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COMMON OFFICERS OF RAILWAY AND SUPPLY COMPANIES.

THURSDAY, JULY 13, 1916.

UNITED STATES SENATE,

SUBCOMMITTEE OF THE COMMITTEE ON THE JUDICIARY,

Washington, D. C. The subcommittee of the Committee on the Judiciary having under consideration S. J. Res. 129 met in the room of the Committee on the Judiciary in the Capitol at 10 o'clock a. m.

Present: Senators Overman (chairman), Chilton, Clark of Wyoming, and Nelson.

Senator OVERMAN. This is a hearing on Senate joint resolution 129, which is as follows:

JOINT RESOLUTION Extending until October fifteenth, nineteen hundred and eighteen, the effective date of section ten of the Act entitled "An Act to supplement existing laws against unlawful restraints and monopolies, and for other purposes," approved October fifteenth, nineteen hundred and fourteen.

Resolved by the Senate and House of Representatives of the United States of America in Congress assembled, That the effective date on and after which the provisions of section ten of the act entitled "An act to supplement existing laws against unlawful restraints and monopolies, and for other purposes," approved October fifteenth, nineteen hundred and fourteen, shall become and be effective is hereby deferred and extended to October fifteenth, nineteen hundred and eighteen.

I have here a letter from the firm of Dudley & Michener, transmitting a memorandum in regard to this resolution. Mr. Michener is here this morning. Do you want this to go in the record, Mr. Michener ? Mr. LOUIS T. MICHENER. Yes.

(The matter referred to is here printed in full, as follows:)

[Louis T. Michener, Perry G. Michener. Dudley & Michener, counsellors at law, Pacific Building, Washington, D. C.]

Hon. CHARLES A. CULBERSON,

JUNE 6, 1916.

Chairman Senate Committee on Judiciary, Washington, D. C. DEAR SIR: We represent the Philadelphia and Reading Railway Co., in support of S. J. Res. 129, and we ask leave to file the enclosed memorandum of an argument prepared by that company, which we will thank you to lay before the committee or a subcommittee, if one should be appointed.

The purpose of the resolution is to postpone the effective date of section 10 of the Clayton Act until October 15, 1918. It seems to be clear that such postponement is necessary in order to enable the railroads to adjust themselves to the provisions of that section.

The Interstate Commerce Commission will continue its hearings on the subject on the 20th instant. If your committee or its subcommittee should grant a hearing on this resolution, a representative of the Railroad Company would be glad to attend and testify.

Very truly yours,

Enc.

DUDLEY & MICHENER.

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MEMORANDUM BY P. & R. RY. CO. IN RE COMPETITIVE BIDDING UNDER RULES TO BE FORMULATED BY THE INTERSTATE COMMERCE COMMISSION UNDER SECTION 10 OF THE CLAYTON ACT, WHICH SECTION IS PROPOSED TO BE EXTENDED AND MADE EFFECTIVE OCTOBER 15, 1918, UNDER S. J. RES. 129 AND H. J. RES. 217.

It is submitted that the effective date of that act should be extended to October 15, 1918.

1. A very serious objection to such rules if adopted now is that it would be impracticable to obtain emergency supplies which, in many instances, must be ordered for immediate delivery in order to prevent delay to important work. It is not always practicable, even with the best possible system of purchasing, to keep stocked up with all the varied kind of materials required by a railroad company, and the inability to order materials immediately might result in delay in the erection of engines, bridges, or buildings where such delay would entail very serious consequences.

2. In view of the great responsibility that rests upon a railroad, the quality of the materials it buys and the time of delivery are quite as important as the price, in determining the award on bids for materials or work. Our company has, as the result of years of experience, built up a list of parties from whom bids are invited for certain lines of materials or work, these parties having earned our confidence through years of mutually satisfactory dealings. When an order is given to one of these parties for materials or a contract for construction work of any kind is awarded, the company can depend on getting material or workmanship in strict accord with its specifications. If we were required to advertise, as provided in the rules proposed by the commission and to accept the lowest bid, we would frequently be compelled to deal with irresponsible parties who would either furnish low grade material or work or be unable to complete their contracts and cause serious loss and delay. For instance, a great deal of the wrought iron pipe, of which our company buys a large quantity, is purchased from one concern whose product can always be depended upon. It is difficult, from an outward examination, to tell the difference between wrought iron pipe and steel pipe, but the iron pipe is much more durable than the steel.

