Addyston Pipe and Steel Company v. United States
Encyclopedia
Addyston Pipe and Steel Co. v. United States, 85 F. 271 (6th Cir. 1898), was an important case in which the United States Court of Appeals for the Sixth Circuit
United States Court of Appeals for the Sixth Circuit
The United States Court of Appeals for the Sixth Circuit is a federal court with appellate jurisdiction over the district courts in the following districts:* Eastern District of Kentucky* Western District of Kentucky...

 determined that U.S.
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...

 antitrust
Antitrust
The United States antitrust law is a body of laws that prohibits anti-competitive behavior and unfair business practices. Antitrust laws are intended to encourage competition in the marketplace. These competition laws make illegal certain practices deemed to hurt businesses or consumers or both,...

 laws, as set forth in the Sherman Antitrust Act
Sherman Antitrust Act
The Sherman Antitrust Act requires the United States federal government to investigate and pursue trusts, companies, and organizations suspected of violating the Act. It was the first Federal statute to limit cartels and monopolies, and today still forms the basis for most antitrust litigation by...

, were to be governed by a rule of reason
Rule of reason
The Rule of Reason is a doctrine developed by the United States Supreme Court in its interpretation of the Sherman Antitrust Act. The rule, stated and applied in the case of Standard Oil Co. of New Jersey v. United States, 221 U.S...

. The opinion was written by Chief Judge William Howard Taft
William Howard Taft
William Howard Taft was the 27th President of the United States and later the tenth Chief Justice of the United States...

 (who later became President of the United States
President of the United States
The President of the United States of America is the head of state and head of government of the United States. The president leads the executive branch of the federal government and is the commander-in-chief of the United States Armed Forces....

, and then Chief Justice of the United States
Chief Justice of the United States
The Chief Justice of the United States is the head of the United States federal court system and the chief judge of the Supreme Court of the United States. The Chief Justice is one of nine Supreme Court justices; the other eight are the Associate Justices of the Supreme Court of the United States...

 Supreme Court). Taft's reasoning was eventually adopted by the Supreme Court as the proper interpretation of the Sherman Act.

Facts

The defendants were pipe
Pipe (material)
A pipe is a tubular section or hollow cylinder, usually but not necessarily of circular cross-section, used mainly to convey substances which can flow — liquids and gases , slurries, powders, masses of small solids...

makers who were operating in agreement, so that when municipalities offered projects available to the lowest bidder
Bid price
A bid price is the highest price that a buyer is willing to pay for a good. It is usually referred to simply as the "bid."In bid and ask, the bid price stands in contrast to the ask price or "offer", and the difference between the two is called the bid/ask spread.An unsolicited bid or purchase...

, all companies but the one designated would overbid, thus guaranteeing the success of the designated low bidder (although it was still possible for a company outside the group to win).

Issue

The defendants asserted that this was a reasonable restraint of trade, and that the Sherman Act could not have meant to prevent such restraints.

Opinion of the court

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 during the time that 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:
  1. it is ancillary to the main purpose of the lawful contract; and
  2. it is necessary to protect enjoyment of legit fruits or to protect from dangers.

If the primary purpose is to restrain trade, then the agreement is invalid, and in this case, the restraint was direct, and therefore invalid.

Later developments

This case was appeal to the Supreme Court as Addyston Pipe and Steel Company v. United States, 175 U.S. 211 (1899), but in that case. 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 only authorized Congress only to remove barriers to interstate commerce erected by individual states. They argued also 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 instead was simply a partial restraint that 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 below. Peckham conceded that the framers and ratifiers of the Constitution likely anticipated that the Commerce Clause would mainly authorize 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, that is 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 did in fact directly restrain trade Here 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 instead charged $24.25 per ton.
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