Judgment
Court of Appeals (6th Circuit)
The United States Court of Appeals for the Sixth Circuit noted that it would be impossible for the Sherman Act to prohibit every restraint of trade for that would even encompass employment contracts, which, by their nature, restrain the employee from working elsewhere while they are being paid to work for the employer. Therefore, reasonable restraints were permitted, but this would only apply if the restraint was ancillary to the main purpose of the agreement. No conventional restraint of trade can be enforced unless it is both ancillary to the main purpose of the lawful contract and necessary to protect the enjoyment of legitimate fruits of the contract or protect from the danger of unjust use of those fruits by the other party.
If the primary purpose is to restrain trade, then the agreement is invalid, and in this case, the restraint was direct and therefore invalid.
The opinion was written by Chief Judge William Howard Taft (who later became President of the United States and then Chief Justice of the United States Supreme Court). Taft's reasoning was subsequently adopted by the Supreme Court as the proper interpretation of the Sherman Act.
Supreme Court
This case was appealed to the Supreme Court as Addyston Pipe and Steel Company v. United States, 175 U.S. 211 (1899). [1] However, on appeal, the defendants did not attack the reasoning of the Sixth Circuit. Instead, they argued that the Commerce Clause of the Constitution did not empower Congress to regulate purely private agreements but instead authorized Congress only to remove barriers to interstate commerce erected by individual states. They argued that even if Congress possessed the authority to regulate purely private agreements, banning defendants' cartel would infringe liberty of contract because the defendants' cartel purportedly set reasonable prices. The defendants' last argument was that their cartel did not directly restrain trade but was simply a partial restraint, which ensured the defendants merely a reasonable rate of return and thus would have been enforceable at common law.
The Court, in an opinion by Justice Peckham, rejected all three arguments and affirmed the decision of the Court of Appeals. Peckham conceded that the framers and ratifiers of the Constitution likely anticipated that the Commerce Clause would authorize mainly Congressional interdiction of state-created barriers to interstate commerce. At the same time, Peckham observed that in some cases, purely private agreements can have the same economic impact and directly restrain commerce among the several states. Moreover, Peckham also held that contracts that directly restrain trade are not the sort of ordinary contracts and combinations that find shelter in liberty of contract. Finally, Peckham held that the defendants' cartel directly restrained trade. Peckham quoted extensively from Judge Taft's opinion below, which found, as a matter of fact, that the defendant's cartel set unreasonable prices. See 85 F. 291–93. In particular, Peckham quoted Taft's finding that pipe produced by the cartel could have been produced and delivered to Atlanta for a cost, including a reasonable profit and the cost of transportation, or $17 or $18 per ton, but the cartel charged instead $24.25 per ton.
The Sherman Antitrust Act of 1890 is a United States antitrust law which prescribes the rule of free competition among those engaged in commerce. It was passed by Congress and is named for Senator John Sherman, its principal author.
In the United States, antitrust law is a collection of mostly federal laws that regulate the conduct and organization of businesses to promote competition and prevent unjustified monopolies. The three main U.S. antitrust statutes are the Sherman Act of 1890, the Clayton Act of 1914, and the Federal Trade Commission Act of 1914. These acts serve three major functions. First, Section 1 of the Sherman Act prohibits price fixing and the operation of cartels, and prohibits other collusive practices that unreasonably restrain trade. Second, Section 7 of the Clayton Act restricts the mergers and acquisitions of organizations that may substantially lessen competition or tend to create a monopoly. Third, Section 2 of the Sherman Act prohibits monopolization.
The rule of reason is a legal doctrine used to interpret the Sherman Antitrust Act, one of the cornerstones of United States antitrust law. While some actions like price-fixing are considered illegal per se, other actions, such as possession of a monopoly, must be analyzed under the rule of reason and are only considered illegal when their effect is to unreasonablyrestrain trade. William Howard Taft, then Chief Judge of the Sixth Circuit Court of Appeals, first developed the doctrine in a ruling on Addyston Pipe and Steel Co. v. United States, which was affirmed in 1899 by the Supreme Court. The doctrine also played a major role in the 1911 Supreme Court case Standard Oil Company of New Jersey v. United States.
Hartford Fire Insurance Co. v. California, 509 U.S. 764 (1993), was a controversial United States Supreme Court case which held that foreign companies acting in foreign countries could nevertheless be held liable for violations of the Sherman Antitrust Act if they conspired to restrain trade within the United States, and succeeded in doing so.
