United States v. American Linseed Oil Company/Opinion of the Court
By an original bill filed June 30, 1920, the United States charged that appellees-defendants below-were parties to a combination in restraint of interstate trade and commerce forbidden by the Sherman Act, and asked that they be enjoined from continuing therein. The court below held the combination lawful and dismissed the bill. 275 Fed. 939.
The defendants are 12 corporations, commonly referred to as 'crushers,' with principal places of business in six different states, which manufacture, sell, and distribute linseed oil, cake, and meal, and Julian Armstrong, who operates at Chicago under the name 'Armstrong Bureau of Related Industries.' This bureau conducts a so-called 'exchange,' through which one subscribing manufacturer may obtain detailed information concerning the affairs of others doing like business. The defendant 'crushers' constitute one of the groups who contract for this service. They manufacture and distribute throughout the Union a very large part of the linseed products consumed therein, and prior to the challenged combination were active, unrestrained competitors. Some time in September or October, 1918, each of them entered into an identical written 'subscription agreement' with the Armstrong bureau, and a year thereafter signed another, not essentially different. The latter is summarized and quoted from below.
After stating that 'the matter contained herein is for the exclusive and confidential use of the subscriber,' the agreement recites that it and other 'crushers' of flaxseed desire promptly and economically to secure from and through the bureau the following things, 'which will promote better and more safe, sane, and stable conditions in the linseed oil, cake, and meal industry and increase its service to the commonwealth': Comprehensive data as to market, trade, and manufacturing conditions in the linseed oil industry; economies in manufacture and sale, by frank exchange of accurate information; the latest authentic information concerning the credit of buyers; a broader market for cake and meal; establishment of uniform cost accounting systems; fair and just freight tariffs and classifications; definite standardization of the products of the industry; economies in the development of foreign markets and increase of sales therein; stabilization of the flaxseed market so far as lawful; shipment of cake and meal to the consumer from the nearest point of production.
To subscribe for the bureau's service for 12 months, and thereafter from year to year, subject to cancellation by either party upon 30 days' notice, and pay therefor a sum reckoned upon the amount of flaxseed milled by it, but not less than $1,100 annually.
That all information reported or received shall be purely statistical and relevant to past operations, and no part of the bureau's machinery will be used to fix prices, divide territory, limit sales, production, or manufacture, or control competition.
That it will 'promptly make, have made, forward, and have sent in and to said bureau, as and in the form required y this agreement, full, accurate, complete, signed, and certified reports of all said sales, quotations, and offerings or other information required by the bureau, and full, correct replies or answers to any and all inquires concerning the same or seeking any information in regard thereto.'
That upon request it will 'at once turn and have turned over to the bureau's auditor for examination all vouchers, books of account, correspondence, and such other evidence or documents as he may request, or, in lieu of the same, or any part thereof, such abstracts therefrom as he may designate, verified under oath and certified by a certified public accountant in good standing.'
That, 'if any subscriber considers that it has good cause to question the report made by any other subscriber, then it may request an investigation or audit to be made by the bureau, and, if considered proper by the bureau, it will be so made,' the incident expense to be paid by the party found in error.
That it will deposit with the bureau not less than $1,000 nor more than $10,000 of Liberty Bonds, according to its milling capacity.
That, 'should the undersigned subscriber fail, in any manner whatsoever, to comply with any of the terms of this agreement, or with any and all reasonable requirements of said bureau, then it shall and does hereby forfeit to said bureau, at its election, all money paid for services and all further benefits and rights under this agreement, which forfeiture, for just cause, may be declared by said bureau, evidenced by written notice thereof mailed to said offender by United States registered mail, and such subscriber shall thereby forfeit all further right, title, or interest in and to said bonds [so on deposit] in whole or in part,' subject to the right of appeal to a council, of three subscribers, which shall have power to review the entire matter, reinstate the offender, or take such other final action as seems proper. No fine shall exceed the deposit with the bureau.