Accordingly, if we were compelled to deal with a party who could not be depended upon to furnish wrought-iron pipe, it is quite probable that the result of taking the lowest of a great many competitive bids would be that we would have on our hands a large quantity of steel pipe which would rapidly deteriorate and result in loss out of all proportion to the difference between the bids. This is, of course, but a single illustration and the same possibility of loss from compulsory dealing with the low competitive bidder would exist with respect to most of the numerous materials which a railroad company purchases. In some instances our orders or specifications provide that material manufactured by a designated concern must be used. This is due to the fact that, after long experience, the products of the designated factory have been found to give the most satisfactory results.

3. There seems to be grave doubt whether, under the proposed rules of the commission if adopted now, it would be possible to purchase materials of such standard makes if other could be furnished more cheaply.

4. In many instances, the proposed rules if adopted now would result in increased prices to railroad companies on account of the inability to accept a bid when made. Frequently a concern that has on hand a large quantity of certain materials which they customarily furnish to a railroad company will, in order to obtain cash quickly, make a very low bid on condition that it be accepted immediately. The opportunity to secure bargain prices under such circumstances would be taken away in dealings carried on under the proposed rules. Furthermore, it frequently happens that a bidder, who has established confidential relations with the purchasing agent of a railroad company, will quote a lower price, knowing that same will be treated as confidential, than he would be willing to do in open competition where his bid would be known to all in the same line of business. There can be no doubt that the effect of the proposed rules would be greatly to increase the cost of many lines of materials and work.

5. Compliance with these proposed rules if adopted now would greatly increase the clerical work required to handle the purchasing of materials and construction contracts, and the cost of such increased clerical work, together with printing and advertising, would amount to many thousands of dollars in the course of a year's business. In these times, when railroad companies are constantly under pressure to reduce their expenses to the lowest level consistent with safety, it seems unreasonable to ask them to conduct their business in accordance with rules which would greatly increase their expenses without any corresponding advantage to themselves or to the public.

6. The foregoing brief statement of serious business objections to the proposed rules is not based in anywise on the desire of our company to evade the Clayton Act.

About a year ago the Interstate Commerce Commission sent one or more examiners to go over the records of our purchasing agent for the purpose of making a comparison between the prices paid by our company for its materials and the prices paid by other carriers. At the end of this examination, which was most searching in character and lasted for a number of weeks, our purchasing agent, Mr. J. D. Landis, was highly complimented on the economical basis on which the business of his department was conducted, and he was given to understand that no company whose records had been examined was obtaining its materials on as favorable terms.

7. When it is practicable for the commission at all times to satisfy itself that the treasury of a railroad company is not being wrongfully depleted through dealings within the purview of the Clayton Act, it is respectfully suggested that no public interest will suffer through the postponing until October 15, 1918, of the operation of section 10 of the Clayton Act, and that such postponment should be effected to permit the thorough consideration of the rules governing competitive bidding which it is the duty of the Interstate Commerce Commission to formulate.

Senator OVERMAN. Mr. Thom, I suppose you want to be heard as well as to put this brief of yours in the record? Mr. ALFRED P. THOM. Yes.

(The letter and brief referred to are here printed in full, as follows:)

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Section 10 of the Clayton Act, after October 15, 1916, forbids, in the absence o competitive bidding, any dealings in securities, supplies, or other articles of commerce and in contracts for construction or maintenance of any kind, to the amount of more than $50,000 in any one year, between a common carrier and another tion, firm, partnership or association, in the following two cases:

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1. When such common carrier has a director, president, manager, purchasing or selling officer or agent in the particular transaction, who is at the same time a director, president, manager, purchasing or selling officer of such other corporation, firm, partnership or association.

2. Where any such officer of a carrier has a substantial interest in such other corporation, firm, partnership or association.

