Court: Supreme Court of the United States; June 10, 1946; Federal Supreme Court; Federal Appellate Court
Mr. Justice Burton delivered the Court's opinion regarding the convictions of several tobacco companies and their officials for violating the Sherman Anti-Trust Act. The petitioners were convicted on four counts: conspiracy in restraint of trade, monopolization, attempt to monopolize, and conspiracy to monopolize, all related to interstate and foreign tobacco commerce. A total fine of $15,000 was imposed on each petitioner, aggregating $255,000. Seven other defendants were acquitted, and some were severed from the case. The Sixth Circuit affirmed the convictions on December 8, 1944. The Supreme Court granted certiorari on March 26, 1945, specifically addressing whether actual exclusion of competitors is necessary for a monopolization charge under Section 2 of the Sherman Act. Reynolds and others sought a broader review, which was denied. The opinion focuses on the definitions pertinent to monopolization, emphasizing that "monopolize" entails the collective ability to control and dominate trade to exclude competitors, while "attempt to monopolize" involves actions that could lead to monopolization and pose a significant risk of achieving it.
Ownership or control of a significant portion of a commodity by individuals or corporations is not inherently illegal; however, illegal monopolization requires proof of a conspiracy or combination aimed at securing and maintaining the power to exclude competitors substantially. The trial court instructed the jury that such a conspiracy is a crucial element of the charges in this case. The opinion assumes that the conspiracy to monopolize has been established, distinguishing this case from instances where parties inadvertently find themselves in a monopolistic position due to new discoveries or market entries. Unlike the Aluminum Co. case, where unlawful means were employed to establish a monopoly, this case involves a deliberate conspiracy to exclude competitors, as stated in the fourth count. The opinion does not resolve factual disputes but applies the law to the jury's findings, which were upheld by the Circuit Court of Appeals. The trial court's instructions did not require proof of actual exclusion of competitors by the petitioners. The central legal question is whether the established facts constitute a violation of Section 2 of the Sherman Act. Additionally, the petitioners argue that their separate convictions for conspiracy to restrain trade and conspiracy to monopolize trade lead to double jeopardy, conflicting with the Fifth Amendment. They contend that Section 2 should mandate evidence of actual exclusion to differentiate between conspiracies to monopolize and conspiracies in restraint of trade, thereby preventing multiple punishments in a single proceeding.
Petitioners argue that there is one overarching conspiracy to fix prices, referencing Braverman v. United States, while contrasting this with the existence of separate statutory offenses under the Sherman Act: a conspiracy in restraint of trade and a conspiracy to monopolize. The former is criminalized under Section 1, while the latter falls under Section 2. They assert that the Blockburger case necessitates proof of distinct conspiracies, even if their objectives overlap. The court found sufficient evidence for both conspiracies: one involving price fixing and the other aimed at monopolizing the tobacco industry by excluding competitors.
Petitioners raise concerns that the charges may result in multiple punishments, as the monopolization theory necessitates proof of a joint enterprise with the intent to exclude, arguing that the conspiracy to monopolize is inherently part of this proof. However, established legal precedent holds that conspiracy to commit a crime is a separate offense from the crime itself. For instance, petitioners could be convicted of conspiracy to monopolize without ever achieving the power needed to execute the conspiracy.
The summary of the fourth count reveals the intent to exclude competitors to maintain a monopoly, emphasizing that the jury did not need to prove intent to exclude all competitors. The statute merely requires that offenders must monopolize any part of trade or commerce. The jury's perception of the conspiracy's significance was bolstered by evidence of the petitioners' extensive and effective conduct towards competitors, rather than a formal written agreement.
The charges pertain to three years preceding the filing on July 24, 1940, primarily using data from 1937 to 1939, supplemented by earlier statistics to establish a context for potential restraint of trade or monopoly. Understanding the cigarette industry’s historical background is crucial for these cases. Although there are notable differences in the business activities of the petitioners involved, these variations do not impact the legal conclusions regarding monopolization under the Sherman Act. Referring to the actions of 'the petitioners' as a homogenous group is imprecise, given that each acted differently, particularly between corporate entities like American, Liggett, Reynolds, and American Suppliers, Inc. Reynolds, having entered the market competitively with Camel cigarettes in 1913, later collaborated with American and Liggett, leading to findings of joint violations of the Sherman Act.
