TRADE SECRETS of the COMBINES DETECTIVES
Price-fixers may fleece you on anything from bread to eyeglasses— but sooner or later they lock horns with Ottawa’s combines investigators. Today these big-business sleuths are opening two new "cases" a week. Here’s how they work
PETER C. NEWMAN
A paradox of our economic system is that the very individuals who express the most vocal lip service to free enterprise often try to defeat its basic philosophy of unrestricted competition by agreeing on prices and sales methods with their rivals. Canada since 1889 has been fighting such combines with one of the world’s strictest anti-monopoly laws.
The fifteen men in mufti who enforce this legislation as Department of Justice combines investigation officers, claim their work saves Canadian consumers millions of dollars a year. In the last half century they have ferreted out evidence that has convicted two hundred Canadian business firms—including some of the largest and best known—of criminally restraining trade through secret market sharing and price arrangements. For their attempts to garrotte competition these companies have paid fines of nearly two million dollars.
The fact that only one in ten combines investigations turns up enough evidence to warrant prosecution indicates that the majority of Canadian businessmen compete with uninhibited vigor, and that the consumer usually benefits in better goods and services and lower prices.
But the tempo of the combines hunt is now at an all-time peak. More than a hundred preliminary enquiries have been launched in the last year; two new continued on page 39 case files are being opened every week.
continued on page 39
Trade secrets of the combines detectives continued from page 20
Many businessmen regard the probes as legalized witch hunts”
The current investigation that is certain to stimulate the most heated debates, both in and out of court, is the four-year study of Canadian Breweries Limited— the company which E. P. Taylor in the last quarter of a century has built from an insignificant cluster of broken-down Ontario plants operating at a loss into the world's largest brewing concern, selling a million dollars' worth of beer every thirty hours. The case has been referred to counsel for prosecution, Justice Minister Davie Fulton announced in parliament last November.
Combines investigations have provided some spectacular illustrations of companies overcharging consumers, once they escape into the economic no-man's-land where prices are set by confidential intercompany memoranda rather than by the impersonal forces of competition. Justice Department agents have uncovered pricefixing agreements among the manufacturers and distributors of such commodities as oatmeal, fruits and vegetables, coffins, car accessories, matches, wire fencing, galoshes, quilted goods, eyeglasses, tires, Hour, gasoline, bread, coal, cigarettes, toilet paper and false teeth.
In recent years Canada's anti-combines legislation and the methods of enforcing it have been the subject of bitter controversy among businessmen, many of whom regard the investigations as legalized witch hunts. "We need a good, effective and intelligible anti-trust law in Canada," says R. M. Fowler, president of the Canadian Pulp and Paper Association, whose members have been involved in six major combines enquiries, "where at the moment we have a bad, ineffective and unintelligible law."
Fowler and other business leaders claim that the existing statute is so difficult to interpret and the resultant trials are so lengthy and expensive that accused companies frequently plead guilty and pay fines on price fixing, even when they know they are innocent. They insist that the law is unfair because it provides for the publication of an investigation’s details before a court rules on the guilt or innocence of the companies involved. Also, they do not agree that a combine should be branded criminal, whether or not its operation actually harms the public.
On the other hand, there are businessmen who back up the opinion of Sir David Maxwell Fyfe, the great British authority on anti-monopoly laws, who concluded after a survey: "All the Dominions have passed laws against trade restraints, but none are as complete or as effective as the Canadian law." Justice Minister Fulton answers the critics of th: law he administers by stressing that it is not based on the assumption that Canadian businessmen are a group of unprincipled profiteers. "What we are trying to destroy,” he says, "is the philosophy which in some areas seeks to substitute inter-company understandings for the rigors of business competition and its attendant benefits to the public.”
Fulton and Fyfe praise the careful preparation of cases, but some Canadians violently condemn the costly, drawn-out nature of investigations. Combines trials have been among the longest proceedings in Canadian legal history. In the fall of 1948. for instance, the combines investigators noted that the prices of Canadian writing, blotting and book papers were remarkably similar and that since 1935 only three new companies had joined the fine-papers industry. A full-scale enquiry was launched. Three years of searching through the files of the forty-five paper mills were followed by two years of private hearings to gather oral evidence and allow the firms to state their defense. The transcript of these sessions numbered about a million words. The report charging Canada's fine-papers industry with having maintained a competition-restraining combine over the past seventeen years was issued in 1952.
