of no evidence that the existing distributional system\nis inefficient, nor are we aware of any reasons why manufacturers\nwould choose an inefficient distribution system.\n-3-\nCurrently, manufacturers distribute the great majority of\ntheir motor vehicles to franchised dealers, who provide\nparticular services as desired by individual consumers and\nother low-volume purchasers. Manufacturers also distribute\nsome of their vehicles directly to high-volume purchasers, such\nas governmen*al units, taxi fleet operators, and rental car\ncompanies, who use those vehicles to provide products or\nservices to consumers. Information we have seen indicates\nthat, at present, high-volume sales account for only\napproximately 20% of the current motor vehicle market. The\nremaining 80% of such sales are made through franchised\ndealers.\nDifferent groups of vehicle users value particular\ndistribution services differently and are, therefore, willing\nto pay different amounts for those services. Thus, for\nexample, an individual who desires to purchase an automobile\nfor personal (or even business) use from a franchised dealer\nwill demand a certain mix of services. Some of those services\nwill be provided by the manufacturer (e.g., installation of\ncertain options, warranty terms, and delivery to the dealer),\nwhile other services will be provided by the dealer (e.g.,\nsales efforts, demonstrators, road preparation, and repair work\nunder the warranty).\nHigh-volume purchasers, on the other hand, may be willing\nto forego certain services or perform them themselves, saving\nmanufacturers those costs and enabling manufacturers to charge\n-4-\nsuch purchasers less than the price charged to franchised\ndealers. In addition, there may be some benefits to\nmanufacturers as a result of use of their vehicles by\nhigh-volume purchasers that also benefit franchised dealers.\nFor example, consumers get valuable information about the\noperation of vehicles they rent that may factor in their\npurchase decisions, and rental car company advertisements about\nthe cars they lease likewise benefit both the manufacturers of\nthose cars and their franchised dealers. If fleet car sales\nfor some reason reduce the willingness of franchised dealers to\nprovide services that most consumers want, then the\nmanufacturer will lose sales and profits and, therefore, will\nhave the incentive to restructure its fleet sales in a way that\nensures that these services will be provided. The important\npoint, however, is that through whatever channel the vehicles\nare distributed, consumers ultimately must bear the costs of\nthe distribution system as purchasers of vehicles, as ultimate\nusers of transportation services, and as taxpayers.\nThe ability of manufacturers to adjust their charges\naccording to different services provided enables them to\nsatisfy the varying demands of their different classes of\npurchasers at prices that reflect the costs of the services\nprovided. If, as we believe, the existing system is efficient,\nthen enactment of H.R. 1415 or H.R. 5305 may require some\ncustomers to pay for services they do not desire, some to\n-5-\npurchase desired services from a less efficient and more costly\nsystem, and others to forego services for which they would be\nwilling to pay. These price differences most likely reflect\ndifferences in consumer demands for vehicle services and the\ncosts of providing them efficiently. If price differences are\nno longer permitted fully to reflect the costs associated with\ndifferent distribution methods because of governmental\nintrusion into existing market arrangements, then prices will\nrise to cover the higher-cost distribution methods. By\nnegating existing efficiencies, these bills will raise the\noverall costs of the motor vehicle distribution system, thereby\nadversely affecting the interests of consumers.\nAn efficient distribution system enables both manufacturers\nand dealers to compete most effectively against their\nrespective rivals and benefits consumers through the lowest\npossible prices. Because tailoring a distribution system to\nthe diverse needs of different classes of customers can have\nthese beneficial effects, multiple distribution systems\nfrequently exist for other manufactured goods. For example,\nproducts such as appliances and electronic and photographic\nequipment are distributed through service-oriented department\nstores, as well as through discount stores and mail-order\ncatalog outlets that provide few, if any, services. By\nprecluding manufacturers from charging different classes of\npurchasers different prices, H.R. 1415 and H.R. 5305 totally\n-6-\nignore the value of services provided and effectively would\ndestroy the manufacturers' incentives and abilities to tailor\ndifferent distributional systems to different needs. Consumers\nthereby would be denied the benefits of the most efficient\ndistribution system for motor vehicles.\nII. The Bills Are Unnecessary\nProponents of H.R. 1415 and H.R. 5305 have labeled them as\nbills to prevent \"unfair price discrimination.