United States v. American Tobacco Co.

Rule of Law:

The Sherman Antitrust Act prohibits contracts, combinations, and conspiracies that, judged by a 'rule of reason,' are found to have the intent or effect of unreasonably restraining trade or monopolizing a part of commerce.

Facts:

• Prior to 1890, the American tobacco industry consisted of numerous competitive manufacturers, with five major firms (Allen & Ginter; W. Duke, Sons & Co.; Kinney Tobacco; W.S. Kimball & Co.; and Goodwin & Co.) engaged in fierce competition in the cigarette market.
• In January 1890, these five competitors merged to form the American Tobacco Company, which immediately controlled approximately 95% of the domestic cigarette market.
• From 1891 to 1898, the American Tobacco Company acquired over fifteen competing tobacco concerns, often requiring the sellers to sign long-term covenants not to compete and frequently shutting down the acquired plants.
• Following a ruinous price war in the plug tobacco market, the American Tobacco Company in 1898 collaborated with several leading plug manufacturers to form the Continental Tobacco Company, consolidating control over that sector.
• Between 1900 and 1903, the combined companies formed specialized corporations to dominate other markets, including the American Snuff Company, American Cigar Company, and companies that controlled essential supplies like tinfoil (Conley Foil Company) and licorice paste (MacAndrews & Forbes Company).
• In 1901, key individuals formed a holding company, the Consolidated Tobacco Company, to acquire the common stock of both the American and Continental companies, further centralizing control.
• In 1902, after a trade war in Great Britain, the American Tobacco Company and the British Imperial Tobacco Company agreed to divide global markets, creating the British-American Tobacco Company to manage their combined export business.
• In 1904, the American Tobacco Company, Continental Tobacco Company, and Consolidated Tobacco Company were formally merged into a single new corporation, The American Tobacco Company, solidifying the combination's control over all facets of the tobacco industry.

Procedural Posture:

• The United States filed a suit in the Circuit Court of the United States for the Southern District of New York against the American Tobacco Company and numerous other corporate and individual defendants.
• The government's petition alleged that the defendants were engaged in a combination and conspiracy in restraint of trade and were monopolizing the tobacco industry in violation of Sections 1 and 2 of the Sherman Antitrust Act.
• After a hearing, the four-judge Circuit Court panel found that the main corporate defendants constituted illegal combinations and enjoined their continued operation.
• The Circuit Court dismissed the petition as to the individual defendants, two foreign corporations, and the United Cigar Stores Company.
• Both the United States and the defendant corporations against whom the decree was entered filed separate appeals to the Supreme Court of the United States.