Evidence regarding tobacco purchases at auction varied among the petitioners, yet all have been convicted of similar offenses. The case’s legal focus is on the monopolization rule applicable to all petitioners, simplifying references to 'petitioners' to include any or all as indicated by the record. The jury's findings indicate that the monopoly established is distinct from the dissolved American Tobacco Trust of 1911, focusing instead on the recent dominance of the petitioners over raw tobacco purchases and cigarette sales. The longstanding control by a limited number of organizations within the industry has facilitated the suppression of competition and consolidation of power against new entrants.
A longstanding friendly relationship within the cigarette industry is viewed as beneficial, provided it does not lead to illegal conduct. The existence of a community of interest among industry players fosters policies that favor insiders over outsiders. Jurors determined, based on circumstantial evidence, that a conspiracy among the major cigarette manufacturers—American, Liggett, and Reynolds—existed from 1937 to 1940, aiming to exclude competitors, thus violating the Sherman Act as interpreted by the trial court.
Data shows that while the combined market share of American, Liggett, and Reynolds decreased from 90.7% in 1931 to between 68% and 73.3% from 1937 to 1939, they consistently produced over 68% of cigarettes, with their overall production increasing from 106 billion in 1931 to approximately 125 billion by 1937. The remaining production was shared among six other companies, none of which produced more than 10.6% of the market. Furthermore, American, Liggett, and Reynolds dominated the burley blend segment, producing 80% of that specific market in 1939. In total, they accounted for over 68% of all domestic cigarette production, along with significant shares in smoking and chewing tobacco. Their dominance is underscored by the fact that the smallest of the "Big Three" produced over twice the output of the largest competitor.
Size presents a risk of abuse, particularly when past actions indicate such abuse has occurred. A jury determined that American, Liggett, and Reynolds intended to use their market power to maintain a monopoly. Their combined net worth increased significantly from $277 million in 1912 to over $551 million in 1939, with net annual earnings rising from approximately $28 million to over $75 million during the same period. Substantial advertising expenditures, exceeding $40 million annually from 1937 to 1939, were linked to increased sales and served as a deterrent to potential new competitors, emphasizing the companies' monopoly power. The trial court identified a combination or conspiracy among these companies not only to restrain trade but also to monopolize key segments of the tobacco industry. This conspiracy involved fixing and controlling prices and conditions for purchasing raw materials, specifically flue-cured and burley tobacco, essential for cigarette production. The jury's findings indicated a clear intent by the petitioners to exclude competition and significantly control both the leaf and cigarette markets.
The tobaccos relevant to these cases include flue-cured, burley, and Maryland tobaccos. Flue-cured tobacco, grown in Virginia, North Carolina, South Carolina, Georgia, and Florida, undergoes a curing process involving heated barns, with 50% to 60% of its production exported to England. Petitioners purchased 50% to 80% of the domestic flue-cured tobacco. Burley tobacco is primarily produced in Kentucky and Tennessee, cured by air exposure, with petitioners acquiring 60% to 80% of the annual crop. Maryland tobacco, cultivated in southern Maryland, is sold via auctions or packed for sale by the Maryland Tobacco Growers' Association. Petitioners purchased the majority of Maryland tobacco as well.
Tobacco crops mature at different times, with southern belts maturing first, and must be sold in the season they are harvested due to perishability and lack of redrying facilities. Petitioners maintained substantial tobacco stocks valued over $100 million each, ensuring market independence. Established auction markets for leaf tobacco have existed for many years, located in numerous towns across the flue-cured and burley regions. The Tobacco Association of the United States sets market opening dates, with flue-cured sales beginning in August and burley sales starting in December.
Evidence presented indicated a combination or conspiracy among American, Liggett, and Reynolds to fix and control prices and practices related to domestic leaf tobacco, effectively restraining trade and preventing competition. Petitioners also refused to purchase tobacco unless other petitioners were present at the markets, leading to the failure of attempts to establish new markets due to the lack of buyers.
Tobacco farmers were reluctant to sell to a market dominated by speculators and dealers, anticipating low prices that would benefit these purchasers when reselling to manufacturers. The petitioners, who sought to establish new tobacco markets, unanimously agreed on market locations and consulted on whether a community warranted a market. Evidence presented by the Government indicated that prior to market openings, the petitioners imposed price limits on buyers, which they adhered to strictly. Grades of tobacco were structured to eliminate competition among the petitioners, with deliberate price manipulation of lower-grade tobaccos to hinder competition from manufacturers of budget cigarettes.
Prior to market openings, the petitioners would convene with their buyers to set price ceilings for tobacco. In instances of tie bids, the auctioneer typically awarded the sale to the buyer who bid first, allowing petitioners' buyers to bid on multiple tobacco lots based on predetermined prices without explicit mention of them. If a petitioner was uninterested in certain tobacco offerings, their buyers would still participate in bidding to compel other petitioners to bid up to the established maximums. The focus for petitioners was on uniform pricing among themselves rather than the actual costs of leaf tobacco, ensuring no competitive edge for any single petitioner.