\" We are not\naware that any price discrimination is occurring, and hence, we\nbelieve this characterization to be erroneous. Price\ndiscrimination occurs when prices charged do not reflect the\ncosts of doing business with particular customers or groups of\ncustomers. Thus, price discrimination may occur when different\nprices are charged to persons for whom the cost of doing\nbusiness is the same; conversely, it may occur when the same\nprice is charged to persons for whom the costs of doing\nbusiness are different. Because proponents of these bills have\nnot shown that any differences in prices charged do not reflect\nthe different costs of doing business with franchised dealers\nand high-volume purchasers, the existence of price\ndiscrimination has not been established. Even if there were\nsome price differences not fully accountable by cost\ndifferences among different customer classes, these bills\nunnecessarily go far beyond existing prohibitions against price\n-7-\ndiscrimination as prohibited by the Robinson-Patman Act, 15 U.S.C.\nS 13a et seq. Unlike that statute, H.R. 1415 and H.R. 5305 would\nprohibit essentially all price differences, even where no anticom-\npetitive effect is observed and without regard to other legitimate\nbusiness justifications recognized by the Robinson-Patman Act,\nsuch as good faith meeting of competition or the reasonable\navailability of lower prices to other customers.\nIt has been argued by proponents of H.R. 1415 and H.R. 5305\nthat this legislation is necessary to prohibit manufacturers from\n\"subsidizing\" fleet sales. However, neither bill defines the term\n\"subsidization\" or contains any proposed Congressional findings as\nto precisely what conduct is alleged to be occurring. Accordingly,\nwe are unaware of the specific basis upon which such a claim has\nbeen made. Moreover, any consideration of so-called \"subsi-\ndization\" requires careful identification and consideration of the\ncommon and overhead costs associated with producing vehicles for\neach group of purchasers, as well as the incremental or marginal\ncosts of producing for each group. Without going into the\ntechnical complications, subsidization essentially requires that\nthe group receiving the subsidy is paying less than the incremental\ncost of serving it, and that the group providing the subsidy is\npaying more than it would pay if the first group were not being\nserved. Proponents of this legislation have not cited, nor are we\naware of, any evidence that would tend to establish that any such\nconduct is occurring. Accordingly, the case for enactment of this\nlegislation simply has not been made.\n-8-\nIII. The Bills Will Lead To Inefficient Distribution\nAnd Higher Prices For Motor Vehicles\nRather than reflecting any so-called \"subsidy\" strategy, it is\nfar more likely that any differences between prices charged\nhigh-volume purchasers and franchised dealers reflect differences\nin the relative costs of serving the different sets of customers.\nFor example, scheduling production, credit, financing, delivery\nand road preparation services may be easier and less costly to\nprovide to high-volume purchasers than to franchised dealers,\nthereby offering manufacturers scale and other economies in their\nsales to the former group. Second, recalls and other after-sale\nservices requiring consumer notification are likely to be simpler\nand less costly with respect to high-volume purchasers. These\nfactors can be expected to reduce manufacturers' costs of dealing\nwith high-volume purchasers, thus enabling them to sell to such\ncustomers at prices lower than they must charge their other\ncustomers for whom such cost savings are not available.\nMoreover, manufacturers' advertising expenditures intended to\ngenerate sales to individual consumers purchasing through\nfranchised dealers should properly be attributed to vehicles sold\nthrough those dealers and not to vehicles whose sales are not\naffected by such advertising. Thus, proper allocation of\nadvertising and other promotional services may also indicate that\nmanufacturers' costs of dealing with high-volume purchasers are\nlower than their costs of dealing with franchised dealers. These\nexamples suggest the range of potential cost differences in\n-9-\nserving the different sets of vehicle purchasers that are likely\nto account for any price differences that may exist. The ability\nto price in accordance with such differences is fully consistent\nwith rational sales policies in a competitive environment, and\nbenefits consumers by providing them the goods and services they\ndesire at the lowest possible cost.\nOur opposition to these bills is not mitigated by the\nexceptions they contain to the general rule that manufacturers\nmust charge the same prices for similar vehicles. That general\nrule will have serious adverse effects, which will not\nsignificantly be alleviated by the bills' narrow, limited and\nrigid exceptions. Rather, enactment of H.R. 1415 or H.R. 5305\nwould tend to freeze manufacturer pricing decisions and may also\nmake it easier for manufacturers to collude on prices because\nprice cutting to particular service outlets would be prohibited by\nlaw. Furthermore, since price differences among service outlets\nwould not be permitted irrespective of the costs of providing\nmotor vehicles to those outlets, in situations where the costs of\nsupplying vehicles differ, competition among manufacturers must\ntake the form of costly and inefficient service competition much\nlike that observed in regulated industries with fixed rates, such\nas experienced in the airline industry prior to deregulation.