Standard Oil Co. of New Jersey v. United States
Overview
 
Standard Oil Co. of New Jersey v. United States, 221 U.S. 1
Case citation
Case citation is the system used in many countries to identify the decisions in past court cases, either in special series of books called reporters or law reports, or in a 'neutral' form which will identify a decision wherever it was reported...

 (1911), was a case in which the Supreme Court of the United States
Supreme Court of the United States
The Supreme Court of the United States is the highest court in the United States. It has ultimate appellate jurisdiction over all state and federal courts, and original jurisdiction over a small range of cases...

 found Standard Oil
Standard Oil
Standard Oil was a predominant American integrated oil producing, transporting, refining, and marketing company. Established in 1870 as a corporation in Ohio, it was the largest oil refiner in the world and operated as a major company trust and was one of the world's first and largest multinational...

 guilty of monopolizing
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...

 the petroleum
Petroleum
Petroleum or crude oil is a naturally occurring, flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds, that are found in geologic formations beneath the Earth's surface. Petroleum is recovered mostly through oil drilling...

 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.
By the 1880s, Standard Oil was using its stranglehold on refining capacity to begin integrating backward into oil exploration and crude oil distribution and forward into retail distribution of its refined products to stores and, eventually, service stations throughout the United States.
Discussions
Encyclopedia
Standard Oil Co. of New Jersey v. United States, 221 U.S. 1
Case citation
Case citation is the system used in many countries to identify the decisions in past court cases, either in special series of books called reporters or law reports, or in a 'neutral' form which will identify a decision wherever it was reported...

 (1911), was a case in which the Supreme Court of the United States
Supreme Court of the United States
The Supreme Court of the United States is the highest court in the United States. It has ultimate appellate jurisdiction over all state and federal courts, and original jurisdiction over a small range of cases...

 found Standard Oil
Standard Oil
Standard Oil was a predominant American integrated oil producing, transporting, refining, and marketing company. Established in 1870 as a corporation in Ohio, it was the largest oil refiner in the world and operated as a major company trust and was one of the world's first and largest multinational...

 guilty of monopolizing
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...

 the petroleum
Petroleum
Petroleum or crude oil is a naturally occurring, flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds, that are found in geologic formations beneath the Earth's surface. Petroleum is recovered mostly through oil drilling...

 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.

Allegations

By the 1880s, Standard Oil was using its stranglehold on refining capacity to begin integrating backward into oil exploration and crude oil distribution and forward into retail distribution of its refined products to stores and, eventually, service stations throughout the United States. Standard Oil allegedly used its size and clout to undercut competitors in a number of ways that were considered "anti-competitive," including underpricing and threats to suppliers and distributors who did business with Standard's competitors.

The government sought to prosecute Standard Oil under 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...

. The main issue before the Court was whether it was within the power of the Congress to prevent one company from acquiring numerous others through means that might have been considered legal in common law, but still posed a significant constraint on competition by mere virtue of their size and market power, as implied by the Antitrust Act.

Facts

Over a period of decades, the Standard Oil Company of New Jersey had bought up virtually all of the oil refining companies in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...

. Initially, the growth of Standard Oil was driven by superior refining technology and consistency in the kerosene products (i.e., product standardization) that were the main use of oil in the early decades of the company's existence. The management of Standard Oil then reinvested their profits in the acquisition of most of the refining capacity in the Cleveland area, then a center of oil refining, until Standard Oil controlled the refining capacity of that key production market.

By 1870, Standard Oil was producing about 10% of the United States output of refined oil. This quickly increased to 20% through the elimination of the competitors in the Cleveland area. Although claims have been made that Standard Oil secretly secured preferential rates from regional rail roads, such a scheme never came into effect, and a more plausible explanation for the rise of Standard Oil was its ability to continuously lower its costs and thereby the cost to the consumer. The resulting competitiveness of Standard Oil compelled the competition to sell out or face bankruptcy, until Standard controlled most of the refining capacity of the U.S.

Opinion of the Court

The Court concluded that this was within the power of Congress under the Commerce Clause
Commerce Clause
The Commerce Clause is an enumerated power listed in the United States Constitution . The clause states that the United States Congress shall have power "To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes." Courts and commentators have tended to...

. The Court recognized that, "taken literally," the term "restraint of trade" could refer to any number of normal or usual contracts that do not harm the public. The Court embarked on a lengthy exegesis of English authorities relevant to the meaning of the term "restraint of trade." Based on this review, the Court concluded that the term "restraint of trade" had come to refer to a contract that resulted in "monopoly or its consequences." The Court identified three such consequences: higher prices, reduced output, and reduced quality.

The Court concluded that a contract offended the Sherman Act only if the contract restrained trade "unduly"—that is, if the contract resulted in one of the three consequences of monopoly that the Court identified. A broader meaning, the Court suggested, would ban normal and usual contracts, and would thus infringe liberty of contract. The Court endorsed the 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...

 enunciated by 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...

 in Addyston Pipe and Steel Company v. United States
Addyston Pipe and Steel Company v. United States
Addyston Pipe and Steel Co. v. United States, 85 F. 271 , was an important case in which the United States Court of Appeals for the Sixth Circuit determined that U.S. antitrust laws, as set forth in the Sherman Antitrust Act, were to be governed by a rule of reason...

, 85 F. 271
Case citation
Case citation is the system used in many countries to identify the decisions in past court cases, either in special series of books called reporters or law reports, or in a 'neutral' form which will identify a decision wherever it was reported...

 (6th Cir. 1898), written when the latter had been Chief Judge of 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...

. The Court concluded, however, that the behavior of the Standard Oil Company went beyond the limitations of this rule.

Justice John Marshall Harlan
John Marshall Harlan
John Marshall Harlan was a Kentucky lawyer and politician who served as an associate justice on the Supreme Court. He is most notable as the lone dissenter in the Civil Rights Cases , and Plessy v...

wrote a separate opinion concurring in the result, but dissenting in the Court's adoption of the rule of reason. Among other things, he argued that the "rule of reason" was a departure from prior precedents holding that the Sherman Act banned any contract that restrained trade "directly." See, e.g.., United States v. Joint Traffic Ass'n, 171 U.S. 505 (1898). While some scholars have agreed with Justice Harlan's characterization of prior case law, others have agreed with William Howard Taft, who concluded that despite its different verbal formulation, Standard Oil's "rule of reason" was entirely consistent with prior case law.

Further reading

Predatory Price Cutting: The Standard Oil (N. J.) Case
John S. McGee
Journal of Law and Economics
Vol. 1, (Oct., 1958), pp. 137-169

External links

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