B 73 "vA^i'.i'iA'iil ■ Ik >w i^Jift Cornell University Library HD 2809.B79 First case under Canada's combines inves 3 1924 013 871 805 First Case Under Canada's Combines Investigation Act — The United Shoe Machinery Company James E. Boyle 3. S-»^ .7? r:? \0 ■7 // AC?--»'r''/"- -.f-^ / Reprinted from the QUARTERLY JOURNAL of the University of North Dakota, Vol. IV, No. 3, April 1914 (Vipyright 1914 Cornell University Library The original of tiiis book is in the Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924013871805 First Case Under Canada's Combines Investigation Act — The United Shoe Machinery Company James E. Boyle, Professor of Economics and Political Science, University of North Dakota TN an earlier article in this Journal (January, 1913,) I made a -'■full statement of the provisions of the Canadian Combines Inves- tigation Act of May 4, 1910. Hence it is necessary at this point to give only the very briefest summary of this important law. Its exact title is "An Act to provide for the investigation of Combines, Monopolies, Trusts and Mergers." The Act provides that when six or more persons are of the opinion that a combine exists, or that prices have been enhanced or competition restricted by reason of such combine, to the detriment of consumers or producers, these persons may apply for an investigation at public expense of the alleged com- bine. If the written application for the investigation convinces the judge to whom it is submitted that a prima facie case has been made out by the applicants, he so notifies the Minister of Labor at once. Thereupon this Minister forthwith proceeds to appoint a Board of three persons to make a full investigation and to recommend the appropriate remedy. In case a "detrimental combine" is discovered, six distinct remedies are at hand. ( i ) Publicity. The findings are published in the Canada Gazette as well as in the newspapers thru the country. The pressure of informed public opinion is considered well nigh irresistible. (2) The tariff may be reduced or removed en- tirely, if the combine enjoys tariff protection. (3) Patents may be cancelled. (4) A fine of one thousand dollars a day may be imposed for ignoring the findings of the Board. The findings of the Board may serve as a basis for effecting other remedies (under other stat- utes) namely, (5) cancellation of licenses under the Inland Revenue Act, and lastly (6) a withdrawal of subsidies. Case of the United Shoe Machinery Company of Canada The first case under the Canadian Act, that of the United Shoe Machinery Company, has revealed both the strength and the weakness of the Canadian law, and therefore justifies me, I believe, in making a rather full statement of the proceedings. This case began in No- vember, 1910, and terminated (if the settlement reached be final) 238 The Quarterly Journal about the middle of 191 3. The technic of the procedure may be best understood by a mere statement of the chronology of the case. Chronology of the Case Stated as briefly as possible, the case took the following course before the final reports of the Board (majority and minority reports) were made: 1. Initiated November 10, 1910. Application is made to Justice Cannon of the Superior Court of Quebec, by citizens of Montreal, only one of whom is a consumer of shoe machinery, and who is the sole competitor of the United Company in Canada. 2. February 25, 1911. Judge Cannon orders an investigation. 3. February 27, 191 1. Minister of Labor establishes a Board of Investigation. Appointment of Board completed March 16, 191 1, by the appointment of a chairman. Board composed as follows: Honorable Mr. Justice Charles Laurendeau of the Superior Court, Montreal, Chairman; Mr. William J. White, K. C, Montreal (for the alleged combine) ; and Mr. Joseph C. Walsh, journalist (for the applicants). 4. March i, 191 1. Notice served on the Minister by the United Company that an appeal would be taken from Judge Cannon's order. on the three following grounds : "insufficiency of application" ; "irre- gular procedure"; and "no jurisdiction" (order should have been made in district of Montreal where the Company has its principal Canadian offices). 5. March 21, 191 1. Board holds preliminary meeting. 6. March 22, 191 1. United Company hies petition asking for an injunction prohibiting proceedings till June 15. Granted, April I. Writ later extended to September 15. 7. May 16, 191 1. Appeal (No. 4 above) dismissed by Justice Cross, Court of Appeals. Court holds unanimously that an "order" is not a "judgment" and hence is not subject to appeal. 8. July 12, 191 1. Privy Council, London, refuses application of United Company for leave to appeal to London. Special leave to appeal was asked on the following grounds : ( i ) The Combines Act is founded on novel princples, and it is important to have these principles, at the very outset, decisively interpreted. (2) The Act is expensive to accused persons, exposes their business to ompetitors, and puts them out of the protective hands of the courts and into the unchecked hands of administrative departments. (3) The crucial question is, Is an Order subject to appeal? (4) Apparently an Order is a judicial act, subjecting ordinary civil rights to curtailment by Canada's Combines Investigation Act 239 mere administrative departments. (5) The injury to be suffered by the petitioners by an investigation, no matter what the result may be, will far exceed the amount ordinarily justifying an appeal to the Privy Council. 9. November 17, 191 1. Investigation by Board commenced. 