Northern Securities Co. v. United States

In 1896, the Supreme Court had prevented a merger planned by J. P. Morgan, who controlled the Northern Pacific Railroad, with the Great Northern Railroad, controlled by J. J. Hill. In this early plan, Morgan would simply exchange control of the Great Northern by obtaining stock in Northern Pacific. Foiled in this plan, the railroad investors planned another means to achieve the same end. On 13 November 1901, they formed Northern Securities Company in New Jersey. This company would acquire stock from both railroad companies and give, in exchange, stock in Northern Securities. At the time of the plan, Northern Pacific had 5,500 miles of railroad, while Great Northern had 4,128 miles. Both railroads operated from the upper Midwest to the Northwest of the United States.

The railroad executives argued that their plan would put their operations on a stronger footing, and would assist in expanding international trade. Northern Securities had purchased interests in the Burlington lines, operating from Iowa toward the south and east. Railroad cars used to carry goods from the Midwest to Seattle for export to Asia would return with cargoes destined not only for the upper Midwest, but with cargoes for the south and east, through the Burlington connection. Attorneys for the railroad argued that the companies' intent had not been to monopolize or to restrain trade. Their aim was the opposite--to help in national development through more efficient linkages of suppliers and markets.

However, on 9 April 1903, the circuit court in Minnesota ruled that the Northern Securities company formed a combination in restraint of trade, thereby violating the Sherman Anti-Trust Act of 1890. Justice Harlan wrote the opinion of the court, ruling that the Sherman Act did apply, and that it applied to all restraints of trade, whether reasonable or unreasonable. Congress had the power to pass the act. Combinations that extinguished competition among railroads were illegal under the act. Furthermore, the act suggested that any combination that tended to restrict trade or create a monopoly was illegal, and it was clear that Northern Securities had that tendency. Corporations created by the various states were subject to the law of the land.

The other judges on the Court offered important and interesting views on this case. Justice Brewer, although concurring in the decision, dissented on one point. He brought up the "rule of reason," suggesting that only unreasonable restraints of trade were outlawed under the Sherman Act, and that the combination proposed by the railroads should have been outlawed on the grounds that it was unreasonable, not simply that it tended to restrain trade. Justice White pointed out that all the Northern Securities Company would do was own stock--the Sherman Act had never made it illegal for one firm to own stock in another. He also pointed out that all railroads had grown larger by combinations, and that all of those combinations had "tended" to create some degree of restraint of trade. By the majority opinion, White argued, all growth of railroad companies would be prevented. Justice Holmes took this argument further. He pointed out that Congress could never have intended through the Sherman Act to prevent all combination. All combinations of businesses of any kind could be said to have the tendency to reduce competition. If taken to an extreme, the Sherman Act could lead to the universal disintegration of society into individuals. Furthermore, the combination set up by Northern Securities was not intended to exclude others from the field, but only to make more efficient the operations and marketing of the two firms and their connecting lines. Holmes, Fuller, White, and Peckham dissented from the decision written by Harlan. The close 5-4 decision, with the partial dissent by Brewer, and the arguments of the other dissenters suggested that in the future, a rule of reason might be applied. If companies could argue that their intent was only to be more efficient and to meet reasonable goals, they might be able to build on the logic suggested by Brewer and Holmes and the other dissenters, to create larger combinations.