Legal writing

Standard Oil Co. of New Jersey v. United States

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Date:10\10 \2018

Standard Oil Co. of New Jersey v. United States (1911)

Introduction

In 1911, the United States made a historic ruling against the Standard Oil Company of New Jersey. Standard Oil Co. of N. J. v. United States, 221 U.S. 1 (1911). The United States government sued the company for violating the Sherman Antitrust Act of 1890. By that time, the Standard Oil Company of New Jersey, was the largest oil company in the world. Stand. Oil Id. Rockefeller, the owner of the oil company was also the richest man in the world. Amidst all the influence of Rockefeller and his company, the Supreme Court managed to declare the company guilty of monopoly behaviors that killed the competition on the industry. The company was charged with different accounts of unethical competitive actions. Stand. Oil Id.

The court ruling ordered the dissolution of the company. The company broke into thirty-three different companies. These companies include Standard Oil of Indiana, Standard Oil of New Jersey, Standard Oil of New York, and Standard Oil of California. Stand. Oil Id.

Despite this ruling that that happened over one-hundred years ago, some questions still form debate, these questions include:

1. Did the Standard Oil Company of New Jersey actions violate the Sherman Act?

2. Was it within the authority of the Congress to stop a company from acquiring other companies, hence eradicating the competition, even if it is using means that might have been considered legal in the common law?

This project tends to answer these questions by using the available online resources to collect the facts about the case and conducting an analysis based on the prevailing context.

This paper is organized in three main parts. The first part of the paper introduces the entire paper. The second part of the paper looks into the background of the case including the Sherman Antitrust Act, the act on which the case was based, the size and market power of the company. Also, the first part looks into the company’s competition-related activities such as the acquisition of other companies. The third part addresses the key concerns surrounding the accused company’s position and activities. The fourth part of the paper addresses the Supreme Court’s resolution of the case. The final part contains the author’s opinion on the resolution of the case. Stand. Oil Co. of N.J., 221 U. S.

Case Background

Monopoly is a threat to the business world. Having few companies controlling major industries that are important to people’s everyday life is unimaginable. These companies will have all the powers influencing supply and prices of the products in the industry’s market Hidy, R. W., Gibb, G. S., Larson, H. M., & Business History Foundation. (2015). History of Standard Oil Company (New Jersey). New York: Harper. At that condition, the consumers are vulnerable to the excessive pricing of products, the supply of poor-quality products, and insufficient supply of products. Stand. Oil Co. of N.J., 221 U. S.

In 1890, the United States Congress enacted the Sherman Antitrust Act to protect the industries from the undesired consequences of monopoly, at least from the consumers’ viewpoint. This act enabled the government to order divestiture of monopolies in different industries. The Congress enacted this law to prevent monopolies from using their position to intimidate legitimate competition Hidy et al., 2015, Id. This act allows a company to be superior based on their products or business practices such as marketing. However, the law prohibits a company from using its position to intimidate the competitors which are trying to be successful. Stand. Oil Id.

The Standard Oil Trust was founded by John D. Rockefeller in 1863. Rockefeller built the company to become the world’s largest oil refinery firm by 1868. The company continued to grow rapidly and by 1899, it was controlling 90% of the oil in the world. The success of the company is attributed to the use of the tactics of horizontal mergers. Stand. Oil Id.

Initially, the unmatchable refining technology and techniques of the company formed the key drive to its success. These techniques led to consistency in production and supply of kerosene products as well as product standardization. As a strategy to grow the company further, the management reinvested the profits by acquiring the Cleveland oil production capacities, the primary region of oil refining. The move ensured the continuity of the company’s dominance in the oil industry. The company managed to buy all the oil refining companies in the entire United States. Stand. Oil Id.

Standard Oil Company of New Jersey allegedly used its size and influence to eliminate competition in several ways that the court termed “anti-competitive.” The practices include predatory pricing and using threats to intimidate the suppliers and distributors who were working with the competitors .FindLaw, 2018 https://caselaw.findlaw.com/us-supreme-court/221/1.html.

Case Facts

The United States government took the company to court for violating the Sherman Antitrust Act. Some of the issues that the United States brought before the Court against Standard Oil Company of New Jersey include unfair methods of competition such as malicious price-cutting; creating bogus independent businesses; discriminatory and unfair practices; dividing the United States into regions; limiting the operation of the subsidiary corporations to these regions hence completely eradicating the competition in the petroleum products Chalmers, D. M. (2012). History of the Standard Oil Company: Briefer Version. Dover Publications. The suit also maintained that even though purchasing the competition was not illegal according to the common laws, the company’s practices violated the Sherman Anti-Trust Act since it stifled competition. Stand. Oil Id.

