Gadol v. Dart Drug Corp.

³⁷⁴ Brune, C. J., delivered the opinion of the Court. In this Fair Trade Act case the complainants-appellants, Filis and Selma Gadol, are the proprietors of the Four Corners Pharmacy, which is on the outskirts of Silver Spring in Montgomery County, and the respondents-appellees, Dart Drug Corporation of Maryland (Dart) and Peoples Service Drug Stores, Inc. (Peoples), each own and operate another drugstore in the vicinity. Silver Spring is in the area which is suburban to Washington, D. C., and there is no Fair Trade Act in the District of Columbia. Dart owns one other drugstore, at Bethesda, also in the Washington suburban area.

Peoples’ store in direct competition with the Gadols is one of a chain of drugstores operating in and around Washington. The Gadols brought this suit in the Circuit Court for Montgomery County for injunctive relief, both temporary and permanent, to restrain Dart and Peoples from advertising and selling the products of four named manufacturers at less than the minimum retail resale prices fixed by those manufacturers under the Maryland Fair Trade Act (Code (1957), Art. 83, §§ 102-110, the “Fair Trade Act” or the “Act”). An interlocutory injunction was issued by the late Judge Reeves on July 28, 1958. Following a hearing more than a year later, an order dissolving the interlocutory injunction, dismissing the bill and thereby denying a permanent injunction, was entered by Judge Pugh on November 12, 1959.

The Gadols appeal from that order. This appeal turns upon whether or not there has been reasonable diligence on the part of the manufacturers to enforce adherence to their Fair Trade prices. Judge Pugh held that there had not been, and he dismissed the bill. There was no denial—on the contrary it was admitted—that the respondents had advertised and made sales at less than the manufacturers’ Fair Trade prices.

The defense was that the complainants were barred by lack of diligence of the four manufacturers in enforcing compliance with such prices, and hence that no valid Fair Trade prices were in existence, and action against these respondents is claimed to be discriminatory. The four manufacturers whose products are involved are Johnson & Johnson, Bristol-Myers Company, Mead-Johnson ³⁷⁵ Company, and Miles Laboratories, Inc. Each of them has taken appropriate steps to establish Fair Trade prices, and there seems to be no question that each has given adequate notice to the trade of those prices and of changes from time to time made therein. Their respective usual Fair Trade enforcement procedures and policies, as shown by the evidence, may be summarized as follows: Johnson & Johnson. Notice of violations is received from their own salesmen, competitors, a local pharmaceutical association or a Fair Trade Service Bureau.

Upon receipt of a complaint, a salesman will call upon the alleged violator and request that he raise his prices to the established minimum. If this fails, a letter is sent to the violator from the company’s home offices. Thereafter a salesman will follow up the letter to see whether compliance has been obtained. Professional shoppers are sometimes employed.

If compliance is not obtained, the company’s counsel sends a registered letter to the violator. If all of these efforts fail, counsel would be employed to bring suit, but suit would be brought only if negotiations failed. Bristol-Myers Company. Violations are reported by salesmen or competitors.

Violators are notified by registered letter, and this is followed up by a visit from a salesman. If compliance is not obtained, a professional shopper makes three separate shoppings; and if violations still continue, the evidence is turned over to local counsel with instructions to sue. Mead-Johnson Company. Violations are reported by salesmen and competitors.

Salesmen are instructed to watch advertisements in newspapers. After a violation is reported a warning letter is sent to the alleged violator and shoppings are made to check compliance. If compliance is not obtained, a second warning letter is sent; and if this is ineffective the matter is referred to the home office. Miles Laboratories, Inc. Notice of violation is received from salesmen or competitors, and a letter is written to the alleged violator.

If there is no correction, a visit by a salesman or by counsel, who is also an assistant secretary of the company, follows. If violations continued, suit would be filed. The implementation of the manufacturers’ procedures and ³⁷⁶ policies in Maryland in general and in the Washington suburban area in particular may be thus summarized: Johnson & Johnson. Ten instances were cited where the above procedures resulted in compliance.

No suits had to be brought. The situation in Maryland was complicated by the giving of trading stamps by a number of dealers. Johnson & Johnson amended their contracts and prices to meet this by permitting a 3% merchandising allowance. Action had been deferred on this matter pending decision in the case of Dart Drug Corp. v. Lilly, 216 Md. 20 , 139 A. 2d 272 (decided March 3, 1958).

Johnson & Johnson has had no problem with Drug Mart, another dealer in the Washington suburban area, since July, 1958. Dart and Peoples were visited several times and Johnson & Johnson was on the point of suing Dart when this suit was filed. Bristol-Myers Company. Testimony as to this company was limited to the year 1958 and thereafter.

