Addyston Pipe & Steel Co. v. United States, 175 U.S. 211 (1899)

Addyston Pipe & Steel Company v. United States

No. 61

Argued April 26-27, 1899
Decided December 4, 1899
175 U.S. 211

APPEAL FROM THE COURT OF

APPEALS FOR THE SIXTH CIRCUIT

Syllabus

Under the grant of power to Congress contained in Section 8 of Article I of the Constitution "to regulate commerce with foreign nations and among the several states and with Indian tribes," that body may enact such legislation as shall declare void and prohibit the performance of any contract between individuals or corporations where the natural and direct effect of such a contract shall be, when carried out, to directly, and not as a mere incident to other and innocent purposes, regulate to any extent interstate or foreign commerce.

The provision in the Constitution regarding the liberty of the citizen is to some extent limited by this commerce clause, and the power of to regulate interstate commerce comprises the right to enact a law prohibiting the citizen from entering into those private contracts which directly and substantially, and not merely indirectly, remotely, incidentally and collaterally regulate, to a greater or less degree, commerce among the states.

Interstate commerce consists of intercourse and traffic between the citizens or inhabitants of different states, and includes not only the transportation of persons and property and the navigation of public waters for that purpose, but also the purchase, sale and exchange of commodities.

The power to regulate interstate commerce and to prescribe the rules by which it shall be governed is vested in Congress, and when that body has enacted a statute such as the Act of July 2, 1890, c. 647, entitled "an act to protect trade and commerce against unlawful restraints and monopolies," any agreement or combination which directly operates not alone upon the manufacture, but upon the sale, transportation, and delivery of an article of interstate commerce by preventing or restricting its sale thereby regulates interstate commerce to that extent, and thus trenches upon the power of the national legislature, and violates the statute.

The contracts considered in this case, set forth in the statement of facts and in the opinion of the court, relate to the sale and transportation to other states of specific articles, not incidentally or collaterally, but as a direct and immediate result of the combination entered into by the defendants, and they restrain the manufacturing, purchase, sale, or exchange of the manufactured articles among the several states and enhance their value, and thus come within the provisions of the "act to protect trade and commerce against unlawful restraints and monopolies."

When the direct, immediate and intended effect of a contract or combination among dealers in a commodity is the enhancement of its price, it amounts to a restraint of trade in the commodity, even though contracts to buy it at the enhanced price are being made.

The judgment of the court below, which perpetually enjoined the defendants in the court below from maintaining the combination in cast-iron pipe as described in the petition and from doing any business under such combination, is too broad, as it applies equally to commerce which is wholly within a state as well as to that which is interstate or international only.

Although the jurisdiction of Congress over commerce among the states is full and complete, it is not questioned that it has none over that which is wholly within a state, and therefore none over combinations or agreements so far as they relate to a restraint of such trade or commerce, nor does it acquire any jurisdiction over that part of a combination or agreement which relates to commerce wholly within a state by reason of the the fact that the combination also covers and regulates commerce which is interstate.

This proceeding was commenced in behalf of the United States, under the so-called antitrust act of Congress, passed July 2, 1890. 26 Stat. 209, c. 647. It was undertaken for the purpose of obtaining an injunction perpetually enjoining the six corporations who were made defendants, and who were engaged in the manufacture, sale, and transportation of iron pipe at their respective places of business in the states of their residence, from further acting under or carrying on the combination alleged in the petition to have been entered into between them, and which was stated to be an illegal and unlawful one under the act above mentioned because it was in restraint of trade and commerce among the states, etc.

The trial court dismissed the petition, 78 F. 712, but upon appeal to the circuit court of appeals, the judgment of the court below was reversed, with instructions to enter a decree for the United States perpetually enjoining defendants from maintaining the combination in cast-iron pipe as described in the petition, and from doing any business under such combination. 85 F. 271. The six defendants are the Addyston Pipe & Steel Company, of Cincinnati, Ohio; Dennis Long & Company, of Louisville, Kentucky; the Howard-Harrison Iron Company, of Bessemer, Alabama; the Anniston Pipe & Foundry Company, of Anniston, Alabama, the South Pittsburg Pipe Works, of South Pittsburg, Tennessee, and the Chattanooga Foundry & Pipe Works, of Chattanooga, Tennessee, one company being in the State of Ohio, one in Kentucky, two in Alabama, and two in Tennessee.