Standard Oil Company of New Jersey denied the allegation and disagreed with the court that it was a monopoly Chalmers, 2012, Id. The Supreme Court had to decide whether the company’s actions fell under the prohibitions of ‘contract or conspiracy in restraint of trade’ by the Sherman Antitrust Act. Below is the summary of the arguments made by Frank Kellogg, the attorney representing the petitioner and John C. Milburn, the attorney representing the respondent

Frank Kellogg, attorney (Arguing for the Petitioner)

Kellogg argued that Rockefeller used under the table deals and bribery for example, bribery with the railroad companies, to get special rates, that enabled him to further dominate the market. This move killed the competition in the industry by giving his company a huge advantage over the others Chalmers, 2012, Id. Kellogg also responded to the defendant’s argument that the profits and success of Rockefeller and his companies are as a result of efficiency and superior business tactics and strategies Chalmers, 2012, Id. He claimed that the companies’ savings from the efficient processes could not be reflected in the prices of oil implying that they were never handed down to the consumers. Rockefeller and his partners, consequently, continued to make super competitive profits.

John C. Milburn, attorney (Arguing for the Defendant)

Milburn denied the accusations raised against Rockefeller. He stated that the accused business deals were ethical and favorable. He denied that the defendant had an intention of killing the competition in the industry. Instead, he claimed that the defendant executed deals that were aimed at improving the status of the industry Chalmers, 2012, Id. The attorney also pointed out that the consumers were never hurt by the activities of Rockefeller and his companies. He argued that the prices generally remained constant over the decades hence leading to a stable market.

Witnesses such as Henry Flagler, Rockefellers’ business partner, also testified that the business that the accused carried out through his companies did not involve illegal agreements with the railroad company and other companies. He claimed that Rockefeller, through Standard Oil Company of New Jersey, made an appealing offer to the railroad companies by involving continuous and exclusive partnerships in the deal. Stand. Oil Id.

The Resolution of the Court

The court concluded that the facts of the case were within the power of the Congress to regulate under the Commerce Clause. The court stated that if taken literally, the term “restraint of trade” may mean any number of normal trade that does not hurt the public. After thoroughly seeking the contextual English meaning of “restraint of trade,” the court concluded that the term refers to a contract that led to monopoly or its consequences FindLaw, 2018, Id. The Court highlighted such consequences to be higher product prices, reduced quality, and reduced output.

The court concluded that a contract went violated the Sherman Antitrust Act if it resulted in any of the listed consequences of monopoly. FindLaw, 2018, Id.

The Court, therefore, found out that the Standard Oil Company of New Jersey was guilty of violating the Sherman Anti-Trust Act. The court ordered the company’s dissolution into smaller competitive companies. Stand. Oil Id.

Comparing Standard Oil Co. of New Jersey v. United States (1911)

with other Monopoly Cases in the United States.

Swift and Company v. United States (1905).

In this case, the “beef trust,” group of six leading meat packers agreed to destroy the competition by prohibiting bidding against each other with the goal of getting a full control of the prices in the industry’s market. Swift & Co. v. United States, 196 U.S. 375 (1905). As a result of this agreement, this companies forced the railroads to lower for them the normal rates. In 1902, the United States through President Theodore Roosevelt ordered the attorney general to sue the “beef trust.” The lawsuit was based on Sherman Antitrust Act of 1890. The main question that surrounded the case was whether the Congress had the mandate to control the companies’ actions based on the Anti-Trust Act.

The court ruled against the “beef trust” by justifying the regulations of the groups’ actions. Swift & Co Id.

United Steel Corp. v. Fortner Enterprises (1977).

In this case, the petitioner, United States Steel Corp filed a petition in the Supreme Court on the District Court’ ruling that it was guilty of violating the Sherman act. In the account, the company’s Home Division and petitioner Credit Corp, a wholly, owned subsidiary providing financing to the customers of Home Division entered the deal to finance respondent’s cost of acquiring and developing a piece of land that the defendant would erect prefabricated houses U.S. Steel Corp. v. Fortner Enterprises, Inc., 429 U.S. 610 (1977). The petitioner accused the defendant for making the transaction a tying arrangement that is forbidden by the Sherman Act since it restrained the competition for the houses by exercising abusive control over credit. The primary question was whether the petitioner had an appreciable economic power in the market for the tying product. Fortner Enterprises, Id.

