Story Case

The Federal Anti-Trust Act of October 15, 1914, known as the Clayton Act, provides, in Section 2, that it shall be unlawful for any person engaged in interstate commerce to discriminate in price between different purchasers, where the effect of such discrimination may be to substantially lessen competition or tend to create a monopoly. The act also provides, in Section 4, that any person who shall be injured by reason of any act done in violation of the Anti-Trust Laws shall have the right to recover damages threefold, in the United States Courts.

A suit was brought by Karl Reuter, a wholesale baker, alleging that the Wild Baking Company had made special contracts with all the dealers that Reuter had been supplying with bread, offering them a discount of 10 per cent on all purchases during the first year if they would buy exclusively of the Wild Baking Company instead of Reuter, alleging also that the Wild Baking Company shipped its goods in interstate commerce, from a city in another state, and also alleging that as a result of the special prices given to his former customers but not to other persons, the Wild Baking Company had committed a violation of the Clayton Act which had directly injured the plaintiff, Reuter, by diminishing his business, and which threatened to put him out of business if persisted in. The suit asked both the threefold damages for the injury suffered and an injunction of the court, forbidding the Wild Baking Company from continuing the practice. The defense of the Wild Baking Company was that this was a legislative interference with the freedom to make contracts and engage in trade which was not required by public interest nor reasonably necessary to protect the public welfare, but that it was an excessive exercise of power and unconstitutional.

Is this section of the law invalid, or is it constitutional and is Reuter entitled to its protection and to the recovery of damages?

Ruling Court Case. State Of South Dakota Vs. Central Lumber Company, Volume 226 United States Reports, Page 157

A statute of South Dakota provided that every one should be held guilty of a crime and fined who discriminated between different places in the state by selling a commodity in general use at a lower price in one section than in another, for the purpose of destroying the competition of any regular, established dealer in such commodity.

The state proceeded against the Central Lumber Company for alleged violations of this statute, and the lumber company appealed to the United States Supreme Court, on the ground that the law was in violation of the United States Constitution and therefore beyond the power of the state to pass.

The opinion of the court was delivered by Mr. Justice Holmes. The argument that the law was unconstitutional was, first, that it denied the equal protection of the laws because it affected the conduct of a particular class only - those selling goods in two places in the state - and because it was intended for the protection of only a particular class - regularly established dealers; and second, that it unreasonably limited the liberty of the people to make such bargains as they like. It may be conceded that the prohibited act is no different in principle from the ordinary efforts of traders at a single place, and that the act applies only to those having two places of business. But this does not require the conclusion that this is an unconstitutional discrimination. If the legislature shares the now prevailing belief as to what is public policy, and finds that a particular instrument of trade is being used against that policy in certain cases, it may direct its law against what it deems the evil as it actually exists, without covering the whole field of possible abuses, and it may do so none the less that the forbidden act does not differ in kind from those that are allowed. We must assume that the legislature of South Dakota considered that people selling in two places made the prohibited use of their opportunities, and that such use was harmful although the usual efforts of competitors were desired. The facts and the economic conclusions drawn from the facts are not within the field or review for the Supreme Court, and the law was therefore sustained.

Ruling Law. Story Case Answer

It has become well known that one of the most effective weapons for stifling competition is for a business which covers a large territory and has great resources to reduce the price of its commodity temporarily in any market where a competitor is trying to survive or to gain a foothold. If the competitor is limited to the one market or to a small territory, he must lose money upon all his business, for he can not sell anything unless he meets the low price by the aggressor. By charging a high price in fields that are free from competition, the larger business can bear a continual loss from this part of its business, but the smaller one, which is losing all through and making no profit at all, must reach the time when its resources are exhausted. It is then forced out of business, so prices can now be raised, and the territory, now free from competition, may be used as a source of extra profit, through prices excessively high, so that the low-price war may be again begun against a different competitor in a different field.

Because of the prevalence and effectiveness of this unfair method of competition, it may legitimately be selected by the legislatures and by Congress for special attention. By its power to regulate commerce, Congress has authority to prevent the creation of unreasonable restraints upon interstate commerce such as the creation of a monopoly by this method would undoubtedly be. The legislatures of the states, having the general sovereign power to protect the public welfare, have the power to prevent this means of creating a monopoly because it is an abuse of the individual right to make terms and prices in free competition by which the public is deprived of the benefit of an open market and compelled to accept the prices fixed by a single seller or a monopoly.

For these reasons, the statutes of the various states have been upheld as constitutional, and Section 2 of the Clayton Act will doubtless receive the approval of the courts if it ever attacked upon this point. Therefore, in the Story Case, Reuter is entitled to the recovery of three-fold damages and the court should enjoin the Wild Baking Company from continuing its violation of the statute.