Standard Oil Co. of New Jersey v. United States, 221 U.S. 1 (1910), was a case in which the Supreme Court of the United States found Standard Oil Co. of New Jersey guilty of monopolizing the petroleum industry through a series of abusive and anticompetitive actions. The Court's remedy was to divide Standard Oil into several geographically separate and eventually competing firms.
In US law, the term illegal per se means that the act is inherently illegal. Thus, an act is illegal without extrinsic proof of any surrounding circumstances such as lack of scienter (knowledge) or other defenses. Acts are made illegal per se by statute, constitution or case law.
Restraints of trade is a common law doctrine relating to the enforceability of contractual restrictions on freedom to conduct business. It is a precursor of modern competition law. In an old leading case of Mitchel v Reynolds (1711) Lord Smith LC said,
it is the privilege of a trader in a free country, in all matters not contrary to law, to regulate his own mode of carrying it on according to his own discretion and choice. If the law has regulated or restrained his mode of doing this, the law must be obeyed. But no power short of the general law ought to restrain his free discretion.
Fashion Originators' Guild of America v. FTC, 312 U.S. 457 (1941), is a 1941 decision of the United States Supreme Court sustaining an order of the Federal Trade Commission against a boycott agreement among manufacturers of "high-fashion" dresses. The purpose of the boycott was to suppress "style piracy". The FTC found the Fashion Guild in violation of § 5 of the FTC Act, because the challenged conduct was a per se violation of § 1 of the Sherman Act.
Goldfarb v. Virginia State Bar, 421 U.S. 773 (1975), was a U.S. Supreme Court decision. It stated that lawyers engage in "trade or commerce" and hence ended the legal profession's exemption from antitrust laws.
Mogul Steamship Co Ltd v McGregor, Gow & Co [1892] AC 25 is an English tort law case concerning the economic tort of conspiracy to injure. A product of its time, the courts adhered to a laissez faire doctrine allowing firms to form a cartel, which would now be seen as contrary to the Competition Act 1998.
Mitchel v Reynolds (1711) 1 PWms 181 is decision in the history of the law of restraint of trade, handed down in 1711. It is generally cited for establishing the principle that reasonable restraints of trade, unlike unreasonable restraints of trade, are permissible and therefore enforceable and not a basis for civil or criminal liability. It is largely the basis in US antitrust law for the "rule of reason." William Howard Taft, then Chief Judge of the Sixth Circuit Court of Appeals, later US President and then Chief Justice of the Supreme Court, quoted Mitchel extensively when he first developed the antitrust rule-of-reason doctrine in Addyston Pipe & Steel Co. v. United States, which was affirmed in 1899 by the Supreme Court. The doctrine also played a major role in the 1911 Supreme Court case Standard Oil Company of New Jersey v. United States 221 U.S. 1 (1911).
United States v. Singer Mfg. Co., 374 U.S. 174 (1963), was a 1963 decision of the Supreme Court, holding that the defendant Singer violated the antitrust laws by conspiring with two European competitors to exclude Japanese sewing machine competition from the US market. Singer effectuated the conspiracy by agreeing with the two European competitors to broaden US patent rights and concentrate them under Sanger's control in order to more effectively exclude the Japanese firms. A further aspect of the conspiracy was to fraudulently procure a US patent and use it as an exclusionary tool. This was the first Supreme Court decision holding that exclusionary use of a fraudulently procured patent could be an element supporting an antitrust claim.
United States v. Terminal Railroad Association, 224 U.S. 383 (1912), is the first case in which the United States Supreme Court held it a violation of the antitrust laws to refuse to a competitor access to a facility necessary for entering or remaining in the market. In this case a combination of firms was carrying out the restrictive practice, rather than a single firm, which made the conduct susceptible to challenge under section 1 of the Sherman Act rather than under the heightened standard of section 2 of that act. Even so, the case was brought under both sections.
United States v. Motion Picture Patents Co. , 225 F. 800, was a civil antitrust prosecution overlapping to some extent with the issues in the decision in the Supreme Court's Motion Picture Patents case. After the trial court found that the defendants violated §§ 1 and 2 of the Sherman Act by establishing control over "trade in films, cameras, projecting machines, and other accessories of the motion picture business," by their patent licensing practices and other conduct, they appealed to the Supreme Court. After the Supreme Court's 1917 decision in Motion Picture Patents Co. v. Universal Film Manufacturing Co., however, the parties dismissed the appeal by stipulation in 1918 that the decision had made the defendants' appeal futile.