The trial of the companies, in the Supreme Court of Ontario, began on Jan. 11, 1954. It lasted seventy-one
days: more than twenty million words of evidence were submitted. The judge took five hours to read his ruling, which found most of the companies guilty. After a hearing before the Ontario Court of Appeal, the case reached the Supreme Court of Canada in the fall of 1956. This court delivered its judgment on May 13, 1957, confirming the decision in a twenty-four-page, single-spaced document. Twenty-seven of the fine-paper companies were fined a total of $242,()()() in November 1957—almost a full decade from the date of the investigation's beginning.
Although the trial re-established competition in the fine-papers industry it is not possible to estimate how much money this saved Canadian consumers. Prices seldom move down immediately after a combine is broken up. A frequent result is that less efficient companies in the industry, which had been supported by fixed price levels and the artificial division of sales territories, drop out. But that’s a long process and often before it takes effect there are other factors which alter price tags.
Even unsuccessful combines prosecutions sometimes benefit consumers. A 1947 investigation into the manufacturers of dental supplies lost whatever legal force it might have had on a technicality, but the publication of the investigators’ findings, which showed that dentists were being forced to charge a markup of more than a hundred percent on the plastic used in the making of false teeth, created enough pressure to persuade the manufacturers to cut prices, saving Canadians substantial amounts.
The investigating officers who uncover combines all have training in law, economics or accountancy. They’re hired at $4,560 a year, and at the senior-level salary of $10,000 they’re among the country’s highest-paid detectives. The law has a seldom-used provision under which any six Canadian citizens can send these high-priced watchdogs into action by signing a complaint against an alleged combine. But most enquiries are initiated by T. D. MacDonald, the director of investigation and research, who keeps a running record of the fluctuations in Canadian commodity prices.
MacDonald is a precise, fifty-year-old lawyer known as Ottawa’s most cautious civil servant. He uses words with the immaculate caution one might expect from the Scotland Yard inspector in a B-budgct British suspense film. His scratched mahogany desk holds the branch’s only gun: a flintlock-shaped paperweight. Seven years after his graduation from Dalhousic Law School at Halifax in 1933, MacDonald at thirtytwo became the youngest deputy attorney-general in Nova Scotia history. He moved to Ottawa in 1949 as superintendent of bankruptcies for the Department of Justice, and a year later became director of combines investigation.
MacDonald works hard at educating Canadian businessmen to understand clearly the full anatomy of the Combines Investigation Act and to abide by its provisions. He startled the 1953 annual meeting of the Canadian Manufacturers’ Association by handing out a questionnaire with ten statements about his branch. He asked members to mark each true or false, and offered a bound copy of the act to every businessman scoring over eighty percent. He refuses to talk about the results, but officials at the gathering don’t recall many copies changing hands.
MacDonald spends his typical day analyzing the documents gathered by his staff to determine the exact dimensions of restrictive practices in Canadian corporate behavior. Because most businessmen who participate in trade combinations scrupulously destroy written evidence, much of the available material consists of difficult-to-identify marginal scraps ofpaper they have forgotten to burn, and confidential inter-office memoranda.
During the 1952 investigation of a combine formed by electrical wire and cable manufacturers, it was discovered that suggested pricing arrangements were circulated on onionskin paper without letterhead. The lists were sealed in plain white envelopes and mailed with stamps, although the participating companies all had postage meters. Senders identified themselves by signing the first initial of their surnames. But even this recognition symbol was dropped as soon as the correspondents learned to discern each other’s typewriter styles. These firms were convicted and fined the maximum ten thousand dollars each in 1955.
When MacDonald orders an industry investigated, Branch officials usually arrive simultaneously at the offices of the executives who head the suspected companies, so that they don’t have time to pass warnings back and forth. The investigators’ road equipment consists of extra copies of the Combines Investigation Act, a batch of large envelopes, paper seals, a ball of string, and search warrants signed by MacDonald. They quickly identify themselves, then instinctively head for the lower right-hand drawer of the president’s desk—the most common cache for confidential correspondence. The presumption of business sin gives investigators the right to demand and seize all documents they judge relevant to their enquiry.