10. October 18, 1912. End of Investigation. A total of fifty- nine witnesses examined. Sessions of the Board held with due pub- licity in Montreal, Toronto and Quebec. Monopoly and Its Causes The investigation was not as "expeditious" perhaps, as the law had contemplated. But it was thoro, and brought to light the fol- lowing interesting facts. The Canadian branch of the United Shoe Machinery Company operates under license from the provinces of Ontario and Quebec. Nine competing companies had been absorbed by the United Company, and but one competitor remained in Can.ida. And of the 145 boot and shoe manufacturers in Canada, 138 v.ere customers of the United Company. This company makes about three hundred varities of machines for use in the manufacture of boots and shoes. Some of these of a general nature were sold outright. But the specialized machines, such as heeling machines, machines for lasting, eyeletting, etc., were leased only. The leases Avere all made for a term of twenty years. The royalty paid on the shoes turned out ranged from five to seven and one-half cents per pair, for tlie best shoes and a much less amount for cheaper shoes. Since the lease provided that the company should keep all machines in perfect repair and should introduce new and improved machines from time to time (extending the lease twenty years from date of new ma- chines) it followed that the leases between the company and its cus- tomers were for an indefinite period. But the chief limitation in the lease was found in the "tying clause." Here is a sample from the pegging machine department. Tying Clause "The lessee shall use the leased machinery to its full capacity on all boots, shoes, and other footwear made in his factory which are or are to be pegged, but the leased machinery shall not, nor shall any part thereof be used in the manufacture of any boots, shoes, 01 other footwear which have been or shall be lasted on machines not leased to the lessee by the lessor of its assignor or in the manufacture of any boots, shoes, or other footwear which have been or shall be slugged, heal seat nailed, or otherwise partly made by the aid of any 24© The Quarterly Journal "Metallic" machinery not leased to the lessee by the lessor or its assignor." This tying clause fastened the United Company's monopoly on its customers, and some customers chafed under the joke, not because it was heavy, but merely because it "tied" them. The Board, in stating its conclusions, said "The company has obtained a practically complete control of the business of supplying shoe machinery in Canada." But this monopoly was not due, so the investigation proved, to rebates, to predatory competition, or to unfair practises. It was to the following factors, however, said the Board, that the monopoly was due: "Control of Patent Rights; the quality of the machines supplied; the fact that the company can supply a full set of machines; the introduction of the tying clause into the lease and the duration of the lease; the efficiency of the ser- vice furnished by the company in maintaining its machines in good order; the facility with which the lessee can obtain repair parts for his machines; the maintenance of a corps of competent roadman at convenient places for the inspection and repair of machines ; the fact that the manufacturers are all on the same footing as regards the royalties paid, the machines supplied, and the service rendered ; the ability of the company to provide the large amount of capital needed to adopt and maintain the system of equipping factories with machines under lease.' Neither the manufacturers nor the ultimate consumers com- plained of the Company's royalty charges. Neither were any com- plaints made by the manufacturers where the grounds of these com- plaints would disappear if the way were open to competition. Would not the superiority of the machinery and the efficiency of the Company's service be sufficient security to the Company should the tying leases be dropped? No, President Winslow of the Com- pany thought these would not be sufficient securit\'. These leases gave the "security" needed (by shutting out competition) and any change in the lease system would require the Company to change its method of doing business. The necessity of such changes to pro- tect the Company's interests and the nature of the changes were not clearly pointed out by the president, altho he was pressed on these two points. Findings of the Board majority report "Competition Unduly Restricted" The Board broaight in majority and minority reports which are Canada's Combines Investigation Act 241 published in full in the Canada Gazettte of October 26, 1912. The majority held that "The United Shoe Machinery Company is a combine and by the operation of the clauses of its leases, quoted in the foregoing, which restrict the use of the leased macjiines in the way therein set forth, competition in the manufacture, production, purchase, sale and supply of shoe machinery in Canada has been and is unduly restricted and prevented." Six months' time was allowed the Company to make such changes as would eliminate the restricting clauses of the leases. This gave the Company till April, 1913, to change the form of their leases. Before discussing the "obedience" of the Company to the Board's findings, it is but fair to look at the report of the minority. MINORITY REPORT "Business Not Restricted But Increased." The minority report, signed by the Company's attorney, made these interesting and significant claims: The words "unduly and "unreasonably" mean an act which is oppressive, contrary to public policy. Now, examine the Com- pany's business as a whole, not merely the tying clauses in its leases. Has it been oppressive? The Company furnished the best machines that are known; it provides efficient inspection and repair; it intro- duces the very latest improvements ; it charges a royalty based on output and hence is interested with the manufacturers in increasing, not restricting, output. Other shoe machinery manufacturers sold their machines outright, giving no adequate guarantee as to repair service. We furnished the service — a case of the survival of the fittest under free and fair competition. We have not increased the royalties or otherwise acted oppressively. On the contrary, every effort has been made to constantly improve the machinery, to assist new manufacturers in starting