The top prices set by the petitioners typically became the prevailing prices on the market. Competition among petitioners was further stifled by each company defining specific grades for purchase, which were then acknowledged as unique by the others, resulting in no competition for those grades. Although these distinctions were minimal and only recognizable by experienced buyers, they did not allow any company to set arbitrary prices for their grades. Instead, other companies would bid to a point that prevented any one company from gaining an unfair advantage. Each company predetermined its desired portion of the crop prior to market openings, subsequently communicating these percentages to their buyers along with instructions to limit purchases accordingly.
Purchases of tobacco were made evenly across different markets throughout the season, allowing petitioners to acquire predetermined percentages within set price limits, indicating a stabilized market. Supervisors were employed to ensure consistent pricing across markets, adjusting bids and purchase percentages when necessary to maintain price uniformity. As manufacturers of lower-priced cigarettes began increasing production, petitioners purchased large quantities of cheaper tobacco without clarifying its intended use. Despite these purchases, the formulations for their premium brands remained unchanged. The Government alleged that these actions demonstrated a conspiracy among petitioners to restrict access to necessary tobacco for lower-priced cigarette manufacturers and to inflate prices, preventing competition with their more heavily advertised products. Jury verdicts indicated that petitioners conspired to fix prices and limit competition in the sale of their products. Products were sold to jobbers and selected dealers at list prices minus discounts, primarily benefiting small storekeepers and similar establishments. The pricing structure has remained largely unchanged since 1923, with only minor adjustments that were uniformly implemented by the companies involved. This consistency in pricing serves as circumstantial evidence of a conspiracy aimed at excluding competition from cheaper cigarettes. Notably, petitioners produced 90% of U.S. cigarette output in the two years leading up to June 1931, coinciding with the lowest prices received by tobacco farmers since 1905.
Tobacco leaf costs for the petitioners were lower than usual over the past 25 years, coinciding with declining manufacturing costs. In 1931, amidst significant economic depression, Reynolds raised the list price of Camel cigarettes from $6.40 to $6.85 per thousand without prior notice. American and Liggett followed suit with similar price increases for Lucky Strike and Chesterfield cigarettes, respectively, also to $6.85. No economic justification was provided for these increases; Reynolds' president cited a desire to show confidence in the industry, while American's president aimed to increase profits for advertising. Liggett's officials expressed skepticism, fearing competitive disadvantages without a price hike.
This collective price increase led to higher retail prices and decreased sales volume. However, in 1932, despite a decline in cigarette sales, the petitioners garnered over $100 million in profits, marking one of their most profitable years. Before this price adjustment, smaller companies had sold 10-cent cigarettes with minimal market impact. Post-increase, these lower-priced brands significantly gained market share, skyrocketing from 0.28% to 22.78% of total sales between June 1931 and November 1932.
In response to the competitive threat, the petitioners reduced the list prices of their leading brands from $6.85 to $6 and then to $5.50 per thousand in early 1933. Evidence indicated these price cuts were a direct reaction to the encroachment of 10-cent brands, as the petitioners aimed to maintain a retail price differential of no more than 3 cents to combat competition. The price reductions effectively diminished the sales of the 10-cent brands, with reports noting a significant decline following each price cut, suggesting the potential for some of these lower-priced competitors to exit the market.
The sale of 10 cent cigarette brands declined significantly from 22.78% in November 1932 to 6.43% in May 1933. In response, petitioners raised their leading brand prices from $5.50 to $6.10 per thousand in January 1934, despite selling at a loss during the lower price. Liggett had to reduce its business activities and advertising to compete at this price. Subsequent price increases occurred in 1937 to $6.25 and in July 1940 to $6.53 per thousand. The petitioners implemented strategies to limit the retail pricing of 10 cent brands, requiring retailers to maintain a maximum 3 cent price differential compared to their premium brands. Liggett's salesmen were instructed to enforce this pricing structure, regardless of whether it meant raising or lowering prices. They labeled any greater differential as "discriminatory" because it would result in higher profits for dealers on premium brands.
During a price war, the petitioners promoted their brands at 10 cents through posters and various incentives, including discounts, advertising displays, and cash subsidies. They also employed punitive measures against non-compliant dealers, such as revoking purchase privileges, altering credit terms, and utilizing price cutters to enforce compliance with their pricing scheme. Evidence indicated that when dealers tried to order cigarettes at unchanged prices from one petitioner's brand after a price increase announcement from another, their orders were not filled until prices were raised, effectively coordinating price changes.