Evidence in the furnace
Businessmen who have tried to impede their work have found such tactics costly. During a 1954 investigation of electricalequipment firms, combines officer W. R. McQuarrie searched the Toronto office of Arthur S. McCordick, the executive vicepresident of the Moloney Electric Company. In the third drawer of his filing cabinet he found two folders of useful evidence. McQuarrie put the files in his envelope and fastened it with a red seal into which he impressed his initials. When he continued hunting for documents in another room, McCordick ordered the office janitor to chuck the envelope into the boiler-room furnace. McCordick was immediately charged with impeding a combines enquiry and a few weeks later sentenced by a Toronto magistrate to pay $1,750 or spend six months in jail. He paid the fine.
When a combines investigator completes his search, he addresses the impounded material to himself in Ottawa, where it’s microfilmed, then returned. While monopolistic tactics are usually thought of as involving only giant industries, the combines cops are equally concerned with small business. Last year an investigation revealed that a dozen Montreal and Toronto quilting companies had restricted competition by setting themselves sales quotas. Firms that exceeded their allotment had to pay a penalty of seven cents into an association kitty for each extra yard sold.
The court proceedings brought out the cloak-and-dagger tactics used by the quilters to enforce their agreement. When the Expert’s Quilting Company of Toronto attempted secretly to widen its market, the other quilters hired a private detective to trace the goods. He shadowed them to the Belleville, Ont., plant of Deacon Brothers—a customer Expert’s had recorded in its books under an assumed name. Following the private detective’s report, the quilters’ association fined Expert’s fifteen hundred dollars. The court penalized the quilters only six thousand dollars for operating the combine, because it was felt that the companies were too small to afford a larger fine.
Even the most vocal supporters of combines legislation admit that it has been weakened by the relative insignificance of the fines imposed. Last January, for instance, eleven shingle manufacturers paid the courts the maximum fine of ten thousand dollars each for having operated a combine in the $3()-million-a-year asphalt-roofing industry since 1932.
‘The maximum penalty of ten thousand dollars for profiteering under the Combines Act is not enough," John Diefenbaker said while in opposition. "If we told people engaged in robbery that we would take a percentage of what they get, we would not be discouraging robbery.” A 1952 legislative change allows the courts to penalize guilty corporations with unlimited fines. The provision has not so far been applied, because the period covered by charges against the combines prosecuted to date has usually spread back to before the law was altered.
Combines investigators point out that the fine is not the only punishment. The prestige of guilty companies suffers, and the Branch may recommend the removal of an industry’s protective tariff or patent rights.
After an eight-year investigation into the marketing of eyeglasses it was found that patents on frames in most common use were held by the American Optical Company. The firm was forcing Canadian optometrists to charge fifteen dollars for glasses costing $5.80. The U. S. manufacturer sent shoppers around Canadian stores to prevent price-cutting attempts. Instead of prosecuting, the Combines Branch requested that the AttorneyGeneral of Canada ask the Exchequer Court to throw the patents involved into the public domain. This allowed other manufacturers to enter the market.
The type of business arrangement that most ruthlessly limits the entry of new manufacturers into an industry is the international cartel, which rigidly limits regional (and sometimes world) sales of commodities through absolute control of production facilities or raw materials. Professor V. W. Bladen, head of the Department of Political Economy at the University of Toronto, has estimated that more than half of world trade during the 1930s was subject to some form of restrictive agreement. The most savage example was the quinine cartel. Before the invention of synthetic substitutes during World War II. the world’s five hundred million malaria sufferers depended on quinine made from the bark of Javanese cinchona trees. To maintain its high price, the quinine cartel’s employees regularly burned half the harvest of the life-giving bark.
The international cartel with the most rigid control of its industry ever uncovered in Canada was the woodenmatch monopoly. It was formed by companies associated with Ivar Kreuger, the Swedish millionaire who owned a hundred and fifty factories in twenty-eight countries producing sixty-five percent of the world’s matches. In 1923 Kreuger bought a match plant at Berthierville. Que., from the Rockefeller family and four years later merged it with the match business of the E. B. Eddy Company at Hull, then controlled by R. B. Bennett. This made the Swedish financier’s newly formed Eddy Match Company Canada’s only wooden-match producer.