That it will (a) 'immediately, and when and as hereafter issued, deposit with the bureau all public price lists of the undersigned covering raw and boiled linseed oil, cake, and meal; (b) also to report to the bureau by prepaid telegraph, and further confirm by mail, duplicate of all quotations made at variance with above price lists, giving better terms to the contemplated purchaser than those quoted; (c) with all reports made in compliance with the above paragraph 'b' of quotations which amount to one carload or more of oil, cake, or meal there shall also be reported at the same time and in the same manner the prospective buyer's name, address, and f. o. b. point of shipment; (d) in so far as the above reports 'a,' 'b,' and 'c' do not disclose the following, the undersigned 'subscriber' agrees to give the following information in connection therewith, that is: The exact prices, terms, and discounts, and whether made to the jobber, dealer, or consumer, and in what quantities, carload or less than carload, and warehouse or mill prices; (e) also to promptly report all changes in and alterations or withdrawals of the above, of every kind whatsoever, that may be made; (f) also to promptly report by prepaid telegraph, and further confirm by mail, all orders received by the undersigned subscriber in response to special quotations made as above provided in paragraph 'c,' designating the quotation which is the basis of such order and any variance therefrom.'
That 'directly at the close of each day's business each subscriber shall mail by special delivery to the bureau a complete report of all its carload sales for that day of oil, cake, or meal, not covered by its previous daily sales reports, which report shall disclose the quantity and kind, price, and terms, and whether for immediate or future delivery, and, if no sale has been so made, this fact shall be likewise reported.'
That for the purpose of compiling a weekly sales report 'a map of the United States shall be divided int zones as agreed upon by all of the subscribers to this service, and each subscriber at the conclusion of the week shall send to the bureau by special delivery, not later than the following Monday night, a compiled report of all its sales of oil, cake, or meal into each zone made during the period covered by such report, and not previously so reported, specifically setting forth the following: (a-a) Total gallons of oil sold into each zone, also showing the total gallons and price per gallon received for such oil sold; (b-b) total tonnage of cake and meal sold into each zone, also showing total weight and price received per ton for such cake or meal sold; (c-c) sales reports on both oil, cake, and meal shall differentiate spot and future delivery, giving period of such futures.'
That before the 10th day of each calendar month it will report to the bureau the number of gallons of oil and the total tons of meal or cake on hand not covered by sale or contract.
That all information received from the bureau or any meeting of subscribers will be treated as confidential.
The bureau undertakes, 'with the help of each and every subscriber':
That it will use its best efforts to organize the linseed oil, cake, and meal industry of the United States.
That it will afford its full statistical service for the exchange of information concerning quotations, sales, shipments, production, and terms; also the service of its credit reporting department, will suggest from time to time the means for broader service; and will supply additional service whenever required, the rate to be agreed upon.
That the statistical service furnished shall be accomplished and provided by the use of special report forms conveying information on past transactions which may be modified, changed, and others provided, as experience suggests or as called for by the subscribers in any of their meetings and approved by the bureau.
That the market information received by the bureau will be cleared and relayed promptly to subscribers in good standing.
That it will send to subscribers, in the form of market letters 'news clippings' of interest to the industry and in accordance with the object and terms of the agreement.
That 'monthly meetings will be held of all subscribers hereto at some convenient center,' with a representative of the bureau, as secretary, who shall present the matters pertaining to the industry, to be therein openly discussed. Subscribers may send in notice of matters and topics for discussion, and if they accord with the agreement and object of the service the bureau shall cause the same to be docketed and presented. 'All subscribers shall report at these meetings on all matters and conditions within their knowledge affecting the industry and within the limits of this agreement, that they may be there discussed for mutual benefit.' 'Any subscriber failing to attend in person or by said representative at each of these meetings, and be in punctual and continued attendance thereon, shall be subject to a fine of $25 for each offense, the same to be collected by and payable to the bureau. This fine may be remitted by a majority vote of the members present at the meeting where it is incurred.'
