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Standard Oil Co. v. United States (full text) :: 337 U.S. 293 (1949) :: Justia US Supreme Court Center Log In
U.S. Supreme CourtStandard Oil Co. v. United States, 337 U.S. 293 (1949)Standard Oil Co. of California v. United StatesNo. 279Argued March 3-4, 1949Decided June 13, 1949337 U.S. 293APPEAL FROM THE UNITED STATES DISTRICT COURT
This is an appeal to review a decree enjoining the Standard Oil Company of California and its wholly owned subsidiary, Standard Stations, Inc., [Footnote 1] from enforcing or entering exclusive supply contracts with any independent dealer in petroleum products and automobile accessories. The use of such contracts was successfully assailed by the United States as violative of § 1 of the Sherman Act [Footnote 2] and § 3 of the Clayton Act. [Footnote 3] Page 337 U. S. 295
Exclusive supply contracts with Standard had been entered, as of March 12, 1947, by the operators of 5,937 independent stations, or 16% of the retail gasoline outlets in the Western area, which purchased from Standard in 1947 $57,646,233 worth of gasoline and Page 337 U. S. 296 $8,200,089.21 worth of other products. Some outlets are covered by more than one contract, so that, in all, about 8,000 exclusive supply contracts are here in issue. These are of several types, but a feature common to each is the dealer's undertaking to purchase from Standard all his requirements of one or more products. Two types, covering 2,777 outlets, bind the dealer to purchase of Standard all his requirements of gasoline and other petroleum product as well as tires, tubes, and batteries. The remaining written agreements, 4,368 in number, bind the dealer to purchase of Standard all his requirements of petroleum products only. It was also found that independent dealers had entered 742 oral contracts by which they agreed to sell only Standard's gasoline. In some instances, dealers who contracted to purchase from Standard all their requirements of tires, tubes, and batteries, had also orally agreed to purchase of Standard their requirements of other automobile accessories. Of the written agreements, 2,712 were for varying specified terms; the rest were effective from year to year, but terminable "at the end of the first 6 months of any contract year, or at the end of any such year, by giving to the other at least 30 days prior thereto written notice. . . ." Before 1934, Standard's sales of petroleum products through independent service stations were made pursuant to agency agreements, but, in that year, Standard adopted the first of its several requirements purchase contract forms, and, by 1938, requirements contracts had wholly superseded the agency method of distribution.
Between 1936 and 1946, Standard's sales of gasoline through independent dealers remained at a practically constant proportion of the area's total sales; its sales of lubricating oil declined slightly during that period from 6.2% to 5% of the total. Its proportionate sales of tires and batteries for 1946 were slightly higher than they were in 1936, though somewhat lower than for some Page 337 U. S. 297 intervening years; they have never, as to either of these products, exceeded 2% of the total sales in the Western area.
Obviously the contracts here at issue would be proscribed if § 3 stopped short of the qualifying clause beginning, "where the effect of such lease, sale, or contract Page 337 U. S. 298 for sale. . . ." If effect is to be given that clause, however, it is by no means obvious, in view of Standard's minority share of the "line of commerce" involved, of the fact that that share has not recently increased, and of the claims of these contracts to economic utility, that the effect of the contracts may be to lessen competition or tend to create a monopoly. It is the qualifying clause therefore which must be construed.
"Grant that, on a comparative basis, and in relation to the entire trade in these products in the area, Page 337 U. S. 299 the restraint is not integral. Admit also that control of distribution results in lessening of costs and that its abandonment might increase costs. . . . Concede further that the arrangement was entered into in good faith, with the honest belief that control of distribution and consequent concentration of representation were economically beneficial to the industry and to the public, that they have continued for over fifteen years openly, notoriously, and unmolested by the Government, and have been practised by other major oil companies competing with Standard, that the number of Standard outlets so controlled may have decreased, and the quantity of products supplied to them may have declined, on a comparative basis. Nevertheless, as I read the latest cases of the Supreme Court, I am compelled to find the practices here involved to be violative of both statutes. For they affect injuriously a sizeable part of interstate commerce, or -- to use the current phrase -- 'an appreciable segment' of interstate commerce."