The following are in substance the facts upon which the judgment of the circuit court of appeals rested, as stated in the record:

It was charged in the petition that, on the 28th of December, 1894, the defendants entered into a combination and conspiracy among themselves by which they agreed that there should be no competition between them in any of the states or territories mentioned in the agreement (comprising some thirty-six in all) in regard to the manufacture and sale of cast-iron pipe, and that, in obedience to such agreement and combination and to carry out the same, the defendants had since that time operated their shops and had been selling and shipping the pipe manufactured by them into other states and territories under contracts for the manufacture and sale of such pipe with citizens of such other states and territories. There was to be a "bonus" charged against the manufacture of the pipe to the extent set forth in the agreements and to be paid as therein stated. The whole agreement was charged to have been entered into in order to enhance the price for the iron pipe dealt in by the defendants.

The petition prayed that all pipe sold and transported from one state to another under the combination and conspiracy described therein be forfeited to the petitioner and be seized and confiscated in the manner provided by law, and that a decree be entered dissolving the unlawful conspiracy of defendants and perpetually enjoining them from operating under the same and from selling said cast-iron pipe in accordance therewith to be transported from one state into another.

The defendants filed a joint and separate demurrer to the petition insofar as it prayed for the confiscation of goods in transit, on the ground that such proceedings under the antitrust act are not to be had in a court of equity, but in a court of law. In addition to the demurrer, the defendants filed a joint and separate answer in which they admitted the existence of an association between them for the purpose of avoiding the great losses they would otherwise sustain due to ruinous competition between defendants, but denied that their association was in restraint of trade, state or interstate, or that it was organized to create a monopoly, and denied it was a violation of the antitrust act of Congress.

Testimony in the form of affidavits was submitted by petitioner and defendants, and by stipulation it was agreed that the final hearing might be had thereon.

From the minutes of the association, a copy of which was put in evidence by the petitioner, it appeared that prior to December 28, 1894, the Anniston Company, the Howard-Harrison Company, the Chattanooga Company, and the South Pittsburg Company had been associated as the Southern Associated Pipe Works. Upon that date, the Addyston Company and Dennis Long & Co. were admitted to membership, and the following plan was then adopted:

First. The bonuses on the first 90,000 tons of pipe secured in any territory, 16" and smaller, shall be divided equally among six shops.

Second. The bonuses on the next 75,000 tons, 30" and smaller, sizes to be divided among five shops, South Pittsburgh not participating.

Third. The bonuses of the next 40,000 tons, 36" and smaller, sizes to be divided among four shops, Anniston and South Pittsburg not participating.

Fourth. The bonus on the next 15,000 tons, consisting of all sizes of pipe, shall be divided among three shops, Chattanooga, South Pittsburg, and Anniston not participating.

The above division is based on the following tonnage of capacity:

South Pittsburg . . . . 15,000 tons

Anniston. . . . . . . . 30,000 tons

Chattanooga . . . . . . 40,000 tons

Bessemer. . . . . . . . 45,000 tons

Louisville. . . . . . . 45,000 tons

Cincinnati. . . . . . . 45,000 tons

When the 220,000 tons have been made and shipped and the bonuses divided as hereafter provided, the auditor shall set aside into a reserve fund all bonuses arising from the excess of shipments over 220,000 tons, and shall divide the same at the end of the year among the respective companies according to the percentage of the excess of tonnage they may have shipped (of the sizes made by them) either in pay or free territory. It is also the intention of this proposition that the bonuses on all pipe larger than 36 inches in diameter shall be divided equally between the Addyston Pipe & Steel Company, Dennis Long & Co., and the Howard-Harrison Company.

It was thereupon resolved:

First. That this agreement shall last for two years from the date of the signing of same, until December 31, 1896.