United States v. Vehicular Parking Ltd. is a patent–antitrust case in which the United States Government eroded the doctrine of United States v. General Electric Co. permitting patentees to fix licensee prices, but failed to persuade the court to decree royalty-free licensing as a remedy.
United States v. United States Gypsum Co. was a patent–antitrust case in which the United States Supreme Court decided, first, in 1948, that a patent licensing program that fixed prices of many licensees and regimented an entire industry violated the antitrust laws, and then, decided in 1950, after a remand, that appropriate relief in such cases did not extend so far as to permit licensees enjoying a compulsory, reasonable–royalty license to challenge the validity of the licensed patents. The Court also ruled, in obiter dicta, that the United States had standing to challenge the validity of patents when a patentee relied on the patents to justify its fixing prices. It held in this case, however, that the defendants violated the antitrust laws irrespective of whether the patents were valid, which made the validity issue irrelevant.
Besser Mfg. Co. v. United States, 343 U.S. 444 (1951), is a 1951 patent–antitrust decision of the United States Supreme Court in which the Court upheld a ruling that the dominant U.S. manufacturer of concrete block–making machines violated the antitrust laws when it acquired its two principal competitors, bought important patents, made bad–faith threats of patent infringement suits, and entered into patent licensing agreements in which the parties were given veto powers over any prospective additional licensees. The Supreme Court approved the district court's grant of compulsory, reasonable–royalty licensing of the patents and compulsory sales of patented machines, holding that such relief "is a well–recognized remedy where patent abuses are proved in antitrust actions, and it is required for effective relief."
United States v. Krasnov, 143 F. Supp. 184, was a 1956 district court patent–antitrust decision that the United States Supreme Court affirmed per curiam without opinion. The district court granted the Government's summary judgment motion because it concluded:
That the defendants in combination controlled the market and had the ability to and did drive competitors from the business of manufacturing knitted fabric slip covers is abundantly clear from the record. That the defendants in combination fixed and maintained prices is likewise crystal clear. That the defendants in combination and cross-licensing created a situation in the industry which, particularly by agreement for joint action respecting the patents, effectively hindered newcomers in the field, is also established beyond peradventure of doubt. That the harassing suits against competitors, previously discussed in some detail, were designed as and were actually only harassing suits is clear from an examination of the correspondence between the parties and the Court feels that such conclusion in inescapable from an objective analysis of the documents. All of these actions taken in concert constitute a clear violation of the Sherman Anti-Trust Act and the Government has established to the satisfaction of the Court that the combination and conspiracy above referred to represents an unreasonable restraint of trade and commerce among the several states of the United States in the manufacture and sale of ready-made furniture slip covers, is unlawful, and in violation of Section 1 of the Sherman Anti-Trust Act. Further, the Government, in the opinion of the Court, has effectively demonstrated that the defendants combined and conspired not only to restrain trade unreasonably but also to monopolize trade and commerce among the several states of the United States in the manufacture and sale of ready-made furniture slip covers, in direct violation of Section 2 of the Sherman Anti-Trust Act. The Court also feels that by documentary proof the Government has established that the defendants have used patent rights unlawfully in instituting, effectuating and maintaining the aforesaid combination and conspiracy which likewise constitutes a clear violation of the Sherman Anti-Trust Act.
United States v. Line Material Co., 333 U.S. 287 (1948), is a decision of the United States Supreme Court limiting the doctrine of the 1926 General Electric decision, excusing price fixing in patent license agreements. The Line Material Court held that cross-licenses between two manufacturer competitors, providing for fixing the prices of the licensed products and providing that one of the manufacturers would license other manufacturers under the patents of each manufacturer, subject to similar price fixing, violated Sherman Act § 1. The Court further held that the licensees who, with knowledge of such arrangements, entered into the price-fixing licenses thereby became party to a hub-and-spoke conspiracy in violation of Sherman Act § 1.
California Motor Transport Co. v. Trucking Unlimited, 404 U.S. 508 (1972), was a landmark decision of the US Supreme Court involving the right to make petitions to the government. The right to petition is enshrined in the First Amendment to the United States Constitution as: "Congress shall make no law...abridging...the right of the people...to petition the Government for a redress of grievances." This case involved an accusation that one group of companies was using state and federal regulatory actions to eliminate competitors. The Supreme Court ruled that the right to petition is integral to the legal system but using lawful means to achieve unlawful restraint of trade is not protected.
