Plaintiff: Standard Oil of New Jersey
Defendant: United States
Plaintiff's Claim: That Standard Oil was not in violation of the Sherman Anti-trust Act by conspiring to restrain trade.
Chief Lawyer for Plaintiff: John G. Milburn
Chief Lawyer for Defendant: Frank B. Kellogg
Justices for the Court: Rufus R. Day, John Marshall Harlan I, Oliver Wendell Holmes, Charles E. Hughes, Joseph R. Lamar, Horace H. Lurton, Joseph McKenna, Willis Van Devanter, Chief Justice Edward D. White
Justices Dissenting: None
Date of Decision: May 15, 1911
Decision: Ruled in favor of the United States by affirming a lower court order that Standard Oil be broken apart.
Significance: Although supporting the break up of Standard Oil, the Court through the "rule of reason" left open the possibility that some cooperation in restraining trade among companies may be legal. The question of the government's role and power in restricting private economic activities continued into the twenty-first century with the issue of Microsoft business practices making headlines in the year 2000.
Following the American Civil War (1861865), industrialization (growth of large businesses manufacturing goods) increased at a rapid pace. Construction of a national railroad system created cheaper transportation which greatly expanded markets allowing industrial productivity (ability to make more goods) to grow. As competition became more intense, companies sought ways to protect or expand profits. State laws in the late nineteenth century largely restricted economic growth through company mergers. Therefore, one of the more attractive means available for companies to expand profits was to simply collaborate (cooperate) with competitors to set prices and control production. These cooperative relationships often involved creating trusts in which a company would be created to oversee management of the cooperating companies. In 1882 Standard Oil of New Jersey became the first such trust. Trusts would fix prices and drive out new competition through price wars. Trusts in various industries, such as tobacco, beef, whiskey, and sugar, led to major concentrations of capital (money) within those trusts. Eventually, trust became a general term applied to national monopolies where only a few people controlled a major portion of the U.S. economy. Legislatures and the courts focused on protection of new businesses trying to enter markets. The freedom to contract dominated all legal considerations, not individual civil rights or consumer protection.
Public concern over the practices of Standard Oil grew in the 1880s and continued to swell following passage of the Sherman Antitrust Act of 1890. The act prohibited unfair business practices designed to drive out competition but the government and courts were not willing to apply it very aggressively. By 1906 Standard Oil had become a monopoly, controlling over 80 percent of oil production in the United States. Majority ownership of the company was led by John D. Rockefeller (1839937). A $70 million dollar investment, establishing the company in the early 1880s, earned $700 million of profits in only fifteen years.
With little competition for some products, such as kerosene, Standard Oil charged excessive prices leading to remarkable profits. For products where competition did exist, Standard Oil could afford to drastically cut prices driving the smaller companies out of business. In addition, Standard Oil offered rebates (money refunds) to oil producing companies, enticing them to ship their oil only through Standard Oil pipelines. All of these practices are unfair restrictions on interstate commerce (conducting economic trade or business across state lines). A phrase often applied to these practices is "restraint of trade."
Although evidence was uncovered describing the unfair practices Standard Oil used in restricting competition, the U.S. government long refused to act. Finally, under President Theodore Roosevelt's (1901909) second term of office, public pressure resulted in an investigation of Standard Oil's practices and a lawsuit. The government charged that Standard Oil violated the Sherman Antitrust Act by illegally restricting interstate commerce. Standard Oil responded that many of the individual companies controlled by Standard Oil were actually competitive on their own, relatively free of the overarching trust company. Roosevelt's successor as President, William Howard Taft (1909913), inherited the case and kept pursuing prosecution.
Argued for eight months in St. Louis Federal Circuit Court, a decision was issued on November 20, 1909. Judge Walter Henry Sanborn ruled that indeed Standard Oil acted inappropriately to restrict interstate commerce. Although Standard Oil's individual companies might be capable of independent competition, actually they were sufficiently controlled by the Standard Oil trust company to prevent competition. Through this control, Standard Oil had tried to monopolize the petroleum industry. Sanborn wrote that "the combination and conspiracy in restraint of trade and its continued execution which have been found to exist, constitute illegal means by which the conspiring defendants combined, and still combine and conspire to monopolize a part of interstate and international commerce."