Second. On any question coming before the association requiring a vote, it shall take five affirmative votes thereon to carry said question, each member of this association being entitled to but one vote.

Third. The Addyston Pipe & Steel Company shall handle the business of the gas and water companies of Cincinnati, Ohio, Covington and Newport, Ky., and pay the bonus hereafter mentioned, and the balance of the parties to this agreement shall bid on such work such reasonable prices as they shall dictate.

Fourth. Dennis Long & Company, of Louisville, Ky., shall handle Louisville, Ky., Jeffersonville, Ind. and New Albany, Ind. furnishing all the pipe for gas and water works in above-named cities.

Fifth. The Anniston Pipe & Foundry Company shall handle Anniston, Ala. and Atlanta, Ga., furnishing all pipe for gas and water companies in above-named cities.

Sixth. The Chattanooga Foundry & Pipe Works shall handle Chattanooga, Tenn. and New Orleans, La., furnishing all gas and water pipe in above-named cities.

Seventh. The Howard-Harrison Iron Company shall handle Bessemer and Birmingham, Ala., and St. Louis, Mo., furnishing all pipe for gas and water companies in the above-named cities, extra bonus to be put on East St. Louis and Madison, Ill., so as to protect the prices named for St. Louis, Mo.

Eighth. South Pittsburg Pipe Works shall handle Omaha, Neb., on all sizes required by that city during the year of 1895, conferring with the other companies and cooperating with them; thereafter, they shall handle the gas and water companies of Omaha, Neb., on such sizes as they make.

Note. -- It is understood that all the shops who are members of this association shall handle the business of the gas and water companies of the cities set apart for them, including all sizes of pipe made by them.

The following bonuses were adopted for the different states as named below: all railroad or culvert pipe or pipe for any drainage or sewerage purposes on 12" and larger sizes shipped into bonus territory shall pay a bonus of $1 per ton. On all sizes below 12" and shipped into "bonus territory" for the purposes above named, there shall be a bonus of $2 per ton.

On motion of Mr. Llewellyn, the bonuses on all city work as specially reserved shall be $2 per ton.

The states for sale in which bonuses had to be paid into the association were called "pay" territory as distinguished from "free" territory in which defendants were at liberty to make sales without restriction and without paying any bonus.

The bylaws provided for an auditor of the association, whose duty it was to keep account of the business done by each shop both in pay and free territory. On the 1st and 16th of each month, he was required to send to each shop

a statement of all shipments reported in the previous half month, with a balance sheet showing the total amount of the premiums on shipments, the division of the same, and debt credit balance of each company.

The system of bonuses as a means of restricting competition and maintaining prices was not successful. A change was therefore made by which prices were to be fixed for each contract by the association, and except in reserved cities, the bidder was determined by competitive bidding of the members, the one agreeing to give the highest bonus for division among the others getting the contract. The plan was embodied in a resolution passed May 27, 1895, in the words following:

Whereas, the system now in operation in this association of having a fixed bonus on the several states has not in its operation resulted in the advancement in the prices of pipe as was anticipated, except in reserved cities, and some further action is imperatively necessary in order to accomplish the ends for which this association was formed: therefore, be it resolved, that from and after the first day of June, that all competition on the pipe lettings shall take place among the various pipe shops prior to the said letting. To accomplish this purpose it is proposed that the six competitive shops have a representative board located at some central city to whom all inquiries for pipe shall be referred, and said board shall fix the price at which said pipe shall be sold, and bids taken from the respective shops for the privilege of handling the order, and the party securing the order shall have the protection of all the other shops.

In pursuance of the new plan, it was further agreed

that all parties to this association having quotations out shall notify their customers that the same will be withdrawn by June 1, 1895, if not previously accepted, and upon all business accepted on and after June 1st bonuses shall be fixed by the committee.

At the meeting of December 19, 1895, it was moved and carried that, upon all inquiries for prices from "reserved cities" for pipe required during the year of 1896, prices and bonuses should be fixed at a regular or called meeting of the principals.