It is doubtful whether either Congress or the carriers appreciated, when this law was enacted, what might be the far-reaching effect of these provisions, and it is not certain that even now their full effect is realized. The following difficulties are, however, now apparent:

1. If the section is strictly and literally interpreted, it will have the effect of breaking into parts many of the most important railroad transportation systems of the coun try, such as the Pennsylvania, Union Pacific, Southern Pacific, and many others. The through lines of these systems are at present owned by different corporations, as, for example, the Union Pacific through line from the Missouri River to the Pacific Coast, part of which is owned by the Union Pacific, another part by the Oregon Short Line and the remainder by the Oregon and Washington Railroad and Navigation Company.

When additions or improvements, such as tracks, yards, terminals, or equipment, are needed by the subsidiaries, they must be furnished on the credit of the parent company. This is done by the parent company advancing the money and subsequently accepting the securities of the subsidiary for the amount of the indebtedness, which the parent company indorses and puts on the market. Manifestly, this is a transaction which can not be conducted through competitive bidding, and, manifestly, the transaction is in the public interest. It is likewise apparent that the public interests require the continuance of these through lines with harmonious and unified management.

The separate ownership of these lines is in many instances made necessary by State laws. For example, the laws of Texas and Louisiana forbid the ownership of a line in those States respectively by a foreign corporation; and the only way of creating the through lines which the public interests require is, in those States, to form separate corporations and to secure the unified interest and management by placing the securities of the subsidiaries in the parent company.

The danger of section 10 of the Clayton Act being given this construction, and thereby disrupting many of the most useful and best managed systems of the country, is so great that a postponement of the effective date of the section is justified in order that the matter may be inquired into under resolution 60, wherein the whole transportation question will be studied.

2. Many of the railroad systems have found it necessary to form water companies, ice companies, coal and other such companies, the entire stock of which the railroad company owns, for the purpose of insuring a continuous supply of necessary articles of consumption, and thereby the uninterrupted operation of the railroad property. Under a literal construction of section 10 of the Clayton Act these subsidiaries, although simply the hand of the railroad company, could not sell to the parent company, except in competition with others, and thereby the whole scheme of supply and management would be broken up.

3. Some of the railroad companies own an interest in express car companies and refrigerator companies which supply cars. For example, the Union Pacific and the Southern Pacific own jointly the Pacific Fruit Express Company, which furnishes refrigerator cars required by those lines. Section 10 of the Clayton Act might be construed as invalidating dealings between the railroad companies and this Fruit Express company except on competitive bidding, and competitive bidding would necessarily destroy the entire arrangement of facilities needed by the public.

4. Many railroad companies entering a city have found it desirable, in the public interest and to satisfy a public demand, to join in the formation of a terminal or station company, each company taking a part of the stock of the terminal or station company. Dealings between these railroad companies and the terminal or station company might, by a strict construction of section 10 of the Clayton Act, be rendered impossible except on competitive bidding, and yet competitive bidding is contrary to the whole theory of the formation of the terminal or station facilities.

5. The requirement that competitive bidding must be resorted to, whenever one of the officers of the railroad company has a substantial interest in the other company, admits of no certain measure, inasmuch as there is no definition of "substantial interest." This may have the effect of requiring competitive bidding to be resorted to in all instances, no matter how small the interest may be. The law imposes a penalty in case there is a purchase without competitive bidding, in any of the cases covered by the act, even though the corporation does not know of any substantial interest on the part of any of its directors. There is no way to learn of such an interest unless the officer voluntarily gives the information, which some may hesitate to do. 6. To avoid the difficulties and the added expense of the competitive system of dealing, the tendency will be to cause the railroad to have their transactions with companies in which there is no interest whatever on the part of any of its officers. Of course, it is beyond the power of any industrial concern to control the distribution of its securities, as they are purchased on open market. The result, therefore, of this section may be to legally blacklist many of the most important business concerns of the country and to deprive them of a large part of legitimate trade, which would be a result contrary to the public interests and which Congress did not contemplate.

7. The result of the system of competitive bidding under the act, where everybody must be allowed to bid, would be to create a tremendous swarm of adventurers, who will seek to fatten themselves, either on the railroads or on legitimate business concerns, by putting in irresponsible bids with the purpose, if the contract is not awarded to them, of involving the railroads in litigation, or, if they get the contract, of selling their bid to responsible concerns.