The District Court held that the petitioner had a substantial economic power in the market to make the tying arrangements unlawful. The evidence to this claim related to four proportions; the affiliates (petitioners) was owned by one of the largest corporations; two, the petitioner entered the agreement with several other customers besides the defendant; third, the Home Division quoted a non-competitive price to the defendant; fourth, the petitioners provided, to respondent, a financing that covered 100% of the respondents cost of acquisition and development. Fortner Enterprises, Id.

The Supreme court held that the record that was presented before it did not sufficiently support that the petitioners had the appreciable economic power in the credit market tying product .The court held that the evidence merely showed that the credit terms are unique since the seller was willing to accept a lesser profit or to incur greater risk than its competitors, since such uniqueness does not interfere with the economic power in the market. The court, therefore, reversed the case. Fortner Enterprises, Id.

United States v. Aluminum Co. America (Alcoa )1945.

The Aluminum Company of America (Alcoa) was involved in a global group of individual aluminum producers like European and Canadian aluminum manufacturers to create a monopoly in the market of aluminum. The government of the United States took legal action against Alcoa for breaching the Sherman Anti-Trust Act. However, it was claimed by Alcoa that several ventures of this cartel or group were executed away from the boundary of the United States and therefore, United States’ sovereignty could not decide. It was determined by the Appellate Court that the contracts impacted the imports so, Alcoa breached the Sherman Anti-Trust Act. This case formed the basis for Alcoa Effects Test. It states the courts of the United States have command upon actions performed overseas if they have an impact inside the regions where the government or the courts of the US have an authority. U.S. v. Aluminum Co. of Am., 148 F.2d 416, 425 (2d Cir. 1945).

A price squeeze proposition was formulated on the basis of this case which stated that a corporation having monopoly and vertical integration in an upstream market could breach the section two of the Sherman Act if it sells a product at very high cost in an upstream market and at very lower cost in a downstream market and the buyers in an upstream market could not challenge it in a downstream market .It was decided by the Judge Learned Hand in the case of Alcoa that a pricing structure that could not allow the competitors to generate a living profit, breaches the section two of the Sherman Act. However, price squeeze theory was dismissed by the Supreme Court in 2009. Aluminum Co. of Am. Id.

Author’s Opinion

The United States government sued Standard Oil Company of New Jersey for violating the Sherman Antitrust Act of 1890. Therefore, it is important to understand the Act in order to understand the decision that the Court made. Some of the cases that were brought before the Court involving this Act could help in understanding the boundaries it is creating in business. One of this cases is Spectrum Sports, Inc. v. McQuillan 506 U.S. 447 (1993) in which the Supreme Court stated that the Act is to protect the public from the failure of the market rather than to protect the business from the working of the market Chalmers, D. M. (2012). History of the Standard Oil Company: Briefer Version. Dover Publications. The Supreme Court stated that the law directs itself against the conduct that unfairly destroys the competition rather but not against the acts which are competitive FindLaw, 2018, Id. The Court on defining monopoly stated, on the same case, that someone who merely by the superior skill or intelligence dominates a business just because no one can match the good work or products is not a monopolist Chalmers, 2012, Id. However, a person has termed a monopolist if in the activity they undertake involves the use of means which hinders fair competition.

The defendant argued that the business deals were not meant to intimidate the competitors Chalmers, 2012, Id. However, the defendant could not defend itself against the accusation that the activities made it impossible for the competition to exist Chalmers, 2012, Id.. The company’s strategy of horizontal mergers clearly eradicated the competition rather than promoting it. Therefore, the Court was right to rule that the company was guilty of violating the Sherman Antitrust Act of 1890. Stand. Oil Co. of N.J., 221 U. S.

Reference:

Standard Oil Co. of N. J. v. United States, 221 U.S. 1 (1911)

Swift & Co. v. United States, 196 U.S. 375 (1905)

U. S. Steel Corp. v. Fortner Enterprises, Inc., 429 U.S. 610 (1977)

U.S. v. Aluminum Co. of Am., 148 F.2d 416, 425 (2d Cir. (1945)

U.S. v Griffith, 334 U.S. 1236 (1948)

Chalmers, D. M. (2012). History of the Standard Oil Company: Briefer Version. Dover Publications.

FindLaw (2018). United States Supreme Court STANDARD OIL CO. OF NEW JERSEY v. U S, (1910) No. 398.

Retrieved on September 9, 2018, from https://caselaw.findlaw.com/us-supreme-court/221/1.html

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