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Highlights from the Sherman Act, Section 1 Case History. Judicial interpretation of section 1 takes it shape from three key decisions. U.S. v. Addyston Pipe & Steel (1899) U.S. v. Trenton Potteries, et al (1927) U.S. v. Socony-Vacuum Oil, et al (1940).

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Highlights from the Sherman Act, Section 1 Case History

Judicial interpretation of section 1 takes it shape from three key decisions.

  • U.S. v. Addyston Pipe & Steel (1899)
  • U.S. v. Trenton Potteries, et al (1927)
  • U.S. v. Socony-Vacuum Oil, et al (1940)

Key issue in the “early days” of section 1 enforcement: Would the courts apply a per se rule? That is, is price fixing illegal per se?

u s v addyston pipe steel 175 u s 211 1899
U.S. v. Addyston Pipe & Steel [175 U.S. 211 (1899)]

Highlights of Addyston Pipe & Steel

  • 6 makers of cast iron soil pipe formed an association for purposes of avoiding "cutthroat" price competition.
  • The defense claimed the Association was essential to avoid mutually destructive price wars. Moreover, the prices charged were "reasonable."
  • Judge Taft makes the distinction between naked and ancillaryprice fixing. Courts should apply a per se rule where naked price fixing is concerned.
  • Judge Taft: "It has been. . . pressed upon us that the prices at which cast iron pipe was sold . . . were reasonable. . .[W]e do not think there is any question of reasonableness open to the courts to such a contract. Its tendency . . . was to give the defendants the power to charge unreasonable prices, had they chosen to do so."
naked versus ancillary price fixing
Naked versus Ancillary Price-Fixing
  • If a man should sell his business and sign a “noncompete” covenant—that is, the seller agrees not to engage in rivalrous competition that would injure the interests of the parties to which he had sold– then the restrictive agreement is upheld because it is “ancillary to the main end of the union [or transaction].”
  • When the main purpose of an agreement is to fix prices, divide the market, or generally eliminate competition, it has the status of “naked” price fixing and hence is covered by section 1.

The defendants in Addyston pipe & Steel tried unsuccessfully to sway the court toward a rule of reason approach. Judge Taft of the Federal Circuit Court said, in effect: “It does not matter if price-fixing agreement merely served to control cut-throat, mutually destructive price wars.

u s v trenton potteries et al 273 u s 392 1927
U.S. v. Trenton Potteries, et al[273 U.S. 392 (1927)]

Highlights of Trenton Potteries

  • 23 suppliers of (vitreous pottery) bathroom fixtures admitted to a price-fixing agreement--but attempted to convince a federal jury that the prices resulting from the agreement were fair or reasonable.
  • The jury returned a guilty verdict but Trenton Potteries appealed based on a procedural issue--i.e., the Judge had instructed the jury not to consider the issue of whether prices were reasonable.
  • The conviction was upheld on appeal. Justice Stone: "The aim and result of every price-fixing agreement is . . . the elimination of one form of competition. The power to fix prices, whether exercised reasonably or not, involves the power to control the market."
appalachian coals a section 1 anomaly
Appalachian Coals:A section 1 anomaly

Appalachian Coals v. U.S. [288 U.S. 344 (1933)]

17 producers of bituminous coal stabilized prices through the use of an exclusive selling agency. The Justice Department obtained an injunction dissolving the cartel but Appalachian Coals appealed--successfully, as it turned out.

highlights of appalachian coals
Highlights of Appalachian Coals

The Supreme Court veered in the direction of a rule of reason standard for section 1. Chief Justice Hughes: "As a charter of freedom, the [Sherman] Act has a generality and adaptability comparable to that found to be desirable in constitutional provisions." And later: "[A] close and objective scrutiny of particular conditions and purposes is necessary in each case. Realities must dominate judgment. The mere fact that the parties to an agreement eliminate competition between themselves is not enough to condemn it."

socony vacuum return to a per se rule
Socony Vacuum: Return to a per se rule

U.S. v. Socony Vacuum Oil, et al [310 U.S. 150 (1940)]

Antitrust scholars view the Appalachian coals decision as a depression era freak. In the Socony Vacuum decision, the court took its cue from Trenton Potteries.

socony vacuum highlights
Socony Vacuum highlights
  • Indictment charged 27 corporations and 56 individuals with conspiring to fix the price of gasoline sold in the Midwestern "tank car" market. Trial resulted in the conviction of 16 companies and 30 individuals.
  • A federal judge instructed the jury to apply a per se rule. Like the Trenton Potteries case, the procedural question supplied the basis for an appeal. Appellants naturally relied on the Appalachian Coals decision.
  • The conviction was overturned on appeal but reversed again by the Supreme Court. Justice Douglas: "[For] over forty years this Court has consistently and without deviation adhered to the principle that price fixing agreements are illegal per se . . . and no showing of so-called competitive abuses or evils which those agreements were designed to eliminate or alleviate may be interposed as a defense." And later: "Under the Sherman Act any combination formed for the purpose and with the effect of raising, fixing, pegging, or stabilizing the price of a commodity in interstate or foreign commerce is illegal per se."

The Supreme Court ruling in Socony Vacuum has been the definitive ruling on section 1 for more than 60 years. If you face price-fixing charges, it is no use to say “I did it, but let me explain why.” Rather, your defense is “I didn’t do it.”

Price-fixing is illegal per se

recent section 1 cases of interest
Recent section 1 cases of interest
  • U.S. v. Archer Daniels MidlandFood processing giant ADM paid a $100 million fine to settle DOJ price fixing suit. ADM was alleged to have conspired with offshore food processors to fix the price of lycene, a corn derivative used as feed supplement.
  • U.S. v. Sotheby’s HoldingsThe upscale auction house convicted of conspiring with rival Christy’s to fix seller’s commissions.
more recent section 1 cases of interest
More recent section 1 cases of interest

Back to Lesson 5

  • U.S. v. Ted Riley BrattonMr. Riley is accused of being the principal instigator of a bid-rigging scheme for commercial plate glass installation in Virginia
  • U.S. v. Kesco, Inc. The defendant and co-conspirators entered into and engaged in a combination and conspiracy to suppress and eliminate competition in the sale of certain non-electric blasting caps to C & K Coal Company, in Clarion, Pennsylvania.