Breakup Of Standard Oil

''Standard Oil Co. of New Jersey v. United States''

(1911), was a landmark U.S. Supreme Court decision that ruled that John D. Rockefeller's petroleum conglomerate Standard Oil had illegally monopolized the American petroleum industry and ordered the company to break itself up. The decision also held, however, that U.S. antitrust law bans only "unreasonable" restraints on trade, an interpretation that came to be known as the "rule of reason".

History

Over the course of the 1870s, the Standard Oil Company of Ohio acquired a monopoly on oil refining in the United States. The Cleveland-based company was already among the largest refiners in the United States at the start of the decade, but it controlled only about four percent of the market. Under the leadership of founder John D. Rockefeller, Standard Oil began acquiring other refineries in Cleveland, which was a center of the U.S. refining industry. By early 1872, it owned nearly every refinery in the city and controlled roughly 25 percent of the American oil refining market. Under Rockefeller's direction, Standard Oil then began acquiring refining companies in other cities, and by 1879 it controlled more than 90 percent of the market.

By the 1880s, Standard Oil was using its large market share of 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.

In November 1906, the Justice Department sued Standard Oil of New Jersey for violating the Sherman Act. The action was brought under the Expediting Act in the United States circuit court for the Eastern District of Missouri. After a 15-month-long trial, the court issued its decree of dissolution in November 1909 and its opinion in December 1909.

The main issue before the Supreme Court was whether it was within the power of 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.

Judgment

As in the case against ''American Tobacco'', which was decided the same day, the Court concluded that these facts were within the power of Congress to regulate under the Commerce Clause. 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 enunciated by William Howard Taft in ''Addyston Pipe and Steel Company v. United States'' (1899), written when Taft had been Chief Judge of the United States Court of Appeals for the Sixth Circuit. The Court concluded, however, that the behavior of the Standard Oil Company went beyond the limitations of this rule.

Concurrence

Justice John Marshall Harlan concurred with the result, but dissented against adopting a "rule of reason". It departed from precedent that the Sherman Act banned any contract that restrained trade "directly." He said the following:

Significance

The ''Standard Oil'' case resulted in the breakup of Standard Oil into 43 separate companies. Many of these have since recombined; the largest present direct descendants of Standard Oil are ExxonMobil (Standard Oil of New Jersey and Standard Oil of New York) and Chevron (Standard Oil of California). Some Standard Oil descendants merged into other companies, particularly BP, which acquired/merged with Standard Oil of Ohio and Amoco.

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.

See also

*US antitrust law
* List of United States Supreme Court cases, volume 221

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{{DEFAULTSORT:Standard Oil Co. Of New Jersey V. United States
Standard Oil
United States Supreme Court cases
United States Supreme Court cases of the White Court
United States antitrust case law
United States energy case law
1911 in United States case law
ExxonMobil litigation
1911 in American law