B. FACTORS' AGREEMENTS AS INSTRUMENTS OF COMBINATION Factors' agreements may be defined as contractual arrangements whereby one of the contracting parties secures a limited control over the freedom of action of the other in business matters. Usually, they aim to diminish, moderate or prevent competition in the sellers' line of commodities. The provisions of the Sherman Act, declaring agreements in restraint of trade to be unlawful, are aimed at them, and the Clayton Act of 1914 gives them even greater attention under provisions against the use of unfair methods of competition. A careful study of agreements of this kind brought to light through court proceedings, shows that their variety is very great.1 However, for sake of convenience they may readily be classified into three kinds, namely; (1) conditional requirements; (2) exclusive arrangements; and (3) preferential arrangements with or without rebates. Conditional Requirements. This type of factors' agreement is frequently employed by manufacturers or dealers who have a more or less complete control over certain kinds of commodities, to bind the purchaser of these commodities to buy only from the seller certain other commodities over which the latter has no such control. Thus, manufacturers of patented articles and machines often insert in their contract of sale that the buyer, or dealer shall purchase certain non-patented articles or those on which the patent monopoly has expired, only from the seller of the patented article. Others again require the buyer to handle new lines of commodities as a condition of continuing to handle old lines, or to purchase certain commodities as a condition of the purchase of others. 1 Specimens of such agreements may be found in Dr. W. H. S. Stevens' Industrial Combinations and Trusts. See also Unfair Competition by the same author. For example, between 1906 and 1909 the General Electric Company secured from the German owners the patents and applications covering tungsten and tantalum filament lamps. The demand for electric lamps in this country was such that dealers were more or less obliged to handle not only the old carbon filament lamp but also the two newer types above mentioned. Patents covering the carbon lamps had expired, in 1894, and many manufacturers had lamps of this kind on the market. Among them was the General Electric Company. This company set about securing all of the carbon lamp business. Since the newer types could be bought only from it, it stipulated in its contracts of sale that purchasers of tungsten and tantalum lamps must also buy from it all of their carbon filament lamps. The United States Supreme Court, however, declared these contracts to be an unlawful restraint of trade. The "full-line forcing "- a practice of requiring dealers to order new lines of products as a condition to retaining the agency for some brand of the company's harvesting machines employed by the International Harvester Company is another such practice discountenanced by the courts. The United Shoe Machinery Company, the Motion Picture Patents Company and the American Coal Products Company also made extensive use of factors' agreements of this type. Exclusive Arrangements. Professor W. H. S. Stevens defines exclusive arrangements as "arrangements which require that certain dealings or transactions shall be confined exclusively to a specified organization or organizations." They are frequently included in contracts involving conditional requirements. Three types of exclusive arrangements have been commonly used, namely; those that require (1) exclusive use; (2) exclusive sale; and (3) exclusive purchase of the com 2 W. H. S. Stevens, Unfair Competition, p. 77. modity in question. For example, the United Shoe Machinery Company stipulated in its contracts, that the lessors of certain of its patented machines should use them only in connection with nails and other commodities sold by that company for the manufacture of boots, shoes and footwear. The American Tobacco Company provided in its contracts with dealers, that the exclusive sale by them of its products would entitle the dealers to a rebate of 7 per cent, whereas otherwise the rebate would be but 2 per cent. But in many cases they completely cut off the supply of their cigarettes to dealers who did not handle the American Tobacco Company's products exclusively. The National Wall Paper Company and the Eastman Kodak Company usually stipulated in their contracts with dealers, that the latter bound themselves to purchase only the product of the respective companies. Preferential Arrangements. Provisions in contracts of sale, whereby dealers or users of the commodity are given rebates and other special reductions in the purchase price of the commodity for the purpose of suppressing competition, have been very common. These are now usually called preferential arrangements. The records of the federal courts give many examples where they were used by railroads, steamship companies and industrials. They helped build up the Standard Oil and the tobacco monopolies and numerous others. In the case of the Standard Oil Trust they took the form of rebates given to that combine by railroads on the freight charges for oil transported, an advantage that other oil companies did not enjoy. The American Tobacco Company.used a similar practice in connection with exclusive arrangements to build up a semiindependent distributive organization over which it might exercise control. All of these three types of factors' agreements serve at their best as a very weak form of combination, since there is in most cases no legal means of forcing compliance with them. While they still crop out occasionally, they are nevertheless becoming less common, and are gradually giving way to ownership combinations built up on the integration principle. C. FEDERATIONS The federation, as before stated, differs from the association and the factors' agreement in that it provides in the agreement creating it for a central body which shall exercise some measure of control over the business of the combining units. This power of control usually hinges upon one or more of three factors, namely; (1) the supply of the commodity in question; (2) the market or demand for it; and (3) the price at which it is to be sold. It may or may not be accompanied by penalties to be imposed upon recalcitrant members. The chief aim and purpose of these combinations is the suppression of competition. In the United States they are called pools, while in Europe the name kartell, or syndicate is applied to them. Federations ordinarily are combinations of the horizontal type, including in their membership few or many establishments in like stages of production or distribution. Occasionally, however, we do find federations of manufacturers, wholesalers and retailers, respectively, bound together through factors' agreements into a gigantic combination that has a complete control of the entire trade in a given type of commodity. As a matter of fact, there seems to be a marked tendency on the part of these combinations to extend their control as far as possible. In the United States, this soon brings them before the courts as violators of the anti-trust laws. In Europe, on the other hand, they enjoy quite generally the sanction of the law, and are frequently even fostered and encouraged by the governments. The American Pools. - Pools became prominent in the United States during the decade following the year 1870. At first they were successfully used by the railroad companies, who employed all three of the basic elements above mentioned in organizing them. Somewhat later, the industrial and trade branches of business took up this form of organization. It was early recognized that they not only sought to restrict competition, but that they actually did so. Thus, when the Interstate Commerce Commission Act (1887) and the Sherman Anti-Trust Act (1890) were passed, they included provisions seeking to suppress pools that substantially reduced competition and unduly restrained trade between the states or with foreign nations. This resulted in the development of new forms that it was hoped would, at least technically, be outside the pale of these laws. Nevertheless, it remains a fact that they seek to suppress competition; and one need not look far in the annals of court decisions under our anti-trust legislation to find many of them that have been adjudged to violate these laws. A careful study of the documentary evidence contained in these decisions, and of specimens of pool agreements disclosed in reports of Congressional and other committees, enables us to classify American pools according to the means used to accomplish the end in view. From this standpoint we recognize a number of distinct methods that have been used in organizing pools. However, several of these may be employed in a single pool. They are as as follows: 1. Percentage Division of Business. The total business done by all those in the pool is allotted to the various members usually in proportion to their productive capacity, and these agree to stay within their limits or pay a penalty to the pool on exceeding their percentage. Bonuses are commonly paid to those who produce less than their allotted percentage. The percentage contributed by each |