At the meeting of December 20, 1895, the plan for division of bonuses originally adopted was modified by making the basis the total amounts shipped into "pay" territory, rather than the totals shipped into "pay" and "free" territory.

To illustrate the mode of doing business the following excerpt from the minutes of the meetings of December 20, 1895, February 14, 1896, and March 13, 1896, is given:

It was moved to sell the 519 pieces of 20" pipe from Omaha, Neb., for $23.40, delivered. Carried. It was moved that Anniston participate in the bonus and the job be sold over the table. Carried. Pursuant to the motion the 519 pieces of 20" pipe for Omaha was sold to Bessemer at a premium of $8.

Moved that "bonus" on Anniston’s Atlanta water works contract be fixed at $7.10, provided freight is $1.60 a ton. Carried.

An illustration of the manner in which "reserved" cities were dealt with may be seen in the case of a public letting at St. Louis. On February 4, 1896, the water department of that city let bids for 2,800 tons of pipe. St. Louis was "reserved" to the Howard-Harrison Company, of Bessemer, Ala. The price was fixed by the association at $24 a ton, and the bonus at $6.50. Before the letting, the vice-president of this company wrote to the other members of the association under date of January 24, 1896, as follows:

I write to say that in view of the fact that I do not as yet know what the drayage will be on this pipe, I prefer that if any of you find it necessary to put in a bid without going to St. Louis, please bid not less than $27 for the pipe, and 2 3/4 cents per pound for the specials. I would also like to know as to which of you would find it convenient to have a representative at the letting. It will be necessary to have two outside bidders.

The contract was let to the Howard-Harrison Company, of Bessemer at $24, who allowed the Shickle, Harrison & Howard Company, a pipe company of St. Louis not in the association, but having the same president as the Howard-Harrison Company, of Bessemer, to fill part of the order. The only other bidders were the Addyston Pipe & Steel Company and Dennis Long & Co., the former bidding $24.37 and the latter $24.57. The evidence shows that the Chattanooga foundry could have furnished this pipe, delivered in St. Louis at from $17 to $18, and could have made a profit on it at that price. The record is full of instances of a similar kind, in which, after the successful bidder had been fixed by the "auction pool," or had been fixed by the arrangement as to reserve cities, the other defendants put in bids at the public letting as high as the selected bidder requested, in order to give the appearance of active competition between defendants.

In January, 1896, after the auction pool had been in operation for more than six months, the Chattanooga Company wrote a letter to its representative in the central committee. The letter is dated January 2, 1896, and is as follows:

Dear Sir: Referring to our policy for 1896 in bidding on pipe, we have had this matter under consideration for some time past, and from the information obtained from Mr. Thornton’s statement as to the amount of business done last year in pay territory, and from estimates that we have made for business that will come into that territory for 1896, we have been able to determine to what point we could bid on work and take contracts, and if bonus is forced above this point, let it go and take the bonus. We note from your letter of yesterday that you have sized up the situation in its essential points, and it agrees exactly with our ideas on the subject. It is useless to argue that Howard-Harrison Iron Co., Cincinnati, and other shops, who have been bidding bonuses of $6 or $8 per ton, can come out and make any money if they continue to bid such bonus. In the case of the Howard-Harrison Iron Co. people on Jacksonville, Fla. The truth of the business is they are losing money at the prices they bid for this work. If they take the contract at $19 delivered, it will only net $16 at the shop after they have paid back the bonus of $4.75; if they should continue to buy all the pipe that goes up to such figures as they have paid for Jacksonville and other points, they would wreck their shop in a few months. However, they, of course, calculate this bonus will be returned to them on work taken by other shops. We are very much pleased with the bonus that has been paid and we only hope they will keep it up as it is only money in our pockets. As long as there is no money to us let them make the pipe, as we shall continue to do so.

For the present you will adopt the following basis:

On 16" and under standard weights, $14.25 at shop.

On 18" and 36" standard weights, $13.

On 16" and under light weights, $14.50 to $14.75 at shop.

That is, you will bid all over $13, $14.25 and $14.50 on work. If we get work at these prices it will be satisfactory. If the others run bonus above this point let them take it, as it will be more money to us to take the bonus.

