233 F.2d 755
No. 11458.
United States Court of Appeals Seventh Circuit.
May 29, 1956.
L. M. McBride, Robert B. Gerrie, Chicago, Ill., James T. Welch, Washington,
D. C., McBride & Baker, Chicago, Ill., of counsel, for petitioner.
Robert B. Dawkins, Asst. General Counsel, J. B. Truly, Attorney, Earl W. Kintner,
General Counsel, E. K. Elkins, Attorney, Washington, D. C., for Federal Trade
Before DUFFY, Chief Judge, and MAJOR and LINDLEY, Circuit Judges.
DUFFY, Chief Judge.
Petitioner asks us to vacate and set aside a Cease and Desist Order of the Federal Trade
Commission dated March 18, 1955. The complaint charges Petitioner with engaging in unfair methods
of competition in violation of § 5 of the Federal Trade Commission Act, 15 U.S. C.A. § 45. In a Per Curiam opinion the
Commission affirmed and adopted the findings, conclusions and order of the Trial Examiner.
The complaint charged Stenographic Machines, Inc., the Petitioner herein, LaSalle Extension University, and the latter's
wholly-owned subsidiary, the Stenotype Company, had entered an agreement to divide the customers in the mechanical
shorthand machine market among themselves, so that Petitioner would confine its solicitation and sales of such machines
principally to schools, and LaSalle Extension University and its subsidiary (hereinafter referred to collectively as "LaSalle")
would confine their solicitation and sales principally to home study or correspondence students. The complaint alleged that
the agreement and the practices pursued thereunder have a dangerous tendency to hinder competition and to create a
monopoly in the named companies in the sale and distribution of mechanical shorthand machines.
LaSalle Extension University was incorporated in 1908 and is engaged largely in the business of operating a
correspondence school. In 1927 LaSalle acquired the assets of the bankrupt Stenotype Company, including the "Stenotype"
mechanical shorthand machine which it has marketed under that name since 1927. The present Stenotype Company is a
wholly-owned subsidiary of LaSalle. It became inactive in 1948 and since that time its functions have been carried on by
From 1928 to 1936 LaSalle sold the Stenotype machine largely to students taking courses in Stenotypy by the
correspondence or home study method, and to a lesser extent to business schools. Starting in 1936 LaSalle began to sell
its machine to students enrolled in schools known as "Stenotype Institutions," which LaSalle assisted in organizing. The
only course offered in those schools was a course in Stenotype as distinguished from the average business school teaching
a variety of commercial subjects. LaSalle designated the owner or manager of such a school as its "Registrar." The student
signed a dual form of contract with LaSalle and with the school. The contract with LaSalle provided for the purchase by the
student of the Stenotype machine, texts, lessons and other material from LaSalle, and the contract with the school provided
for the furnishing of instruction to the student. Separate payments were made by the student to LaSalle and to the school.
This arrangement was known as the "Co-operative Plan."
In the latter part of 1948 LaSalle abandoned the "Co-operative Plan" of operation and began selling its machines, texts and
lesson material to the school as a unit. The schools made their own arrangements with the students for the purchase of the
machines and materials and payment of tuition. Under the Co-operative Plan LaSalle paid a commission to its salesmen on
each sale of a machine and the accompanying material, as well as on the amount of the tuition although LaSalle received
no direct benefit from the tuition which was paid to the school. LaSalle's new plan was called the "Package Plan." The
school did its own selling to the students and LaSalle was not obligated to pay commissions on such sales. Under the Co-
operative Plan, the net to LaSalle, after paying commissions, was $70. Under the Package Plan, LaSalle received about
$90 and paid no commission. As LaSalle paid Petitioner $56 for the machine, the increase in revenue to LaSalle was
Petitioner was incorporated in 1938 and since that time has been engaged in the production and sale of a mechanical
shorthand machine known as the "Stenograph" and supplementary text material. Milton H. Wright, the President of
Petitioner, was principally responsible for its organization. He obtained the necessary capital from private commercial
schools which were, in many cases, customers of Petitioner. Prior to 1936, Wright had been an officer of LaSalle in charge
of the sale of Stenotype machines and courses. However, Petitioner and LaSalle were in no way connected by interlocking
officers, directors or stock-ownership. Until 1952 Petitioner's machines were manufactured by others in accordance with
Petitioner's specifications. In that year Petitioner acquired its own manufacturing plant, and since then has manufactured its
own machines.
