Story Case

The United Brick Company was organized in New York to place the brick manufacturing business on a remunerative basis. There are thirty brick yard companies owning yards about the city, and across the river in adjoining states. Out of this, eighteen agreed to relinquish title to their property and take, in lieu thereof, stock in the United Brick Company, so that, in place of the former eighteen companies, there existed but one consolidated company. The United Brick Company operated for two years; it systematized the brick business, raising it to such a high plane of efficiency, that its own prices were reduced, and thereby compelled the reduction of its competitor's prices. Then it was attacked by the United States as being in contravention of the Sherman Act. The Company maintains in defense that its operation did not result in an unreasonable restraint on commerce, and, therefore, it was not amenable under the Sherman Act. Is this correct ?

Ruling Court Case No. 1. United States Vs. Trans-Missouri Freight Association, Volume 166 United States Reports, Page 290

Some seventeen railroad companies entered into a written agreement, by which the Trans - Missouri Freight Association was organized for the purpose of regulating freight rates. The association was composed of members from the various roads. By the agreement, the association was given the power to fix the freight rates for all the territory covered by the roads in question. The rules of the association forbade any railroad from reducing its rates at any time without the consent of the association. If any railroad, without the consent of the association, reduced its rates, such company could be fined by the association.

This was a proceeding brought by the United States to punish the association and the members thereof, claiming that this agreement was in restraint of trade and commerce among the states, and forbidden by a law of Congress. The association claimed that the agreement was not an unreasonable restraint upon trade and commerce, and, therefore not forbidden by the act. They contended that since the Common Law permitted reasonable restraint upon trade, this law, though forbidding restraint upon trade, must be construed to permit reasonable restraint, and forbid restraint only when it becomes unreasonable.

Mr. Justice Peckham said: "It is now urged, with much argument, that the statute, in declaring illegal every combination in the form of trust or otherwise, or conspiracy in restraint of trade or commerce, does not mean what the language therein plainly imports, but that it only means to declare illegal any such contract which is in unreasonable restraint of trade, while leaving all others unaffected by the provisions of the act; that the Common Law meaning of the term 'contract in restraint of trade' includes only such contracts as are in unreasonable restraint of trade, and when that term is used in the Federal Statute, it is not intended to include all contracts in restraint of trade, but only which are in unreasonable restraint thereof. "The term is not of such limited significance. Contracts in restraint of trade have been known and spoken of for hundreds of years both in England and in this country, and the term includes all kinds of those contracts which, in fact, restrain or may restrain trade. Some of such contracts have been held void and un-enforcible in the courts, by reason of their restraint being reasonable; while others have been held valid because they were not of that nature. A contract may be in restraint of trade and still be valid at Common Law. Although valid, it is nevertheless, a contract in restraint of trade, and would be so described at Common Law or elsewhere. By the simple use of the term 'control in restraint of trade,' all contracts of that nature, whether valid or otherwise, would be included, and not alone that kind of contract which was invalid and unenforcible as being in unreasonable restraint of trade. When therefore, the body of an act pronounces as illegal every contract or combination in restraint of trade or commerce among the several states, etc., the plain and ordinary meaning of such language is not limited to that kind of contract alone which is in unreasonable restraint of trade, but all contracts are included in such language, and no exception or limitation can be added without placing in the act that which has been omitted by Congress."

It was held that the agreement in question was within the provisions of the act of Congress, forbidding agreements in restraint of trade and monopoly.

Exiling Court Case No. 2. Shownee Compress Company Vs. Anderson, Volume 209 United States Reports, Page 423

The Shownee Compress Company was a corporation engaged in the business of compressing cotton. The stockholders of the company leased all their property to the Gulf Compress Company, which was engaged in the same kind of business. The Shownee Company agreed that it would not "directly or indirectly engage in the compressing of cotton within fifty miles of any plant operated by the Gulf Compress Company, and it further agreed to give the Gulf Compress Company all assistance possible in discouraging unreasonable and unnecessary competition." It appeared that the Gulf Company was a lease corporation, licensed in several southern states, and controlling twenty-seven compresses in various southern states. This was an action by the minority stockholders of the Shownee company, brought against Anderson, as president of the Gulf company, seeking to have the lease declared void, in that it was a combination in restraint of trade and commerce among the states, and, therefore, in open violation of the national Constitution.

Mr. Justice McKenna said: "It does not appear whether the Supreme Court based its judgment upon the Common Law, the Sherman Law, or the statutes of Oklahoma. It is insisted that the law applicable to the case, comes from all three sources. The Sherman Law-provides that 'every contract, or form of trust or otherwise, or conspiracy in restraint of trade' among the states is illegal. And it has been held that not only unreasonable, but all direct restraints of trade are prohibited, the law being thereby distinguished from the Common Law."

It was held that this lease was forbidden by law, and should be cancelled.

Ruling Law. Story Case Answer

The Story Case illustrated the manner in which combinations were formed after the technical trust was declared illegal. It will be seen that the new company is the entire owner of the property, holding legal title to it for the benefit of its shareholders, and not for the benefit of the other companies. These companies have entirely been eliminated. A technical trust does exist here. Nevertheless, these combinations were and are called "trusts."

Under the Common Law, the courts determined the reasonableness or fairness of an agreement in order to discover whether or not it was in restraint of trade. In other words, if the contract was not in restraint of trade, not against public policy, but rather promoted trade, the court said it was a valid contract. In its interpretation of the Sherman Act, much stress has been laid upon the Common Law by the United States courts, and there has been great conflict among the judges in their opinion concerning the construction of the Sherman Act, in the light of the Common Law.

As indicated by the Ruling Court Cases, the Federal judges were at first inclined to interpret the statute in a literal way, making it most drastic indeed. The facts of the cases in point, did not, however, require such drastic and literal construction, since the combinations were unreasonable in their restriction. The fact that the combination between the railroad companies was capable of being operated, so as to prescribe unjust or unreasonable rates, was held sufficient to bring it within the scope of the statute, notwithstanding that the actual operation of the combination were beneficial to the public.

In the case of Shownee Compress Company vs. Anderson, we have an example of a flagrant violation of the letter and spirit of the Sherman Act. The lessee agreed not only to go out of the field of competition, but further agreed "to render every assistance to prevent others from entering it," and again "to render the Gulf Company every assistance in discouraging unreasonable and unnecessary competition. Obviously, in this case, it was unnecessary for the judge to lay down the rule that contracts in reasonable restraint of trade come within the purview of the statute. In the light of these Ruling Court Cases, the combination in the Story Case must be declared illegal.