That 'any subscriber who has made offerings or quotations to a prospective buyer, and is advised by such buyer that it is not to be awarded such business, shall have the right to immediately advise the bureau of such unsuccessful offering or quotation, giving all details of such bid or offering, and may then request the bureau to bulletin all of its subscribers asking specific information regarding any quotation or sale to such prospective buyer by any of the other subscribers, and the bureau, on receipt of such request, will immediately bulletin all subscribers asking therefor, and on receipt of replies will send out a compilation report thereof to all subscribers, together with the details of sale, if such a sale has been reported, so that a l subscribers, including the original inquirer, will have a complete report of this transaction. On receipt of a request for such specific information from the bureau, the undersigned subscribers will immediately reply to same, giving full information as to any quotation or sale which it may have made to such a buyer, and, if it has made none, so report.
That each subscriber will furnish the bureau, upon request, information pertaining to any buyer of linseed oil, cake, and meal, and may request the bureau to secure like information from all other subscribers, whenever it shall have an order, or an account with, or an inquiry from, the buyer, and this information will be promptly relayed to all interested subscribers.
When an adequate number of subscriptions had been obtained (September, 1918), the organization began vigorously to function according to letter and spirit of the agreement. It will suffice to state a few of the steps taken:
The United States were divided into eight zones for price quoting, and it was stipulated that each member should quote a basic price for zone No. 1, and should add thereto 1, 2, 4, 6, 7, 8, and 11 cents, respectively, for the others. At subscribers' meetings regularly held 'matters pertaining to the industry' were discussed; members were 'put on the carpet' and subjected to searching inquiry concerning their transactions. A meeting held October 29, 1919, adopted the following rule:
'In order to provide that the daily market information as relayed by the bureau shall at all times contain the fullest measure of news value, it is agreed that hereafter no council member shall dispatch changes in his prices as last filed with the bureau to more than one buyer, without instantly thereafter telegraphing such full and complete information to the bureau as, and in the form, required by the service contract.'
'resolved that it now be recorded that the recommended terms of this council for the sale of oil be 1 per cent. discount for cash settlement in 10 days, or 30 days net trade acceptance, from date of shipment, and in order that a specific list of the terms of sale of all the council members may now be compiled and distributed, it is further resolved that all council members shall send to the bureau, not later than January 27th, a full explanation of the terms of sale as quoted by them to their trade.' The bureau displayed great industry in making inquiries, collecting information, investigating the smallest derelictions, and giving immediate advice to subscribers. Hundreds of so-called 'market letters,' relating to divers transactions, were sent to subscribers. A sale of two barrels of oil below schedule was deemed worthy of special attention. Also from time to time it gave counsel concerning 'unfair merchandising' and the necessity for establishing sound policy by constructive co-operation. The following letters-224 and 245-dated February 5 and 12, 1919, are characteristic:
Will all council members please reply promptly and fully through the bureau whether or not they made the sale in question to the following?
New York, N. Y., Feb. 3, 1919.
Armstrong Bureau of Related Industries, Chicago.
Gentlemen: Our Chicago manager advises us that under date of February 1st the Enterprise Paint Mfg. Co. informed him that they had bought 10 barrels linseed oil at less than $1.46 from another crusher in the Chicago territory. Will you kindly bulletin the subscribers with a view to finding out if any of the crushers sold this lot under their published price?
Yours very truly,
American Linseed Company.
In the file of replies to-day completed, 11 subscribers state, in effect, that they have neither quoted nor sold the Enterprise Paint Mfg. Co. The sale was apparently made by subscriber No. 6, whose letter follows:
Minneapolis, Minn., Feb. 6, 1919.
Armstrong Bureau of Related Industries, Chicago.
Gentlemen: Replying to your market letter No. 224, we sold Enterprise Paint M nufacturing Company on February 3d five barrels of bleached linseed oil at $1.50, delivered their plant. This is our price in the Chicago market at the present time.
Midland Linseed Products Co.
The prices of oil became more stable.
Defendants continued with meticulous care actively to carry out the several provisions of the agreement amongst them, and that they intended further to pursue the plan unless restrained is not denied.
The obvious policy-indeed, the declared purpose-of the arrangement was to submerge the competition theretofore existing among the subscribers, and substitute 'intelligent competition,' or 'open competition'; to eliminate 'unintelligent selfishness' and establish '100 per cent. confidence'-all to the end that the members might 'stand out from the crowd as substantial co-workers under modern co-operative business methods.'