The LaSalle machines have always been manufactured by others. By 1945 the tools and dies had become worn and in
some respects obsolete, so LaSalle entered into a contract with Victor Adding Machine Company to develop a new model
Stenotype machine. However, this contract was cancelled in 1947 when it became obvious the cost of producing the new
machine would be excessive. LaSalle then approached other manufacturing sources in an endeavor to have them produce
the machine, but such efforts were unsuccessful. In October, 1948, LaSalle was desperately in need of machines and finally
approached Petitioner in an effort to supply it temporarily with Stenograph machines and eventually with a new model
Stenotype machine. Negotiations between the two companies resulted in the written contract dated November 16, 1948.
This is the contract which the Commission claims is illegal.
Under the provisions of the contract Petitioner agreed to aid LaSalle in developing a new model Stenotype, to have those
machines manufactured by Petitioner's manufacturing source under supervision of Petitioner's personnel, and to supply
LaSalle with not less than 25,000 Stenotype machines at the rate of 5,000 per year on a cost plus $10 basis. It was agreed
that until the new model could be developed, Petitioner would sell to LaSalle its Stenograph machines. All the tools, dies,
gauges, etc., developed for the new model Stenotype became the property of LaSalle. Although the keyboards of the
Stenograph and Stenotype machines are identical, there are numerous mechanical differences which require special skills
in connection with their service.
LaSalle paid Petitioner the regular school price for machines. Petitioner shipped the machines to LaSalle in bulk, f.o.b.
plant. Because LaSalle had overestimated the number of machines needed, a reduction in deliveries was negotiated from
time to time, and the contract was finally terminated by a letter agreement dated January 8, 1953. This agreement provided
that Petitioner was to continue making Stenotype machines for LaSalle according to the latter's needs, the price to be
determined at the time of each order.
The Examiner found that under the agreement "LaSalle was to de-emphasize its school business and place its primary
emphasis on home study, and that Stenographic was to be given an opportunity to take over a number of LaSalle's schools
as well as to acquire new ones." The Examiner concluded "* * * such agreement has, in substantial measure, been carried
into effect."
The Commission bases its case to a large extent upon Paragraph 7 of the November 16, 1948 agreement. This paragraph
reads: "7. It is understood and agreed that LaSalle desires to promote the sale of Stenotypes by it to purchasers of its
correspondence courses, and through certain private Stenotype Institutes now in existence where sales are made by
salesmen under contract with the Stenotype Company or LaSalle. With respect to any school whose contract is terminated,
Stenographic, upon notice in writing from LaSalle of such termination, shall thereafter offer Stenographs to such school at
Stenographic's regular list price, terms and conditions."
In considering whether LaSalle and Petitioner changed their plans of doing business because of the November 16, 1948
contract, the record clearly shows that from the beginning LaSalle has emphasized the sale of correspondence courses in
machine shorthand rather than the sale of the machines themselves. LaSalle has considered the profit in machine
shorthand to be in the sale of the correspondence courses rather than in the sale of the machines. Over the years its text
material has been designed for home study with LaSalle or the school acting as an advisor and a judge of the progress of
the student. On the other hand, Petitioner has no nation-wide sales organization. In fact, it had a sales force of three. Its
efforts have consistently been directed at schools which teach mechanical shorthand to students in attendance at those
schools. It never attempted to enter the correspondence course field.
How Stenograph Machines Began