Northern Securities Co. v. United States
193 U.S. 197 (1904)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A holding company formed by the stockholders of two competing interstate railroad companies to acquire a controlling share of stock in each, thereby placing the companies under a single control and eliminating competition between them, constitutes a "combination in restraint of trade" in violation of the Sherman Antitrust Act. Congress, under its Commerce Clause power, can prohibit such combinations regardless of whether they are effectuated through stock purchases or are sanctioned by state incorporation laws.
Facts:
- The Great Northern Railway Company (Great Northern) and the Northern Pacific Railway Company (Northern Pacific) operated parallel and competing transcontinental railway lines through the northern United States.
- The two companies were engaged in active competition for freight and passenger traffic between the Great Lakes and the Pacific coast.
- Prior to November 1901, James J. Hill and his associate stockholders of Great Northern, along with J. Pierpont Morgan and his associate stockholders of Northern Pacific, entered into a combination to form a holding corporation.
- They organized the Northern Securities Company under New Jersey law with the purpose of acquiring and holding a controlling interest in the capital stock of both Great Northern and Northern Pacific.
- Stockholders of the two railway companies exchanged their shares for shares in the newly formed Northern Securities Company.
- Through these stock transfers, Northern Securities Company acquired a controlling interest in both formerly competing railway companies, holding more than three-fourths of Great Northern's stock and over nine-tenths of Northern Pacific's stock.
- This arrangement effectively placed the two independent and competing railway systems under the common control and management of the single holding company, removing all inducement for competition between them.
Procedural Posture:
- The United States filed a suit in equity in the Circuit Court of the United States for the District of Minnesota against the Northern Securities Company and other defendants.
- The government sought to enforce the Sherman Antitrust Act of 1890, alleging the holding company was a combination in restraint of interstate trade.
- The Circuit Court ruled in favor of the United States, finding the combination illegal and issuing a decree to enjoin its operation.
- The defendants, Northern Securities Co. et al., as appellants, appealed the Circuit Court's final decree directly to the Supreme Court of the United States.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does the formation of a holding company by stockholders of two competing interstate railroad companies, for the purpose of acquiring a controlling interest in the stock of both and placing them under a single management, constitute a 'combination... in restraint of trade or commerce among the several States' in violation of the Sherman Antitrust Act of 1890?
Opinions:
Majority - Mr. Justice Harlan
Yes. The formation of a holding company by stockholders of competing interstate carriers to acquire a controlling interest in each, thereby eliminating competition, is a combination in restraint of trade that violates the Sherman Antitrust Act. The court reasoned that the Act prohibits every combination, in whatever form, that directly or necessarily operates to restrain trade among the states. The necessary effect of creating the Northern Securities Company was to extinguish all competition between two parallel and competing railroads, placing the commerce of a vast region at the mercy of a single corporate entity. The fact that the combination was accomplished through a state-chartered holding company does not shield it from federal law, as Congress's power under the Commerce Clause is supreme and cannot be obstructed by state action. The court rejected the argument that this was a mere investment, finding it was a scheme created solely to suppress competition, which is the very evil the Sherman Act was designed to prevent.
Concurring - Mr. Justice Brewer
Yes. While the Sherman Act should only be interpreted to prohibit unreasonable restraints of trade, this combination was an unreasonable restraint and therefore illegal. The Northern Securities Company was not a genuine business entity but a 'mere instrumentality' created to combine separate railroad properties under one control and destroy competition. While an individual's right to invest his own money is protected, this was a combination by multiple individuals to achieve a common purpose of suppressing trade. The arrangement created a practical monopoly and, if permitted, could lead to the consolidation of all the nation's railroads, which is clearly an unreasonable result and contrary to public policy.
Dissenting - Mr. Justice White
No. The acquisition and ownership of stock in a state-chartered corporation is not 'interstate commerce' and thus is not subject to regulation by Congress under the Commerce Clause. The power to regulate commerce extends to the intercourse and traffic between states, not to the ownership of property within a state. Matters of corporate creation, consolidation, and stock ownership are powers reserved to the states under the Tenth Amendment. To allow Congress to regulate stock ownership because a company engages in interstate commerce would destroy the distinction between state and federal power and allow Congress to regulate virtually any aspect of local economic life, which is contrary to the fundamental principles of the Constitution.
Dissenting - Mr. Justice Holmes
No. The formation of the holding company through stock purchases is not a 'combination in restraint of trade' as that term was understood at common law and intended by the Sherman Act. The Act, being a criminal statute, should be interpreted narrowly and prohibits two things: contracts in restraint of trade (agreements with strangers to a business) and combinations to monopolize (conspiracies to exclude rivals). This case involves a 'fusion' or 'community of interest,' akin to a partnership, which ends competition between the parties but does not constitute an illegal restraint. The statute says nothing about preserving competition, and to interpret it as doing so would criminalize ordinary business consolidations and partnerships, leading to an attempt to 'disintegrate society into individual atoms.' The majority's decision is a product of public feeling against large corporations, demonstrating that 'great cases like hard cases make bad law.'
Analysis:
This landmark decision revitalized the Sherman Antitrust Act after the Court's narrow interpretation in United States v. E. C. Knight Co. (1895). It established that the Act's prohibitions extended beyond formal cartels and price-fixing agreements to cover combinations achieved through corporate structures like holding companies. The ruling significantly expanded the federal government's power under the Commerce Clause to regulate economic concentration, affirming that the form of a combination is irrelevant if its effect is to restrain interstate trade. This case empowered Theodore Roosevelt's 'trust-busting' agenda and set a precedent for a more aggressive application of antitrust laws for decades to come.
Unlock the full brief for Northern Securities Co. v. United States