The issue before us, therefore, is whether the requirement of showing that the effect of the agreements "may be to substantially lessen competition" may be met simply by proof that a substantial portion of commerce is affected, or whether it must also be demonstrated that competitive activity has actually diminished or probably will diminish. [Footnote 5] Page 337 U. S. 300
258 U.S. at 258 U. S. 356-357. See also Federal Trade Comm'n v. Morton Salt Co., 334 U. S. 37, 334 U. S. 46, n. 14. Page 337 U. S. 301 The Court went on to add that the fact that the Section "was not intended to reach every remote lessening of competition is shown in the requirement that such lessening must be substantial," but, because it deemed the finding of two lower courts that the contracts in question did substantially lessen competition and tend to create monopoly amply supported by evidence that the defendant controlled two-fifths of the nation's pattern agencies, it did not pause to indicate where the line between a "remote" and a "substantial" lessening should be drawn.
In the International Business Machines case, the defendants were the sole manufacturers of a patented tabulating machine requiring the use of unpatented cards. The lessees of the machines were bound by tying clauses to use in them only the cards supplied by the defendants, Page 337 U. S. 302 who, between them, divided the whole of the $3,000,000 annual gross of this business also. The Court concluded:
It is thus apparent that none of these cases controls the disposition of the present appeal, for Standard's share of the retail market for gasoline, even including sales through company-owned stations, is hardly large enough to conclude as a matter of law that it occupies a dominant position, nor did the trial court so find. The cases do indicate, however, that some sort of showing as to the actual or probable economic consequences of the agreements, if only the inferences to be drawn from the fact of dominant power, is important, and, to that extent, they tend to support appellant's position. Page 337 U. S. 303
The present case differs, of course, in the fact that a dealer who has entered a requirements contract with Standard cannot, consistently with that contract, sell the petroleum products of a competitor of Standard's, no Page 337 U. S. 304 matter how many pumps he has, [Footnote 6] but the case is significant for the importance it attaches, in the absence of a showing that the supplier dominated the market, to the practical effect of the contracts. The same is true of the Pick case, in which this Court affirmed in a brief per curiam opinion the finding of the District Court, concurred in by the Court of Appeals, that the effect of contracts by which dealers agreed not to sell other automobile parts than those manufactured by General Motors "had not been in any way substantially to lessen competition or to create a monopoly in any line of commerce." 299 U.S. at 299 U. S. 4.
But then came International Salt Co. v. United States, 332 U. S. 392. That decision, at least as to contracts tying the sale of a nonpatented to a patented product, rejected the necessity of demonstrating economic consequences once it has been established that "the volume of business affected" is not "insignificant or insubstantial" and that the effect of the contracts is to "foreclose competitors from [a] substantial market." Id. at 332 U. S. 396. Upon that basis, we affirmed a summary judgment granting an injunction against the leasing of machines for the utilization of salt products on the condition that the lessee use in Page 337 U. S. 305 them only salt supplied by defendant. It was established by pleadings or admissions that defendant was the country's largest producer of salt for industrial purposes, that it owned patents on the leased machines, that about 900 leases were outstanding, and that, in 1944, defendant sold about $500,000 worth of salt for use in these machines. It was not established that equivalent machines were unobtainable, it was not indicated what proportion of the business of supplying such machines was controlled by defendant, and it was deemed irrelevant that there was no evidence as to the actual effect of the tying clauses upon competition. [Footnote 7] It is clear therefore that, unless a distinction is to be drawn for purposes of the applicability of § 3 between requirements contracts and contracts tying the sale of a nonpatented to a patented product, the showing that Standard's requirements contracts affected a gross business of $58,000,000 comprising 6.7% of the total in the area goes far toward supporting the inference that competition has been or probably will be substantially lessened. [Footnote 8]
In favor of confining the standard laid down by the International Salt case to tying agreements, important economic differences may be noted. Tying agreements serve hardly any purpose beyond the suppression of competition. Page 337 U. S. 306 The justification most often advanced in their defense -- the protection of the goodwill of the manufacturer of the tying device -- fails in the usual situation because specification of the type and quality of the product to be used in connection with the tying device is protection enough. If the manufacturer's brand of the tied product is, in fact, superior to that of competitors, the buyer will presumably choose it anyway. The only situation, indeed, in which the protection of good will may necessitate the use of tying clauses is where specifications for a substitute would be so detailed that they could not practicably be supplied. In the usual case, only the prospect of reducing competition would persuade a seller to adopt such a contract, and only his control of the supply of the tying device, whether conferred by patent monopoly or otherwise obtained, could induce a buyer to enter one. See Miller, Unfair Competition 199 et seq. (1941); Note, 49 Col.L.Rev. 241, 246 (1949). The existence of market control of the tying device therefore affords a strong foundation for the presumption that it has been or probably will be used to limit competition in the tied product also.