The fighting brands
As competing plants were established, Eddy flooded their sales areas with underpriced brands. Several Canadian match companies tried it: all went under. Columbia Match Company, which set up a large factory at St. Johns. Que., in 1929, was for a while the most successful competitor. "No doubt you will watch their efforts and see that they are carefully attended to if they attempt to take any of our business," G. W. Paton, the president of Eddy, instructed A. G. Woodruff, one of his vice-presidents, in a confidential inter-office memo soon after Columbia's incorporation. After three years of battling Eddy’s low-priced "fighting brands" Columbia was forced into the bankruptcy courts. Eddy executives secretly purchased the plant and operated it as the Commonwealth Match Company.
Eddy was convicted as a monopoly in 1951. Because the company had maintained the firms it absorbed as separate corporations—to give the appearance of competition within the industry—the fine totaled eighty-five thousand dollars instead of the usual maximum. But Eddy's grasp on the Canadian market was not splintered. A section of the law providing for the break-up of monopolies was not yet in force. While Eddy continues to dominate this country's wooden-match business, its position was seriously weakened by the 1953 recommendation of the Combines Branch that Canada remove its twenty-five-percent protective tariff on matches.
The breweries case, due to reach the courts later this year, is expected to cause even lengthier debate than the three-yearlong legal proceedings revolving around Eddy Match. The report of the investigation into E. P. Taylor's brewing empire was tabled in the House on June 9. 1955, by then-Justice Minister Stuart Carson. It states: “Erom the date of its incorporation in 1930, Canadian Breweries Limited has pursued a deliberate planned program designed to place the company in a dominant controlling position in the brewing industry.” The company has absorbed about thirty breweries it Ontario and Quebec during the past tventy-five years. The report admits that "Canadian Breweries Limited is not today in either substantial or complete control of the brewing industry ... to the detriment and against the interest of the public,” but warns the company not to buy out any more breweries.
The prosecution of Canadian Breweries will focus interest on current monopolistic tendencies. But the monopoly is not an invention of modern business. Early social scientists regarded competition as evil and un-Christian. Adam Smith, the Scottish economist, held an opposite view. He wrote in 1776: "People of the srme trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public.”
Canada in 1889 became the first naton to legislate against the modern type of industrial combine by adding a secton to the Criminal Code directed at the then-flourishing monopolies in oatmeal. stoves, barbed wire, coal and coffins. The first Combines Investigation Act was written and guided through Parlament in 1910 by Mackenzie King, then minister of labor. A further revision of tthe act in 1923 set up a permanent investigating organization, headed by King's private secretary. F. A. McGregor.
The most sweeping probe of Canadian business buying and selling habits was the 1935 Stevens Commission. It showed price fixing to be far more widespread and pronounced than most people had suspected. Among this commission's most spectacular discoveries was the fact that forty-cents-a-gallon aviation gasoline was being sold as cleaning fluid for the equivalent of sixteen dollars per gallon. One result of the report was the addition to the Combines Investigation Act of a section which prohibits wholesalers and manufacturers from discriminating between customers through preferential discounts and other devices.
Despite the widely publicized findings of the Stevens Commission, the Thirties nurtured Canada’s most rigid combines, including price-fixing agreements in the glass and rubber industries. The glass arrangement was an international cartel which cut up supply of the Canadian market among Belgian, -English and American producers. Enforcement was so tight that when Canadian automobile manufacturers tried to buy a greater portion of their glass from England under the 1932 preferential tariff, they were told they could not get more than in the previous year, regardless of their higher price offers.
The main glass companies pleaded guilty to combines charges in 1950. They paid the maximum ten-thousand-dollar fines but insisted that they had not exploited consumers. Crown prosecutor T. N. Phelan charged that during 1928 they had forced Canadians to pay one third more for the two million dollars’ worth of glass purchased than they would have under competitive conditions. “It must be assumed." he said, “that these excess profits have continued to be taken from the unsuspecting public for the past twenty years.”
The rubber combine involved the domestic manufacture of tires, galoshes, fan belts, garden hose, and dozens of other items. When in 1952 MacDonald charged twenty-three of this country’s leading rubber manufacturers with having operated six separate price-fixing agreements for the past twenty years, the crown prosecutor estimated that the firms had illegally extracted about twenty million dollars from Canadians.