\nI should also point out that enactment of H.R. 1415 or\nH.R. 5305 will undesirably increase litigation through creation of\na new federal cause of action. Moreover, such litigation is\n-10-\nlikely to be expensive, time-consuming and complex due to the\nvarious possible standards for identifying vehicle models and\ntheir respective prices. In addition, manufacturers faced with\nthe requirements contained in these bills can be expected to seek\nto avoid their effects by further differentiating their models,\nparticularly in light of the ease with which they could modify\nthem by altering standard equipment or the options that are\ndesignated as standard. Such attempts will not only further\nincrease the likelihood of litigation but will also add to\nmanufacturers' costs and make the bill largely unenforceable.\nIV. Conclusion\nProponents of H.R. 1415 and H.R. 5305 have not shown that any\nprice discrimination or \"subsidization\" of fleet purchasers is\noccurring, or that consumers are suffering any economic harm from\nthe present method of sales to commercial and governmental\nhigh-volume purchasers. Rather, the dual distribution system\nemployed by motor vehicle manufacturers appears to be efficient,\nto reflect the costs of dealing with different classes of\ncustomers, and to meet those customers' different needs at the\nlowest possible costs. Thus, to impose new, rigid regulations on\nmanufacturers that would prohibit continuation of existing pricing\npractices that are not alleged to be unlawful, as these bills\nwould do, is against the public interest. The bills would destroy\nan efficient distribution system, increase costs to consumers and\nincrease government regulation of private contracts. For all\n-11-\nincrease government regulation of private contracts. For all\nthese reasons, the Department of Justice strongly recommends\nagainst enactment of this legislation.\nMr. Chairman, that concludes my prepared remarks. I would be\nhappy to respond to any questions that you or other members of the\nSubcommittee may have.\nDOJ-1984-06\n-12-\nOFFINE\nAMERICAN\nWashington, D.C. 20230\nSTATES\nof\nJAN 10 1984,\nHonorable James J. Florio\nChairman, Subcommittee on Commerce,\nTransportation and Tourism\nCommittee on Energy and Commerce\nU.S. House of Representatives\nWashington, D.C. 20515\nDear Mr. Chairman:\nThe Department of Commerce has reviewed H.R. 1415, a bill\n\"To protect franchised automobile dealers from\nunfair price discrimination in the sale by the\nmanufacturer or importer of new motor vehicles, 11\nand we hereby submit our views on the legislation.\nUnder H.R. 1415, an automobile manufacturer would be prohibited\nfrom (a) selling or leasing any passenger car, truck or station\nwagon to any person at a price lower than that accorded to its\nfranchised dealers; (b) imposing upon a dealer any restrictions\nthat are not imposed upon all other purchasers; and (c) providing\nto a purchaser any rebate or discount that is not provided to all\npurchasers. In addition, a manufacturer would be unable to sell a\nvehicle to any person for resale to a unit of federal, state or\nlocal government at a price which is lower than the price at which\nthe vehicle is sold to a dealer during the same period for resale\nto a unit of government.\nWe oppose enactment of H.R. 1415. Despite its avowed intention\nto provide protection against \"unfair price discrimination, 11 in\nreality the bill would prohibit marketing practices that vehicle\nmanufacturers and their fleet customers have found highly\nefficient and mutually beneficial. We believe H.R. 1415 is\nanti-competitive and designed to benefit the special interests of\nfranchised automobile dealers at the expense of American\nconsumers.\nH.R. 1415 would eliminate competition in the fleet sales market by\nprohibiting large volume fleet purchasers, including the federal\ngovernment, from negotiating with automobile manufacturers for\nlower prices. We believe that large volume fleet purchasers,\nPrepared by: OAGC/L Lisa Lindeman 377-1328\nbee: EA (C. Miller)\nIPM Chron\nGC Chron\nFile H.R. 1415\nLisa Lindeman\n2\nincluding the federal government, should be allowed to negotiate\nwith manufacturers for lower prices in order to enhance\ncompetition and encourage efficient allocation of resources.\nWe understand that the Department of Justice is opposed to the\nbill because it would prohibit discounts on direct sales by\nmanufacturers both to governmental and commercial fleet purchasers,\nand that the Department intends to submit a report outlining its\nopposition to the bill which will focus on its undesirable effects.\nWe have been advised by the Office of Management and Budget\nthat there is no objection to the submission of this letter\nto the Congress from the standpoint of the Administration's\nposition.\nSincerely,\nthing Mayales\nIrving P. Margulies\nActing General Counsel"
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