In American Column & Lumber Co. v. United States, 257 U.S. 377, 42 Sup. Ct. 114, 66 L. Ed. 284, 21 A. L. R. 1093, we considered a combination of manufacturers got up to effectuate this new conception of confidence and competition, and held it within the inhibition of the Sherman Act (Comp. St. §§ 8820-8823, 8827-8830), because of inevitable tendency to destroy real competition, as long understood, and thereby restrain trade. Our conclusion there cannot be reconciled with the somewhat earlier opinion and judgment of the court below. They are in direct conflict.
The Sherman Act was intended to secure equality of opportunity, and to protect the public against evils commonly incident to monopolies, and those abnormal contracts and combinations which tend directly to suppress the conflict for advantage called competition-the play of the contending forces ordinarily engendered by an honest desire for gain.
'The statute did not forbid or restrain the power to make normal and useful contracts to further trade by resorting to all normal methods, whether by agreement or otherwise, to accomplish such purpose. * * * The words 'restraint of trade' should be given a meaning which would not destroy the individual right to contract and render difficult if not impossible any movement of trade in the channels of interstate commerce-the free movement of which it was the purpose of the statute to protect.' United States v. American Tobacco Co., 221 U.S. 106, 179, 180, 31 Sup. Ct. 632, 55 L. Ed. 663; Ramsay v. Associated Bill Posters, 260 U.S. 501, 43 Sup. Ct. 167, 67 L. Ed. --, January 2, 1923; Federal Trade Commission v. Sinclair Refining Co., 261 U.S. 463, 43 Sup. Ct. 450, 67 L. Ed. --, April 9, 1923.
Certain it is that the defendants are associated in a new form of combination and are resorting to methods which are not normal. If, looking at the entire contract by which they are bound together, in the light of what has been done under it, the court can see that its necessary tendency is to suppress competition in trade between the states, the combination must be declared unlawful. That such is its tendency, we think, must be affirmed. To decide otherwise would be wholly inconsistent with the conclusion reached in American Column & Lumber Co. v. United States, supra.
The record discloses that defendants, large manufacturers and distributors, powerful factors in the trade, of commodities restricted by limited supplies of raw material (linseed), located at widely separated points, and theretofore conducting independent enterprises along customary lines, suddenly became parties to an agreement which took away their freedom of action by requiring each to reveal to all the intimate details of its affairs. All subjected themselves to an autocratic bureau, which became organizer and general manager, paid it large fees, and deposited funds to insure their obedience. Each subscriber agreed to furnish a schedule of prices and terms and adhere thereto, unless more onerous ones were obtained, until prepared to give immediate notice of departure therefrom for relay by the bureau. Each also agreed, under penalty of fine, to attend a monthly meeting and report upon matters of interest to be there discussed, to comply with all reasonable requirements of the bureau, and to divulge no secrets.
With intimate knowledge of the affairs of other producers, and obligated as stated, but proclaiming them selves competitors, the subscribers went forth to deal with widely separated and unorganized customers necessarily ignorant of the true conditions. Obviously they were not bona fide competitors; their claim in that regard is at war with common experience, and hardly compatible with fair dealing.
We are not called upon to say just when or how far competitors may reveal to each other the details of their affairs. In the absence of a purpose to monopolize, or the compulsion that results from contract or agreement, the individual certainly may exercise great freedom; but concerted action through combination presents a wholly different problem, and is forbidden when the necessary tendency is to destroy the kind of competition to which the public has long looked for protection. The situation here questioned is wholly unlike an exchange, where dealers assemble and buy and sell openly, and the ordinary practice of reporting statistics to collectors stops far short of the practice which defendants adopted. Their manifest purpose was to defeat the Sherman Act, without subjecting themselves to its penalties.
The challenged plan is unlawful, and an injunction should go against it, as prayed by the original bill. The cause will be remanded to the court below, with instructions to issue such an injunction, and promptly to take any further action necessary to carry this opinion into effect.