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Federal Trade Commission v. Motion Picture Advertising Service Co.

Supreme Court of the United States
97 L. Ed. 2d 426, 1953 U.S. LEXIS 2566, 344 U.S. 392 (1953)
ELI5:

Rule of Law:

Exclusive dealing contracts that foreclose competitors from a substantial share of the market constitute an "unfair method of competition" under § 5 of the Federal Trade Commission Act, which is designed to stop anticompetitive practices in their incipiency before they ripen into full violations of the Sherman Act.


Facts:

  • Respondent, Motion Picture Advertising Service Co., produces and distributes advertising films for commercial establishments to be shown in movie theatres.
  • Respondent enters into contracts with theatre owners, the majority for terms of one or two years but some for up to five years, for the exclusive right to display its advertising films.
  • These exclusive contracts prevent theatre owners from displaying advertising films from any of respondent's competitors.
  • Respondent held exclusive contracts with nearly 40 percent of the theatres in the areas where it operated.
  • Collectively, respondent and three other major distributors had exclusive screening arrangements with approximately 75 percent of all U.S. theatres that showed paid advertising films.
  • These exclusive arrangements limited the outlets available to competing film distributors, forcing some out of business due to their inability to secure exhibition contracts.

Procedural Posture:

  • The Federal Trade Commission (FTC) filed a complaint against respondent Motion Picture Advertising Service Co., charging it with using 'unfair methods of competition' under § 5 of the FTC Act.
  • After a hearing, the FTC found that the respondent's exclusive contracts extending beyond one year were unduly restrictive of competition.
  • The FTC issued a cease and desist order, prohibiting respondent from entering into or enforcing exclusive contracts with terms longer than one year.
  • Respondent appealed the FTC's order to the United States Court of Appeals.
  • The Court of Appeals reversed the FTC's decision, holding that the contracts were not unfair methods of competition.
  • The Federal Trade Commission (petitioner) successfully petitioned the U.S. Supreme Court for a writ of certiorari.

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Issue:

Whether a company's use of exclusive contracts that foreclose competitors from a substantial portion of the market for motion picture advertising constitutes an 'unfair method of competition' in violation of § 5 of the Federal Trade Commission Act?


Opinions:

Majority - Mr. Justice Douglas

The company's use of exclusive contracts constitutes an 'unfair method of competition' because it unreasonably restrains competition and tends to create a monopoly. The Federal Trade Commission Act was designed to supplement the Sherman and Clayton Acts by stopping anticompetitive practices in their incipiency. The Court found that the respondent's exclusive contracts, in conjunction with those of three other major firms, effectively foreclosed 75 percent of the available market to competitors. A device that 'sewed up a market so tightly' falls within the prohibitions of the Sherman Act and is therefore an 'unfair method of competition' under § 5 of the FTC Act. The Court deferred to the Commission's expertise in fashioning a remedy, finding that limiting the exclusive contracts to one-year terms was a reasonable exercise of the Commission's allowable judgment.


Dissenting - Mr. Justice Frankfurter

The Commission has not adequately demonstrated that these contracts constitute an 'unfair method of competition.' The Commission's conclusion is a 'dogmatic conclusion' presented 'by way of fiat and without explication.' The dissent argues that the Commission failed to provide a clear analysis linking its findings to the legal standards of § 5, and did not specify how many contracts exceeded the one-year term it found acceptable. Aggregating the market share of the respondent with its competitors is improper absent a charge of conspiracy. The dissent maintains that the determination of what constitutes an 'unfair method of competition' is a question of law for the courts, not a matter of unreviewable discretion for the Commission, and the case should be remanded for a more detailed explanation.



Analysis:

This decision solidifies the 'incipiency doctrine,' empowering the Federal Trade Commission to prohibit business practices that have the potential to become full-blown antitrust violations. It affirms that § 5 of the FTC Act has a broader reach than the Sherman and Clayton Acts, allowing the agency to act preemptively against conduct that tends to create a monopoly. The ruling also underscores judicial deference to the FTC's expertise in crafting remedies tailored to specific industry practices, so long as the remedy is reasonably related to the violation found. This encourages a functional, effects-based analysis of business practices, prioritizing their actual impact on competition over their formal legal labels.

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