Requirements contracts, on the other hand, may well be of economic advantage to buyers as well as to sellers, and thus indirectly of advantage to the consuming public. In the case of the buyer, they may assure supply, afford protection against rises in price, enable long-term planning on the basis of known costs, [Footnote 9] and obviate the expense and risk of storage in the quantity necessary for a commodity having a fluctuating demand. From the seller's point of view, requirements contracts may make possible the substantial reduction of selling expenses, give protection Page 337 U. S. 307 against price fluctuations, and -- of particular advantage to a newcomer to the field to whom it is important to know what capital expenditures are justified -- offer the possibility of a predictable market. See Stockhausen, The Commercial and Anti-Trust Aspects of Term Requirements Contracts, 23 N.Y.U.L.Q.Rev. 412, 413-14 (1948). They may be useful, moreover, to a seller trying to establish a foothold against the counterattacks of entrenched competitors. See id. at 424 et seq.; Excelsior Motor Mfg. & Supply Co. v. Sound Equipment, Inc., 73 F.2d 725, 728; General Talking Pictures Corp. v. American Tel. & Tel. Co., 18 F.Supp. 650, 666. [Footnote 10] Since these advantages of requirements contracts may often be sufficient to account for their use, the coverage by such contracts of a substantial amount of business affords a weaker basis for the inference that competition may be lessened than would similar coverage by tying clauses, especially where use of the latter is combined with market control of the tying device. A patent, moreover, although in fact there may be many competing substitutes for the patented article, is at least prima facie evidence of such control. And so we could not dispose of this case merely by citing International Salt Co. v. United States, 332 U. S. 392.
Thus, even though the qualifying clause of § 3 is appended without distinction of terms equally to the prohibition of tying clauses and of requirements contracts, pertinent considerations support, certainly as a matter of economic reasoning, varying standards as to each for the Page 337 U. S. 308 proof necessary to fulfill the conditions of that clause. If this distinction were accepted, various tests of the economic usefulness or restrictive effect of requirements contracts would become relevant. Among them would be evidence that competition has flourished despite use of the contracts and, under this test, much of the evidence tendered by appellant in this case would be important. See, as examples of the consideration of such evidence, B. S. Pearsall Butter Co. v. Federal Trade Comm'n, 292 F. 720; Pick Mfg. Co. v. General Motors Corp., 80 F.2d 641, 644, aff'd, 299 U. S. 3. Likewise bearing on whether or not the contracts were being used to suppress competition would be the conformity of the length of their term to the reasonable requirements of the field of commerce in which they were used. See Corn Products Refining Co. v. Federal Trade Comm'n, 144 F.2d 211, 220, aff'd, 324 U. S. 324 U.S. 726; United States v. Pullman Co., 50 F.Supp. 123, 127-129. Still another test would be the status of the defendant as a struggling newcomer or an established competitor. Perhaps most important, however, would be the defendant's degree of market control, for the greater the dominance of his position, the stronger the inference that an important factor in attaining and maintaining that position has been the use of requirements contracts to stifle competition, rather than to serve legitimate economic needs. See Standard Fashion Co. v. Magrane-Houston Co., supra, 258 U. S. 346; Fashion Originators' Guild v. Federal Trade Comm'n, supra, 312 U. S. 457. [Footnote 11]
Yet serious difficulties would attend the attempt to apply these tests. We may assume, as did the court below, that no improvement of Standard's competitive Page 337 U. S. 309 position has coincided with the period during which the requirements contract system of distribution has been in effect. We may assume further that the duration of the contracts is not excessive, and that Standard does not by itself dominate the market. But Standard was a major competitor when the present system was adopted, and it is possible that its position would have deteriorated but for the adoption of that system. When it is remembered that all the other major suppliers have also been using requirements contracts, and when it is noted that the relative share of the business which fell to each has remained about the same during the period of their use, [Footnote 12] it would not be far-fetched to infer that their effect has been to enable the established suppliers individually to maintain their own standing and at the same time collectively, even though not collusively, to prevent a late arrival from wresting away more than an insignificant portion of the market. If, indeed, this were a result of the system, it would seem unimportant that a short-run byproduct of stability may have been greater efficiency and lower costs, for it is the theory of the antitrust laws that the long-run advantage of the community depends upon the removal of restraints upon competition. See Fashion Originators' Guild v. Federal Trade Comm'n, 312 U. S. 457, 312 U. S. 467-468; United States v. Aluminum Co. of America, 148 F.2d 416, 427-429.