in business and to satisfy our customers generally. Our acts have thus not been against public policy. We have, on the contrary, been of manifest advantage to the manufac- turer of boots and shoes, to the labor operating the machines, and to the consumer. Each one of these claims is apparently borne out by the facts. "Obedience" of the Company is the tie untied After using up the six months of grace, and little more time, the Company finally produced a new set of leases. The question is, is the restricting clause eliminated in these new leases? Viewing this 242 The Quarterly Journal mater as a layman, for I am not qualified to speak as a lawyer, it seems to me the plain intent of the new leases is to perpetuate the tying system. For instance, the "tying clause'' remains the same. It is followed by a clause, which, interpreted broadly, does give the lessee the privilege of terminating the lease at any time. But it must be terminated under certain hard conditions, conditions in fact which would seem far more burdensome than the tying clause itself. For instance, the licensee (as he is now called) must give thirty days' notice in writing of such proposed termination, and must accompany the notice in writing of such proposed termination, and must accom- pany the notice with a check in payment for the machine, and m.iist "surrender and deliver" the machine. From the amount remitted. however, the licensee deducts one-half the monthly rental whicli he has already paid on the machine. To illustrate, take this table from the "Order and Lease Agree- ment,"' Goodj'ear Department: Schedule of Machines I II III IV V VI Goodyear Welt and Turn Shoe Machine (Model K) No. $600. $6. $5. $15. $600. $3. Goodyear Outsole Rapid Lockstitch Machine No. 450. 3. 5. 15. 300. T.50 Goodyear Outsole Rapid Lockstitch Machine (Mod- el M) No. 1000. 6. 5. 15. 600. 3. Column II is the monthly rental schedule. Column III — add this amount to monthly rental if other than machinery of United Company is used. Column V — payment of this amount is to accompany notice to terminate the lease and license. Column VI — this amount (which is half the monthly rental shown in Column II) is to be deducted from the payment required in Column V. From this schedule it is easy to calculate the payment required from a licensee when he gives notice that he desires to terminate the agreement. The very fact that the licensee must now, to terminate the agreement, pay for the machine and then surrender the machine, will likely "tie" him as effectually as the old tying clause. This is the solution worked out in compliance with the findings Canada's Combines Investigation Act 243 of the majority of the Board. Technically the licensee is no longer tied for a twenty-year period. But in reality hard conditions now tie him for an indefinite period. Strength and Weakness of the Law A weakness of the Act is now apparent. There is no Board to pass on the final solution reached by the Company. The Board of Investigation went out of existence when the findings were published. Either this board or some other should exercise continuing jurisdic- tion over the dispute till a final and satisfactory solution is reached. A single business competitor was able to bring on a long and ex- pensive investigation of the United Company. And at the prelimi- nary hearing before the judge, only one side was heard. Fair play to the corporation would seem to warrant certain improvements in the law in these two respects. The main feature of the Canadian Act, efficient publicity, in- formed public opinion, is a proved success. The Canadian experience shows the many influences which go to build a monopoly. It jus- tifies the belief that certainty of investigation and exposure will deter almost every combine from attempting oppression. But the chief lesson from this case is that of the efficiency of the monopoly itself. Monopoly Is Efficient The Board was unanimous in the opinion that the United Com- pany was an efficient monopoly, in fact that its efficiency was the chief factor in both establishing and maintaining its monopoly. A careful, analytical, impartial reading of its whole case raises and answers the following questions, both for the United States and Canada. 1. Under this monopoly, who has suffered? Not the consumer of shoes; not the consumers of shoe machinery. There has, instead, been a minimum of economic suffering and waste. 2. Who would benefit by competition, should this monopoly be displaced by competition ? Not the consumers of shoes ; not the con- sumers of shoe machinery. 3. Does public policy require competition in this field, and if so, why? Public policy is best conserved, apparently, under the pre- sent efficient monopoly form. At least that vast majority of people who are shoe wearers and shoe manufacturers received efficient ser- vice at a fair price from the monopoly. Labor has been benefited. The consumer has been given a better article at a lower price. The 1350 shoe manufacturers of the United States and the 138 of Canada, 244 The Quarterly Journal big and little, have been treated exactly alike, with special privileges to none. Absolute equality of economic opportunity has thus been conserved. The "average business man" has been protected from injury due to unfair methods of competition. The "highways of commerce" have been kept open to all, "big and little, rich and poor on the same terms." Stability has been given to the shoe business, and security to this field of investment of the people's money. Our foreign trade has been enormously expanded in shoes, and the Ameri- can makes are making a commercial conquest of the great trade cen- ters of Europe. All this has been accomplished under the monopoly in the manu- facture and sale of shoe machinery. "Efficient publicity" rather than "criminal prosecution" is Can- ada's method. Popular rights and property rights are both safe at the hands of the public when, and only when, public opinion is informed.