MacDonald’s report showed that the manufacturers of rubber footwear, for example, had not only agreed to observe identical prices, but also had set up elaborate sales-quota arrangements. Companies which exceeded their allotments had to pay part of the surplus sales value to firms which failed to meet their quotas. Every manufacturer had to make a large deposit at a central office as proof of his allegiance. Most of the companies involved in this and the other rubber combines were fined ten thousand dollars. During their trial the Toronto fire department complained that it had just received four identical tenders for rubber hose.
A case that focused even more national attention on the work of the Combines Branch was the report charging a price conspiracy among Canadian flour millers. When Ottawa took the controls off flour on Sept. 15. 1947. the millers immediately raised prices by identical amounts. F. A. McGregor, who was then commissioner, dispatched a squad of combines investigators to impound the minutes of Canadian National Millers Association meetings and the correspondence of its members. The official association minutes showed no price discussions. McGregor claimed that they were dummies and that in the files of the millers he found copies of the real minutes, clearly recording price-setting talks.
The flour-milling investigations turned out to be the most contentious in the Branch's history. The law then required that combines reports be made public within fifteen days of their printing. The yellow-bound copies of the findings landed on the desk of Justice Minister Stuart Garson on April 22, 1949. Parliament prorogued on April 30 for a general election without cabinet action on the report. The ministers had split on the issue. C. D. Howe insisted that the millers’ actions were in keeping with the orders of the Wartime Prices and Trade Board. When the government refused to release the investigation’s findings even after the election, McGregor resigned in protest, on Oct. 29, 1949.
The report was finally tabled in the House of Commons nine days later. The opposition benches exploded. George Drew demanded that the Liberals dissolve parliament over the delay. “In 1649,” shouted M. J. Coldwell, the leader of the CCF, “an English king was beheaded for doing exactly what the government has done.” The flour millers were not prosecuted, but the controversy prompted the setting up of a committee under Mr. Justice J. H. MacQuarrie of the Nova Scotia Supreme Court to review combines legislation.
As a result of this committee’s report the Branch was split into a directorate of investigation responsible for gathering evidence, and the Restrictive Trade Practices Commission, headed by C. Rhodes Smith, a former attorney-general of Manitoba. This commission hears the evidence of the investigators and the suspected companies, then recommends on the advisability of prosecution to the minister of justice.
The study following the Hour case also urged the abolition of resale price maintenance—a practice which had allowed manufacturers to set the retail selling price of their products. The retailers who didn't obey had frequently been deprived of their dealerships. Since being implemented by parliament in 1951, the change has brought about reductions totaling millions of dollars in the prices of appliances, cigarettes, drugs, and brand-name foods. Danforth Radio, a Toronto appliance dealer, cleared out 833 General Electric floor polishers (more than all the retailers in metropolitan Toronto ordinarily sold in a month) during a three-day sale in 1954, at $33.85 each. G.E.'s suggested list price was $54.50.
The perpetual stalking of the combines investigators protects Canadian consumers against manufacturers who attempt to re-impose control over retail prices. In 1956 Moffats Limited, a Toronto appliance maker, was fined five hundred dollars for trying to cut the advertising allowance of George’s Appliances Limited in Toronto, because the store was selling refrigerators with a suggested list price of $469 for $299. Parsons-Steiner Limited, the Canadian distributors of Royal Doulton china and porcelain, had to pay a thousand-dollar fine in 1954 for attempting to impose set profit margins on retailers in Ontario, Quebec and British Columbia.
This case involved the combines agents in tracking down the regional price similarities of some typical Doulton figurines. Their report reads like a fairy tale, dealing with the pricing adventures of Jersey Milk Maid, Goody Two Shoes, Sweet and Twenty, Lady Charmain and Blithe Morning.
An even more bizarre touch was added to the Branch’s routine when investigators probing the Hour-milling industry discovered, among the documents seized from the Quaker Oats Company of Canada, a description of the tendering procedure for a U. S. Army contract during the building of the Alaska Highway.
The American colonel in charge of purchasing found that six Canadian flour mills had submitted identical bids. He took a deck of cards out of his desk, and after several cuts eliminated four of the six millers. Then he and a lieutenant cut the deck again: the king of diamonds won the round for Quaker Oats by beating out the ten of spades which had turned up for Lake of the Woods Milling. ★