We note Mr. Thornton’s report of average premiums from June 1st to December, that the average was $3.63. The average bonuses that are prevailing today are $7 to $8. We cannot expect this to continue, and we think your estimate of $6 ton average bonus is high, as we do not believe the premiums of ’96 will average that price, unless there is a decided change for the better in business. We find there were sold and shipped into pay territory from January 1, 1895, to date, including the 40,000 tons of old business that did not pay a bonus, about 188,000 tons, and we think a very conservative estimate of shipments into this territory will amount to fully 200,000 this year; more than that, probably overrun 240,000 tons, from the fact that the City of Chicago and several other places that annually use large quantities of pipe were not in the market last year, or last season, from the fact that they were out of funds. On the basis as given you above, if the demand should reach 220,000 tons, which would give us our entire 40,000 tons, provided we old no business, then the association would pay us the average "bonus," which might be from $3.50 to $5 on our 40,000. If we cannot secure business in "pay territory" at paying prices, we think we will be able to dispose of our output in "free territory," and, of course, make some profit on that.

At the prices that Howard-Harrison people paid for Jacksonville, Des Plaines, and one or two other points, they are losing from $2.50 to $3 per ton, that is, provided "bonuses" would not be returned to them. Therefore when business goes at a loss, we are willing that other shops make it.

Another letter was written by the same company pending a trouble over a letting at Atlanta. The Anniston Company, to whom Atlanta had been "reserved," made its bid so high ($24) that a Philadelphia pipe firm, R. D. Wood & Co., had been able to underbid the Anniston Company in spite of difference in freights. All the bids had been rejected as too high, and upon a second letting Anniston’s bid was $1.25 a ton less, and the job was awarded to it. The charge was then made by Atlanta persons that there was a "trust" or "combine." This was vigorously denied. The letter of the Chattanooga Company evoked by this difficulty was dated February 25, 1896, and reads as follows:

Gentlemen: We are in receipt of a carbon copy of your favor of the 24th instant to F. B. Nichols, V.P., in reference to Atlanta, Ga. We certainly regret that the matter has assumed its present shape, and that R. D. Wood & Company should make a lower bid by $1 a ton than the southern shops. You know we have always been opposed to special customers and reserved cities, we do not think that it is the right principle and we believe, if the present association continues, that all special customers and reserved cities should be wiped out; there is no good reason why we should be allowed to handle New Orleans, you Atlanta, Howard Harrison Iron Co. St. Louis, or South Pittsburg, Omaha. We are not in the business to award special privileges to any foundry, and we believe that the result would be more benefit to all concerned if all business was made competitive. It is hardly right, and we believe if you will think over the matter carefully you will concede it, for us to be put into a position of being unable to make prices or furnish pipe for the City of Atlanta, when we have always heretofore had a large share of their trade. We cannot explain our position to the Atlanta people and we consider it is detrimental to our business, and think no combination should have the power to force us into such a position. The same argument will apply with you as to New Orleans, St. Louis, and other places. We think this matter should be considered seriously, and some action taken that will result in reestablishing ourselves (I mean the four southern shops) in the confidence of the Atlanta people. Wistar, R. D. Wood & Company’s man, has no doubt told them all about our association, or as much as he could guess, and has worked up a very bitter feeling against us. The very fact that you have been protected and have had all their business for the past two years is proof to them that such a "combination" exists, and they state that, if they find out positively that we are working together, they will never receive a bid from any one of us again. We cannot afford to leave these people under that impression, and something ought to be done that would disprove Mr. Wistar’s statement to them. We believe that all business ought to be competitive. The fact that certain shops have certain cities "reserved" is all based upon mere sentiment, and no good reason exists why it should be so. We believe that, as a general thing, we have had our prices entirely too high, and especially do we believe this has been the case as to prices in reserved cities. The prices made at St. Louis and Atlanta are entirely out of all reason, and the result has been and always will be, when high prices are named, to create a bad feeling and an agitation against the combination. There is no reason why Atlanta, New Orleans, St. Louis, or Omaha should be made to pay higher prices for their pipe than other places near them who do not use anything like the amount of pipe and whose trade is not as desirable for many other reasons. There is no sentiment existing with us in reference to Atlanta, as we would as soon sell our pipe anywhere else, only, as stated above, it is wrong in principle that we should be forced to give up Atlanta or any other point for no good reason that we know of.