Moreover, to demand that bare inference be supported by evidence as to what would have happened but for Page 337 U. S. 310 the adoption of the practice that was in fact, adopted or to require firm prediction of an increase of competition as a probable result of ordering the abandonment of the practice, would be a standard of proof, if not virtually impossible to meet, at least most ill suited for ascertainment by courts. [Footnote 13] Before the system of requirements contracts was instituted, Standard sold gasoline through independent service station operators as its agents, and it might revert to this system if the judgment below were sustained. Or it might, as opportunity presented itself, add service stations now operated independently to the number managed by its subsidiary, Standard Stations, Inc. From the point of view of maintaining or extending competitive advantage, either of these alternatives would be just as effective as the use of requirements contracts, although, of course, insofar as they resulted in a tendency to monopoly they might encounter the anti-monopoly provisions of the Sherman Act. See United States v. Aluminum Co. of America, 148 F.2d 416. As appellant points out, dealers might order petroleum products in quantities sufficient to meet their estimated needs for the period during which requirements contracts are now effective, and even that would foreclose competition to some degree. So long as these diverse ways of restricting competition remain open, therefore, there can be no conclusive proof that the use of requirements contracts has actually reduced Page 337 U. S. 311 competition below the level which it would otherwise have reached or maintained.
We are dealing here with a particular form of agreement specified by § 3, and not with different arrangements, by way of integration or otherwise, that may tend to lessen competition. To interpret that section as requiring proof that competition has actually diminished would make its very explicitness a means of conferring immunity upon the practices which it singles out. Congress has authoritatively determined that those practices are detrimental where their effect may be to lessen competition. It has not left at large for determination in each case the ultimate demands of the "public interest," as the English lawmakers, considering and finding inapplicable to their own situation our experience with the specific prohibition of trade practices legislatively determined to be undesirable, have recently chosen to do. [Footnote 14] Though it may be that such an alternative to the present system as buying out independent dealers and making Page 337 U. S. 312 them dependent employees of Standard Stations, Inc., would be a greater detriment to the public interest than perpetuation of the system, this is an issue, like the choice between greater efficiency and freer competition, that has not been submitted to our decision. We are faced, not with a broadly phrased expression of general policy, but merely a broadly phrased qualification of an otherwise narrowly directed statutory provision.
In this connection, it is significant that the qualifying language was not added until after the House and Senate bills reached Conference. The conferees responsible for adding that language were at pains, in answering protestations that the qualifying clause seriously weakened the Section, to disclaim any intention seriously to augment the burden of proof to be sustained in establishing violation of it. [Footnote 15] It seems hardly likely that, having with one hand set up an express prohibition against a practice thought to be beyond the reach of the Sherman Act, Congress meant, with the other hand, to reestablish the necessity of meeting the same tests of detriment to the public interest as that Act had been interpreted as requiring. [Footnote 16] Page 337 U. S. 313 Yet the economic investigation which appellant would have us require is of the same broad scope as was adumbrated with reference to unreasonable restraints of trade in Chicago Board of Trade v. United States, 246 U. S. 231. [Footnote 17] To insist upon such an investigation would be to stultify the force of Congress' declaration that requirements contracts are to be prohibited wherever their effect "may be" to substantially lessen competition. If in fact it is economically desirable for service stations to confine themselves to the sale of the petroleum products of a single supplier, they will continue Page 337 U. S. 314 to do so though not bound by contract, and if in fact it is important to retail dealers to assure the supply of their requirements by obtaining the commitment of a single supplier to fulfill them, competition for their patronage should enable them to insist upon such an arrangement without binding them to refrain from looking elsewhere.
One last point remains to be disposed of. Appellant contends that its requirements contracts with California dealers, because nearly all the products sold to them are produced in California, do not substantially affect interstate commerce, and therefore should have been exempted from the decree. It finds support for this contention in Addyston Pipe & Steel Co. v. United States, 175 U. S. 211, 175 U. S. 247. But the effect of appellant's requirements contracts with California retail dealers is to prevent them Page 337 U. S. 315 from dealing with suppliers from outside the State as well as within the State, and is thus to lessen competition in both interstate and intrastate commerce. Appellant has not suggested that, if these dealers were not bound by their contracts with it, that they would continue to purchase only products originating within the State. The Addyston case, on the other hand, dealt not with the diminution of competition between suppliers brought about by the action of one at the expense of the rest, whether within or without the State, but a combination among them to restrain competition. Modification of the decree was required only to make clear that it did not reach a combination among the defendants doing business in a single State which was confined to transactions taking place within that same State.