In 1958 the Company was notified of violations by Dart and Peoples and perhaps by one or two others. In September, 1958, Bristol-Myers had sixty-four retail outlets shopped for five of its products, and ten violations were reported. Seven were thought to have been inadvertent; all of these violations were corrected within two weeks as a result of salesmen’s visits. At the time of the trial in November, 1959, a staff attorney for Bristol-Meyers testified that since an investigation of the Company’s enforcement policy in 1958 his Company had notice of only six violators.

Three violators in Maryland, two of them in the Washington suburban area, were reported in the six months preceding the trial. Two of the three offenders ceased violations promptly after notification. The case against the third was turned over to Maryland counsel for action and suit was filed in September, 1959. Bristol-Myers has probably several thousand outlets in Maryland.

It had contemplated suit against Dart and Peoples when this suit was brought. Mead-Johnson Company. Suit was brought by Mead-Johnson in the United States District Court for the District of Maryland against Dart. The case did not come to trial because of the pendency of another case involving several questions, among them the effect of giving trading stamps.

This ³⁷⁷ other suit was originally filed in the Federal Court but was refiled in a State Court in Baltimore. The plaintiff drug manufacturer in that case is not one of the four manufacturers whose products are involved here. In several instances, compliance has been obtained without litigation. One such instance involved a Peoples Drug store at College Park, in Prince George’s County.

Afiles Laboratories. Suits were brought by this corporation in the Federal Court at Baltimore against Dart and Peoples in December, 1957. They have not come to trial and have been held under a stay order for the same reason that the Mead-Johnson suit against Dart has not yet come up. About two weeks after the determination of the instant suit in the Circuit Court for Montgomery County Johnson & Johnson brought suit against Dart in the Federal Court at Baltimore, and on January 19, 1960, Judge Watkins filed an opinion holding that the plaintiff was entitled to a preliminary injunction.

See The Daily Record (Baltimore), January 29, 1960. Judge Watkins was, of course, informed of Judge Pugh’s decision in the instant case. He accepted it (unless reversed by this Court) as a binding determination that as of November 10, 1959, Johnson & Johnson’s enforcement of its Fair Trade prices had not been sufficiently diligent, but he found that as of the time of the hearing before him on January 18, 1960, it was sufficiently diligent. He noted various actions taken by Johnson & Johnson during the interim to enforce compliance, including (but not in this exact order) : (i) demands made upon Dart; (ii) meetings of Johnson & Johnson’s local representatives, at which they were instructed to call upon the trade and give notice of Johnson & Johnson’s intention to enforce P'air Trade prices, and were also instructed to increase their efforts to detect violations; (iii) the sending of notices to some 1425 known retailers in Maryland; (iv) the employment of a detective agency as shoppers to check up on possible violations; (v) a conference with the Prince George’s-Montgomery Pharmaceutical Association; (vi) a conference with the executive vice president of Peoples.

At this last conference Peoples indicated a preference for Fair Trade and a willingness to comply, if competitors were prevented from price cutting. Johnson & Johnson had ³⁷⁸ also sued a dealer at Dundalk (in the Baltimore suburban area), and on the day of the hearing expressed its intention to sue another in Montgomery County. This suit was filed the next day, the date of Judge Watkins’ opinion. Judge Watkins’ opinion also pointed out that five Fair Trade cases on the docket of the Federal Court had been temporarily stayed, with the right to any party to request the Court to lift the stay at any time, pending the determination of similar cases in the Courts of Baltimore City, particularly cases involving questions arising from the giving of trading stamps or cash register receipts.

Of course, the evidence of the above recent activity by Johnson & Johnson was not before Judge Pugh and cannot affect our decision as to whether or not his order here involved should be affirmed or reversed. It does point up the fact that more could have been done by Johnson & Johnson and by the other three manufacturers than was done; but that is not determinative of the case. The question is whether enough has been done, that is, whether or not there has been reasonable diligence by the manufacturers in the enforcement of their Fair Trade prices. Hutzler Bros.

Co. v. Remington Putnam, 186 Md. 210 , 46 A. 2d 101 ; Dart Drug Corp. v. Lilly, supra, 216 Md. 20 , 139 A. 2d 272 ; General Electric Co. v. Home Utilities Co., 131 F. Supp. 838 (D. C., Md.), affd. 227 F. 2d 384 (C. A., 4th). The respondents rely heavily on voluminous newspaper advertisements by the drugstores and other stores in the Maryland area suburban to Washington offering products of the four manufacturers at less than Fair Trade prices and on numerous purchases by persons employed as