8. It is conservatively estimated that the result of forcing upon the railroads the competitive system of purchasing, such as is in use by the United States Government, by the States, and by municipalities, will be to increase the cost of supplies to the railroad at least 15 per cent, and this added burden must, under the operation of a law of economics, be put upon the public in increased charges.

It is not intended to dissent in any way from the general principle advocated by the President that the officer of the railroad, who occupies a fiduciary relation, should not have such an interest on the side of the concern dealing with the company as to interfere with the officer's fiduciary duty. It is, however, believed that this same principle can be carried out in some other way than that adopted by section 10 of the Clayton Act, and a method of enforcing the principle, without destructive consequences upon legitimate business, could be developed in the investigation which is now to be made under resolution No. 60, introduced in the Senate by Senator Newlands.

It would seem wise, therefore, to postpone the effective date of section 10 of the Clayton Act for two years, so that the entire subject can be considered in the proposed investigation.

Senator OVERMAN. We will hear you now, Mr. Thom.

STATEMENT OF ALFRED P. THOM, ESQ., OF WASHINGTON, D. C., COUNSEL FOR THE SOUTHERN RAILWAY.

Mr. THOм. The railroads of the country find themselves in a most embarrassing situation, Mr. Chairman and gentlemen, growing out of the early effective date of section 10 of the Clayton Act [approved October 15, 1914, 38 Stat. L., 730, 734]. That section is as follows:

SEC. 10. That after two years from the approval of this Act no common carrier engaged in commerce shall have any dealings in securities, supplies or other articles of commerce, or shall make or have any contracts for construction or maintenance of any kind, to the amount of more than $50,000, in the aggregate, in any one year, with another corporation, firm, partnership or association when the said common carrier shall have upon its board of directors or as its president, manager or as its purchasing or selling officer, or agent in the particular transaction, any person who is at the same time a director, manager, or purchasing or selling officer of, or who has any substantial interest in, such other corporation, firm, partnership or association, unless and except such purchases shall be made from, or such dealings shall be with, the bidder whose bid is the most favorable to such common carrier, to be ascertained by competitive bidding under regulations to be prescribed by rule or otherwise by the Interstate Commerce Commission. No bid shall be received unless the name and address of the bidder or the names and addresses of the officers, directors and general managers thereof, if the bidder be a corporation, or of the members, if it be a partnership or firm, be given with the bid.

Any person who shall, directly or indirectly, do or attempt to do anything to prevent anyone from bidding or shall do any act to prevent free and fair competition among the bidders or those desiring to bid shall be punished as prescribed in this section in the case of an officer or director.

Every such common carrier having any such transactions or making any such purchases shall within thirty days after making the same file with the Interstate Commerce Commission a full and detailed statement of the transaction showing the manner of the competitive bidding, who were the bidders, and the names and addresses of the directors and officers of the corporations and the members of the firm or partnership bidding; and whenever the said commission shall, after investigation or hearing, have reason to believe that the law has been violated in and about the said purchases or transactions it shall transmit all papers and documents and its own views or findings regarding the transaction to the Attorney General.

If any common carrier shall violate this section it shall be fined not exceeding $25,000; and every such director, agent, manager or officer thereof who shall have knowingly voted for or directed the act constituting such violation or who shall have aided or abetted in such violation shall be deemed guilty of a misdemeanor and shall be fined not exceeding $5,000, or confined in jail not exceeding one year, or both, in the discretion of the court.

That section was the method adopted by Congress to carry out the recommendations of the President that some method should be provided whereby officers in fiduciary relations to a carrier would not have the temptation presented of an interest on the other side of the transaction. I shall in no way dissent from that principle. I regard it as a wholesome principle. But I am convinced that the method which has been adopted to carry it into effect would be destructive of some of the greatest public interests of the country. It is proper for me to say that the railroads themselves did not realize how this would be until very recently. I am sure Congress did not realize it at the time that this Act was adopted. There was no hearing on this provision as it is now in the law. The provision on that subject was introduced in the Senate, and I believe was probably modified in conference.

Senator NELSON. If you will allow me to interrupt you

Mг. THOм. Yes; certainly.

Senator NELSON. I want to call your attention to the fact that it was a substitute for a much more drastic provision as it came from the House.

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