United States v. Addyston Pipe & Steel Co.
46 L.R.A. 122, 1898 U.S. App. LEXIS 2157, 85 F. 271 (1898)
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Rule of Law:
A contract or combination whose sole object is to restrain competition, fix prices, or allocate markets (a naked restraint) is per se illegal under the Sherman Act. A restraint of trade is only permissible if it is ancillary to a legitimate primary purpose of a lawful contract and is no broader than reasonably necessary to protect the parties to that contract.
Facts:
- Six dominant manufacturers of cast-iron pipe, including Addyston Pipe & Steel Co., formed an association to control the market in a 36-state area designated as "pay territory."
- The members' combined output was 220,000 tons annually, while non-member capacity in the pay territory was 170,500 tons, much of which was geographically unable to compete effectively.
- The association's primary purpose was to eliminate competition and fix prices for pipe sales within the pay territory.
- For general sales, the association's central committee would pre-determine a price and then hold a secret internal auction, or "auction pool."
- The member who agreed to pay the largest "bonus" to the association won the right to the contract and would submit the predetermined low bid at the public letting.
- Other members of the association would submit higher, collusive bids to create the illusion of genuine competition for the purchaser.
- The association also designated certain municipalities as "reserved cities," where a specific member was given the exclusive right to all sales at prices also fixed by the association.
- The customary practice in the industry involved the seller delivering the pipe to the buyer's location, which frequently required shipping pipe across state lines.
Procedural Posture:
- The United States filed a petition in equity in the U.S. Circuit Court for the Eastern District of Tennessee against Addyston Pipe & Steel Co. and five other cast-iron pipe manufacturers.
- The government sought an injunction to dissolve the defendants' association, alleging it was a combination in restraint of interstate commerce in violation of the Sherman Antitrust Act.
- The Circuit Court heard the case on the pleadings and affidavits submitted by both parties.
- The Circuit Court dismissed the government's petition, finding in favor of the defendant manufacturers.
- The United States, as the appellant, appealed the dismissal to the United States Circuit Court of Appeals for the Sixth Circuit.
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Issue:
Does an agreement between competing manufacturers to fix prices, rig bids, and allocate markets across numerous states constitute an unlawful restraint of interstate commerce under the Sherman Act, regardless of whether the resulting prices are claimed to be reasonable?
Opinions:
Majority - Judge Taft
Yes, the agreement constitutes an unlawful restraint of interstate commerce. The court distinguishes between naked restraints of trade, whose sole purpose is to eliminate competition, and ancillary restraints, which are subordinate to a lawful main transaction. Naked restraints, such as the price-fixing and market-division scheme here, are void at common law and per se illegal under the Sherman Act, making any inquiry into the reasonableness of the prices charged irrelevant. The defendants' agreement had no legitimate main purpose; its sole object was to restrain competition. Furthermore, the practice of submitting collusive bids was a fraudulent conspiracy against purchasers, many of whom were municipalities required by law to seek competitive bids. The restraint directly impacted interstate commerce because it governed the terms of contracts for the sale and delivery of goods across state lines, which is itself interstate commerce and thus distinguishable from the purely intrastate manufacturing monopoly in U.S. v. E.C. Knight Co.
Analysis:
This decision established the foundational framework for modern antitrust analysis by distinguishing between "naked" and "ancillary" restraints of trade. By declaring that naked horizontal agreements like price-fixing and market allocation are per se illegal, the court obviated the need for a complex inquiry into their economic effects or the reasonableness of the prices set. This 'rule of reason' framework, which was later adopted by the Supreme Court, provides a clear standard that condemns agreements with no pro-competitive justification while permitting restraints that are necessary to facilitate legitimate business transactions. The opinion also clarified the scope of the Sherman Act, limiting the effect of the E.C. Knight decision by holding that contracts governing the interstate sale of goods are subject to federal regulation, even if the manufacturing is local.
