United States v. E. I. du Pont de Nemours & Co.

Supreme Court of United States
351 U.S. 377 (1956)

ELI5:

Rule of Law:

The relevant market for determining monopoly power under § 2 of the Sherman Act is composed of products that have reasonable interchangeability for the purposes for which they are produced, considering their price, use, and qualities. A high cross-elasticity of demand between products indicates they compete in the same market.

Facts:

In 1923, E. I. du Pont de Nemours and Company (du Pont) entered an agreement with a French company, La Cellophane, acquiring exclusive rights to manufacture and sell cellophane in North and Central America using secret processes and patents.
Du Pont's research led to the development and patenting of moistureproof cellophane in 1927, a superior product that experienced much more rapid growth in demand than plain cellophane.
In 1930, Sylvania, another American company, began manufacturing cellophane, and later moistureproof cellophane under its own patents.
Following a patent dispute, du Pont licensed Sylvania in 1933 to produce moistureproof cellophane, but a prohibitive royalty clause effectively limited Sylvania's production to about 20% of the combined sales of that type.
During the period relevant to the case, du Pont produced and sold almost 75% of the cellophane in the United States.
Cellophane was used for packaging various consumer goods and competed with other materials such as glassine, greaseproof paper, waxed paper, aluminum foil, and plastic films.
The price of cellophane was consistently two to three times higher per square area than its chief competitors, glassine and greaseproof papers.
Despite its higher price, du Pont's cellophane sales grew enormously, from approximately $3.7 million in 1928 to nearly $99.2 million in 1950.

Procedural Posture:

The United States filed a civil action against E. I. du Pont de Nemours and Company in the U.S. District Court for the District of Columbia, alleging monopolization under § 2 of the Sherman Act.
On du Pont's motion, the case was transferred to the U.S. District Court for the District of Delaware.
After a lengthy trial, the District Court (the court of first instance) found in favor of du Pont on all issues, ruling it had not monopolized the cellophane market.
The United States (appellant) filed a direct appeal to the Supreme Court of the United States against du Pont (appellee), challenging only the District Court's ruling on the monopolization of cellophane.

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Issue:

Does du Pont's control over nearly 75% of cellophane production and sales in the United States constitute monopolization of a part of trade or commerce in violation of Section 2 of the Sherman Act?

Opinions:

Majority - Mr. Justice Reed

No, du Pont's control over cellophane does not constitute illegal monopolization because the relevant market is not cellophane alone, but the broader market for all flexible packaging materials. To determine monopoly power, the court must define the relevant market, which includes all commodities that are reasonably interchangeable by consumers for the same purposes, considering their price, use, and qualities. The Court found that although cellophane has unique properties, it faces significant competition from other materials like glassine, waxed paper, and aluminum foil. The high cross-elasticity of demand—the responsiveness of sales of one product to price changes of another—showed that these other materials constrained du Pont's ability to control prices. Because du Pont lacked the power to control price or exclude competition within this broader flexible packaging market, it did not possess monopoly power in violation of § 2 of the Sherman Act.

Dissenting - Mr. Chief Justice Warren

Yes, du Pont's control over cellophane constitutes monopolization because the relevant market is cellophane itself, not all flexible packaging materials. The majority's definition of the market is overly broad and 'virtually emasculates § 2 of the Sherman Act.' Cellophane's unique combination of qualities and its significantly higher price demonstrate that it is a distinct product, not reasonably interchangeable with cheaper, inferior materials like waxed paper. The fact that consumers consistently paid a premium for cellophane for decades, and that producers of other materials did not lower their prices in response to du Pont's price cuts, proves a low cross-elasticity of demand. Du Pont’s own actions—seeking tariff protection, dividing world markets, and suppressing competition from its only domestic rival, Sylvania—confirm its monopoly power over the distinct cellophane market.

Concurring - Mr. Justice Frankfurter

No, du Pont did not monopolize in violation of the Sherman Act. The court correctly concluded that the relevant market was the broad market for flexible packaging materials, not just cellophane. Because this defense is sustained, the judgment for du Pont should be affirmed without needing to delve into the difficult and complex subject of what constitutes single-firm 'monopolizing' under § 2. Such social and economic judgments should be avoided when a case can be resolved on the narrower ground of market definition.

Analysis:

This case is significant for establishing the 'reasonable interchangeability' test as the primary standard for defining the relevant product market in monopolization cases. By introducing the economic concept of 'cross-elasticity of demand' into legal analysis, the decision broadened the scope of what constitutes a competitive market. This makes it more difficult for plaintiffs and the government to prove monopoly power, as a defendant can argue that its product competes with a wide range of functional substitutes, even if those substitutes are not identical in quality or price. The decision remains controversial and is often criticized for a market definition that critics argue is too broad, potentially allowing firms with dominance over a distinct product to escape antitrust liability.

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