Story Case

The Standard Oil Company of New Jersey was formed in the year 1899, as a holding company. The laws of New Jersey permitted one corporation to own stock in another, and it was under this power that the Standard Oil Company operated. It proceeded to purchase the majority interest in stock of competing companies, paying for this stock by an issue of its own stock. The holding company also purchased pipe lines and other industries incidental to the oil business. It divided the United States into different districts for the different companies, and thereby eliminated competition. The United States petitioned the court that this holding company be dissolved, and the stocks of the various companies be retransferred to the original owners. The holding company attempted to show that its operations were not detrimental to public good, but, in fact, beneficial. "What shall be the opinion of the court?

Ruling Court Case. United States Vs. American Tobacco Company, Volume 221 United States Reports, Page 106

The defendants in this case were the American Tobacco Company, sixty-five other American corporations, two English corporations, and W. Duke. The American Tobacco Company was originally organized by Allen, Smither and Duke, Sons and Company. Soon after the organization, in 1891, it proceeded to acquire control of the tobacco business, and in due time, prior to the filing of this suit, absolutely controlled all branches of the trade. It did this by direct purchase of plants, paying cash or stock of its own company, and by combination. In the year 1899 it purchased and closed up thirty competing companies, all of these agreeing not to re-enter the tobacco business. In addition to those actually purchased, the American Tobacco Company acquired control of independent companies by purchasing stock, but permitting them to continue, ostensibly as competing and independent companies. The United States asked that the company be dissolved.

The opinion of the court was given by Chief Justice White: "The Sherman Act must be construed in accordance with the Common Law under the rule of reason. It, therefore, embraces acts or contracts, or agreements or combinations, which operate to the prejudice of public interest by unduly restricting competition, or unduly obstructing the due course of trade, and those contracts which might so limit the party making the promise in his trade or business as to put him under an unreasonable handicap in his life work."

It was held that the acts of the American Tobacco Company had destroyed competition, by illegitimate methods; had created a monopoly, and were contrary to the public interest. The company was given eight months' time in which to work its dissolution.

Ruling Law. Story Case Answer

The Story Case is based upon the Standard Oil Company case. This court case and the tobacco case were decided upon at about the same time; Chief Justice White rendering the majority opinion of the court in both cases. The trial of each brought out many facts, showing that the combinations had committed deeds obviously contradictory to the letter and spirit of the Sherman Act, and reprehensible under the Common Law, as being contrary to public policy. In both there were acts in unreasonable restraint of competition. These organizations were clearly condemned under the "rule of reason."

The opinions of Chief Justice White do not, however, use the word "unreasonable" in defining the class of contracts prohibited by the statute. He substitutes for that word "undue" or "unduly." The word apparently interjects into the statute a test which the statute itself does not apply. The statute says, "every contract in restraint of trade." The court says, "every contract in undue restraint of trade." By the insertion of this word, however, the statute is made logical, reasonable and enforcible. The Common Law on restraint of trade is followed.

With all due deference it is submitted, however, that the use of the words "unreasonable" and "undue" is not a happy one. A contract or combination either restrains trade, or it does not, and if the latter is true, it promotes trade. There can be no such thing as reasonable restraint of trade. If the contract is reasonable, and is for the best interest of the parties thereto and the public, it must promote trade, and not restrain it. Had the courts made their decisions on this basis they would not have been subject to the severe criticism of having made laws of their own.