United States v. Standard Oil

Since the passage of the Sherman Anti-Trust Act in 1890, complaints had mounted that Standard Oil of New Jersey violated the letter and spirit of the law by unfair practices. By 1906, federal authorities estimated that Standard Oil controlled over 80 percent of the oil production in the United States. By charging excessive prices for products for which there was no competition, such as kerosene, and by undercutting its competition in other areas, the company had driven many smaller firms out of business. Furthermore, the company offered rebates to oil producing companies if they would ship oil through Standard Oil pipelines, rather than those of competitors. Majority ownership of the firm was held by a small group, led by John D. Rockefeller. Monopolistic practices had allowed the firm to reap excessive profits. From an original investment of about $70 million, stockholders had earned profits over a fifteen year period of more than $700 million.

Despite evidence uncovered by journalists and executives of oil companies destroyed by Standard Oil, attorneys general during the Cleveland, Harrison, McKinley, and Roosevelt administrations refused to act against the corporation. Theodore Roosevelt's second administration, faced with mounting public outrage over the company's practices, finally ordered an investigation and prosecution of Standard Oil. The case was continued by Roosevelt's successor, William Howard Taft, who had made a promise to vigorously prosecute the Standard Oil case during his presidential campaign in 1908.

On 20 November 1909, after eight months of argument, the St. Louis Federal Circuit Court handed down its opinion. Judge Walter Henry Sanborn, representing a unanimous court, ruled that many of the companies controlled by Jersey Standard were potentially competitive, yet the holding company gave the corporation the absolute power to prevent competition. The effect of the stock transfers from the component companies to Standard Oil of New Jersey was a direct and substantial restriction of interstate commerce.

The court also ruled that Standard Oil of New Jersey had tried to monopolize the petroleum industry. The judge ruled that "the combination and conspiracy in restraint of trade and its continued execution which have been found to exist, constitute illegal means by which the conspiring defendants combined, and still combine and conspire to monopolize a part of interstate and international commerce." However, in directing how the corporation should be dissolved, the court ruled that holdings in the subsidiary companies could be distributed to shareholders in Standard Oil in proportion to their holdings in that company. As a result, the small group which controlled Standard Oil would, in turn, become owners of the companies into which the larger firm was dissolved. That arrangement would almost guarantee little competition among the resulting companies. An alternative plan proposed dividing the ownership of the subsidiary firms among the major owners thus fostering competition among the successor firms. However, such an arrangement was not seriously considered.

Standard Oil of New Jersey appealed the decision to the Supreme Court. The federal case brought by Frank Kellogg was assisted by President William Howard Taft's attorney general, George Wickersham, who presented the government's arguments. However, neither Kellogg nor Wickersham challenged the stock transfer provision of the circuit court ruling. In the decision of this case, Justice Day introduced the "rule of reason" which stated effectively that if a restraint of trade was ancillary to a legitimate business transaction, and reasonable in the eyes of the contracting parties and the general public, then such restraints of trade were not illegal. In effect, the rule of reason allowed the courts to judge certain monopolies reasonable. Justice White argued that to strictly enforce the Sherman Act against all agreements in restraint of trade would bring the economy to a halt, by attacking all sorts of contracts which were the essence of trade.

The resulting companies which emerged from the dissolution of Standard Oil of New Jersey included major gasoline suppliers such as Exxon, Amoco, Mobil, Chevron, Standard of California, and others. The decision in United States v. Standard Oil, while hailed as a victory for anti-trust prosecution, in effect stood as a judicial endorsement of the movement toward extremely large corporate monopolies. These monopolies could then dominate a whole sector of the economy through restraining agreements and common ownership.