It appears quite clearly from the prices at which the Chattanooga and South Pittsburg Companies offered pipe in free territory that any price which would net them from $13 to $15 a ton at their foundries would give them a profit. Pipe was freely offered by the defendants in free territory more than five hundred miles from their foundries at less prices than their representative boards fixed prices for jobs let in cities in pay territory nearer to defendant’s foundries by three hundred miles or more.

The defendants adduced many affidavits of a formal type, chiefly from persons who had been buying pipe from defendants and other companies, who testified in a general way that the prices at which the pipe had been offered by defendants all over the country had been reasonable, but in not one of the affidavits was any attempt made to give figures as to cost of production and freight, and in not a single case were the specific instances shown by the evidence for the petitioner disputed.

There was some evidence as to the capacity of the defendants’ mills. The division of bonuses was based on an aggregate yearly output of 220,000 tons, but there are averments in the answer that indicate that this was not a statement of the actual limit of capacity, but was only taken as a standard of restricted output upon which to calculate an equitable division of bonuses. Nowhere in the large mass of affidavits is there any statement of the per diem capacity of the defendants’ mills. Taking their aggregate capacity, however, as 220,000 tons, that of the other mills in the pay territory was 170,500 tons, and that of the mills in the free territory was 348,000 tons, according to the affidavit of the chief officer of one of the defendants. Of the non-association mills in the pay territory, one was at Pueblo, Colorado, another was in the state penitentiary at Waco, Texas, and a third in Oregon. Their aggregate annual capacity was 45,500 tons. Another non-association mill was the Shickle, Howard, Harrison mill, of St. Louis, Missouri, with a capacity of 12,000 tons. John W. Harrison, who was president of this company, was also president of the Howard-Harrison mill at Bessemer, Alabama, which was a member of the association, and it appears that an order taken by the Bessemer mill at St. Louis was partly filled by the St. Louis mill. The other mills in the pay territory were one at Columbus, Ohio, with an annual capacity of 30,000 tons, one at Cleveland, Ohio, of 69,000 tons, one at New Comerstown, in northeastern Ohio, of 8,000 tons, and one at Detroit, Michigan, of 15,000 tons, and their aggregate annual capacity was 113,000 tons. In the free territory there was one mill in eastern Virginia with an annual capacity of 16,000 tons, four mills in eastern Pennsylvania with a capacity of 87,000 tons, three mills in New Jersey with a capacity of 210,000 tons, and two mills at New York, one at Utica and another at Buffalo, with an aggregate capacity of 35,000 tons.

The evidence was scanty as to rates of freight upon iron pipes, but enough appeared to show that the advantage in freight rates which the defendants had over the large pipe foundries in New York, eastern Pennsylvania, and New Jersey in bidding on contracts to deliver pipe in nearly all of the pay territory varied from $2 to $6 a ton, according to the location.

The defendants filed the affidavits of their managing officers, in which they stated generally that the object of their association was not to raise prices beyond what was reasonable, but only to prevent ruinous competition between defendants which would have carried prices far below a reasonable point; that the bonuses charged were not exorbitant profits and additions to a reasonable price, but they were deductions from a reasonable price in the nature of a penalty or burden intended to curb the natural disposition of each member to get all the business possible and more than his due proportion; that the prices fixed by the association were always reasonable and were always fixed, as they must have been, with reference to the very active competition of other pipe manufacturers for every job; that the reason why they sold pipe at so much cheaper rates in the free territory than in the pay territory was because they were willing to sell at a loss to keep their mills going, rather than to stop them; that the prices at a city like St. Louis, in which the specifications were detailed and precise, were higher because pipe had to be made especially for the job and they could not use stock on hand.