The economic theories which the Court has read into the Anti-Trust Laws have favored, rather than discouraged, monopoly. As a result of the big business philosophy underlying United States v. United Shoe Machinery Co., 247 U. S. 32; United States v. United States Steel Corp., 251 U. S. 417; United States v. International Harvester Co., 274 U. S. 693, big business has become bigger and bigger. Monopoly has flourished. Cartels have increased their hold on the nation. The trusts wax strong. [Footnote 2/1] There is less and less place for the independent. Page 337 U. S. 316
The full force of the Anti-Trust Laws has not been felt on our economy. It has been deflected. Niggardly interpretations have robbed those laws of much of their efficacy. There are exceptions. Price fixing is illegal per Page 337 U. S. 317 se. [Footnote 2/2] The use of patents to obtain monopolies on unpatented articles is condemned. [Footnote 2/3] Monopoloy that has been built as a result of unlawful tactics, e.g., through practices that are restraints of trade, is broken up. [Footnote 2/4] But when it comes to monopolies built in gentlemanly ways -- by mergers, purchases of assets or control and the like -- the teeth have largely been drawn from the Act. Page 337 U. S. 318
The lessons Brandeis taught on the curse of bigness have largely been forgotten in high places. Size is allowed to become a menace to existing and putative competitors. Price control is allowed to escape the influences of the competitive market and to gravitate into the hands of the few. But, beyond all that, there is the effect on the community when independents are swallowed up by the trusts and entrepreneurs become employees of absentee Page 337 U. S. 319 owners. Then there is a serious loss in citizenship. Local leadership is diluted. He who was a leader in the village becomes dependent on outsiders for his action and policy. Clerks responsible to a superior in a distant place take the place of resident proprietors beholden to no one. These are the prices which the nation pays for the almost ceaseless growth in bigness on the part of industry.
The Court answers the question for the oil industry by a formula which, under our decisions, promises to wipe out large segments of independent filling station operators. The method of doing business under requirements contracts at least keeps the independents alive. They survive as small business units. The situation is not ideal Page 337 U. S. 320 from either their point of view [Footnote 2/8] or that of the nation. But the alternative which the Court offers is far worse from the point of view of both.
Today there is vigorous competition between the oil companies for the market. That competition has left some room for the survival of the independents. But when this inducement for their survival is taken away, we Page 337 U. S. 321 can expect that the oil companies will move in to supplant them with their own stations. There will still be competition between the oil companies. But there will be a tragic loss to the nation. The small, independent businessman will be supplanted by clerks. Competition between suppliers of accessories (which is involved in this case) will diminish or cease altogether. The oil companies will command an increasingly larger share of both the wholesale and the retail markets.
I am unable to agree that this requirement was met. To be sure, the contracts cover "a substantial number of outlets and a substantial amount of products, whether considered comparatively or not." 78 F.Supp. 850, 875. Page 337 U. S. 322 But that fact does not automatically bring the accused arrangement within the prohibitions of the statute. The number of dealers and the volume of sales covered by the arrangement, of course, was sufficient to be substantial. That is to say, this arrangement operated on enough commerce to violate the Act, provided its effects were substantially to lessen competition or create a monopoly. But proof of their quantity does not prove that they had this forbidden quality and the assumption that they did, without proof, seems to me unwarranted.
I should therefore vacate this decree and direct the court below to complete the case by hearing and weighing the Government's evidence and that of defendant as to the effects of this device. Page 337 U. S. 323
It does not seem to me inherently to lessen this real competition when an oil company tries to establish superior service by providing the consumer with a responsible dealer from which the public can purchase adequate and timely supplies of oil, gasoline, and car accessories of some known and reliable standard of quality. No retailer, whether agent or independent, can long remain in business if he does not always, and not just intermittently, have gas to sell. Retailers' storage capacity usually is limited, and they are in no position to accumulate large stocks. They can take gas only when and as they can sell it. The Government can hardly force someone to contract to stand by, ever ready to fill Page 337 U. S. 324 fluctuating demands of dealers who will not, in turn, undertake to buy from that supplier all their requirements. And it is important to the driving public to be able to rely on retailers to have gas to retail. It is equally important that the wholesaler have some incentive to carry the stocks, and have the transport facilities to make the irregular deliveries caused by varied consumer demands.