The penalty posed by Sanborn, however, was far from damaging for those holding the economic power in Standard. Standard Oil's controlling interest over the various companies was broken up, but that interest was merely shifted to Standard Oil's small group of primary stockholders. Consequently, little actually changed.
Rule of Reason
Standard Oil appealed the decision to the U.S. Supreme Court. Chief Justice Edward D. White, delivered the Court's 9 lengthy unanimous opinion in favor of the United States upholding the lower court's decision. White first found that the vagueness of the Antitrust Act "necessarily called for the exercise of judgement." White then proceeded to introduce a standard to be used in outlawing specific monopolies. This soon-to-be-controversial standard was called the "rule of reason" in outlawing specific monopolies. In a previous case involving the Sherman Antitrust Act, Northern Securities Co. v. United States (1904), White and three other dissenting justices had tried to introduce the rule of reason, but the majority of five in the case held that the act prohibited all restraints of trade. White had claimed it only prohibited trade restraints considered unreasonable.
In Standard Oil, White asserted the rule had long been part of English common law. The rule stated that if the company could justify a restraint of trade as a necessary part of a business transaction, and it was considered reasonable by the participating companies and the general public, then it would not be considered illegal. It would be up to the courts to decide on each case. White added that to ban all restraints of trade would cripple the U.S. economy and that restraint of trade was a key element of most business combinations.
Though agreeing with the decision against Standard Oil, Justice John Marshall Harlan opposed White's rule of reason. Harlan believed the rule would be difficult to apply in future cases consistently. As a result, companies and the public would be left confused about what was considered legally right or wrong in business. Harlan, still believing that all restraint of trade was illegal under the Sherman Act, wrote,
the Court has now read into the act of Congress words which are not to be found there, and has thereby done that which it [had judged] . . . could not be done without violating the Constitution, namely, by interpretation of a statute, changed a public policy declared by the legislative department.
The Ongoing Debate of Monopolies
The individual companies resulting from the break-up of Standard Oil included such major gasoline suppliers as Exxon, Amoco, Mobil, Chevron, and Standard of California. Another trust broken up by a Supreme Court decision in 1911 was the American Tobacco Company. The decisions affirmed (supported) the federal government's role to oversee marketplace economics by determining when trusts restrict competition and restrain trade.
Ironically, although the decision went against Standard Oil, the rule of reason actually opened the door in following years for other large corporate
monopolies to continue operating, just as predicted by Justice Harlan. In 1913 the Court, using the rule, held that a combination of shoemaking manufacturers controlling over 80 percent of the market was not illegal. The Court reasoned that the trust was simply introducing greater efficiency in the industry.
The obvious unpredictability that the rule of reason posed for future court rulings led to public pressure to pass more effective trustbusting laws. Congress responded with the 1914 Clayton Act prohibiting companies from: (1) charging different buyers different prices for the same products; (2) forcing other companies to sign contracts restricting them from doing business with their competitors; (3) prohibiting mergers between competing companies; and, (4) restricting companies from buying stock in competing companies. Associated with the Clayton Act was the 1914 Federal Trade Commission Act creating the Federal Trade Commission (FTC) to combat unfair business practices.
Suggestions for further reading
Binghurst, Bruce. Antitrust and the Oil Monopoly: The Standard Oil Cases, 1890-1911. Westport, CT: Greenwood Press, 1979.
Nash, Gerald P. United States Oil Policy, 1890-1914. Pittsburgh: University of Pittsburgh Press, 1968.
Wallace, James. Overdrive: Bill Gates and the Race to Control Cyberspace. New York: J. Wiley, 1997.
Did this raise a question for you?