KNIGHT COMPANY, E. C., UNITED STATES v. 156 U.S. 1 (1895)

The issue in the Supreme Court's first interpretation of the sherman antitrust act hung on the lawfulness of the Sugar Trust's acquisition of its competitors, and the decision nearly eviscerated the act. An 8–1 Court used the doctrine of dual federalism in dismissing a government suit to dissolve the trust.

When the American Sugar Refining Company (the Sugar Trust) acquired four Philadelphia refineries in 1892 it controlled ninety-eight percent of domestic sugar manufacturing. Attorney General richard olney, who inherited the case from his predecessor, believed that the Sherman Act was founded on a false economic theory; he believed that free competition had been "thoroughly discredited" and that the act should have regulated trusts as a natural development, not prohibited them. There is, however, little evidence of deliberate carelessness in Olney's preparation of the case. Although the majority opinion commented upon a lack of evidence to demonstrate a restraint of trade, the government never believed that such a showing was necessary. Prior decisions had clearly held sales to be a part of commerce; the majority would admit as much here, and a lower court conceded that the trust had sought control of both refining and sales. Clever defense strategy successfully shifted the Court's attention from restraint of interstate commerce to a consideration whether the commerce power extended to manufacturing.

Chief Justice melville w. fuller's opinion for the Court endorsed the defendants' argument. By repeating that manufacturing was separable from commerce, the Court made a formally plausible distinction based solely on precedent. (See kidd v. pearson.) Although the Sugar Trust had monopolized manufacturing, the Court found no Sherman Act violation because the acquisition of the Philadelphia refineries involved intrastate commerce. Although manufacturing "involves in a certain sense the control of its disposition … this is a secondary and not the primary sense." The trust did not lead to control of inter-state commerce and so "affects it only incidentally and indirectly." This directindirect effects test of the reach of federal regulation had been mentioned in earlier cases (see effects on commerce) and was here employed to reach unrealistic ends: "Contracts, combinations, or conspiracies to control domestic enterprise in manufacture, agriculture, mining, production in all its forms, or to raise or lower prices or wages, might unquestionably tend to restrain external as well as domestic trade, but the restraint would be an indirect result, however inevitable and whatever its extent, and such result would not necessarily determine the object of the contract, combination or conspiracy."

justice john marshall harlan, dissenting, posed the basic question: "What, in a legal sense, is a restraint of trade?" The trust was in business to sell as well as manufacture sugar, and most of its sales obviously constituted interstate commerce. Relying on gibbons v. ogden (1824), Harlan posited a broad view of the commerce power. Any obstruction of commerce among the states was an impairment of that commerce and must be treated as such. The majority's construction of the Sherman Act left the public "at the mercy of combinations." The Sugar Trust's inevitable purpose of preventing free competition doomed it as a restraint of trade. "The general government is not placed by the Constitution in such a condition of helplessness that it must fold its arms and remain inactive while capital combines … to destroy competition." Harlan correctly believed that the issue should not have been the contracts of acquisition but rather the trust's control over commerce in sugar.

By excluding manufacturing monopolies from the scope of the antitrust act, the decision in Knight cleared the way for the greatest merger and consolidation movement in American history. Chief among the industries taking advantage of the opportunities given them by the Supreme Court were manufacturing and the railroads. Such massive combines as United States Steel Corporation, American Can Company, International Harvester, and Standard Oil of New Jersey can trace their origins to this period. From 1879 to 1897 fewer than a dozen important combinations had been formed, with a total capital of around one billion dollars. Before the century ended, nearly two hundred more combinations formed, with a total capital exceeding three billion dollars. Of some 318 corporations in business in 1904, nearly seventy-five percent had been formed after 1897.

The Court's opinion also seriously injured the concept of national supremacy; Fuller's distinction between production and commerce lasted until 1937. In the meantime, the Court had created what edward s. corwin called a "twilight zone" in which national regulation of corporations was uncertain and haphazard. Although the Court would apply the Sherman Act to railroads within two years (see united states v. transmissouri freight association), not until the reinterpretation in northern securities co. v. united states (1904) would the Sherman Act become an effective tool against big business.

David Gordon
(1986)

Bibliography

Eichner, Alfred S. 1969 Emergence of Oligopoly: Sugar Refining as a Case Study. Westport, Conn.: Greenwood Press.