The Circuit Court of Appeals determined that the jury's verdicts were supported by sufficient evidence regarding these practices. The key legal question presented to the Court is whether the actual exclusion of competitors is a necessary component of monopolization claims under Section 2 of the Sherman Act.
Actual exclusion of competitors is not a necessary element for establishing a monopolization crime under Section 2 of the Sherman Act. The jury instructions in the cases reviewed were deemed correct, emphasizing that a combination or conspiracy to acquire or maintain the power to exclude competitors constitutes a violation, provided there is intent and capability to exercise that power. The statute condemns the result of the conspiracy rather than the means used to achieve it, and acts that may appear lawful can still contribute to an unlawful conspiracy if they serve the conspiratorial objective. No formal agreement is needed to establish an unlawful conspiracy; evidence can be inferred from the actions of the accused. A shared purpose or common understanding among conspirators can justify the conclusion of a conspiracy. Importantly, proof of actual exclusion or exertion of power is not required to sustain a monopolization charge. Historical cases demonstrate that the mere acquisition of control, even if not actively used to exclude competition, can violate the Sherman Act if it poses a threat to interstate commerce. The existence of a combination that restrains trade or attempts monopolization, regardless of any actual harm, also falls under the Act's prohibitions.
Determining the existence of a monopoly relies on the power to raise prices or exclude competition, rather than on the actual exercise of that power. Legal precedents, including *United States v. American Tobacco Co.* and *United States v. Patten*, establish that the mere existence of such power constitutes monopolization under federal law, particularly when a small group can control prices in interstate commerce. The recent *United States v. Aluminum Co. of America* case approached this issue closely and was unique due to its decision being final and unreviewable by the Supreme Court. The court emphasized that unchecked economic power can stifle innovation and competition, and that the Sherman Anti-Trust Act aims to combat this. It is noted that all contracts fixing prices are prohibited, and while a monopoly involves a greater power to control prices, its existence without action is a formal distinction. Once a monopoly begins to sell, the power to set prices and its exercise become intertwined. Therefore, it is inconsistent to condemn price-fixing contracts but not monopolies, as the latter represent a complete control that encompasses such contracts. Finally, while the Aluminum Company may hold monopoly power, it does not necessarily mean it has monopolized the ingot market, as that condition may not have been self-initiated.
A combination of existing smelters controlling 90% of aluminum ingot production would constitute market monopolization, regardless of whether it ends current competition or prevents future entrants. The Clayton Act's language indicates that both actions harm competition. The text argues that excluding competitors can occur through industrial actions that are not solely aimed at competition prevention; to limit exclusion to only dishonest tactics would undermine the Act's intent. Monopolization requires both the power and intent to monopolize, and it is illogical to demand a specific intent, as monopolists typically understand their actions. The petitioners in the cases discussed have been found to conspire to create and maintain a monopoly, thus falling under the Sherman Act's prohibitions. The trial court's instructions regarding the Act were upheld, with Justice Frankfurter agreeing but suggesting broader review of jury selection issues. Justices Reed and Jackson did not participate in the case. Section 2 of the Sherman Act criminalizes monopolization efforts and prescribes penalties. The defendants in this case are accused of unlawfully monopolizing interstate and foreign tobacco trade, acting in concert to dominate and exclude competition, with the intent and result of achieving such control.
Unlawful monopolization in the tobacco industry has allowed a few companies to control a critical bottleneck in the distribution of a major farm commodity, negatively impacting the incomes of tobacco growers and distributors while depriving consumers of the benefits of competition. Legal standards dictate that a criminal conviction requires relevant evidence for a jury to conclude guilt beyond a reasonable doubt, as established in Mortensen v. United States. Additionally, there are statutes mandating that non-capital offenses must be prosecuted within three years of the crime.
The historical context includes the dissolution of the tobacco trust in 1911, as detailed in United States v. American Tobacco Co., which resulted in the separation of assets among several companies without evidence of ongoing common ownership or interlocking management. The tobacco industry has shifted from primarily distributing various tobacco products to focusing predominantly on cigarettes. In 1910, less than 6% of domestic tobacco was used for cigarettes, while by 1939, that figure rose to 57.5%. The 1911 decree allocated specific cigarette brands to various companies, while Reynolds, initially minor in the industry, successfully introduced Camel cigarettes in 1913, innovatively using burley tobacco and flavored processing, which significantly boosted its competitive presence.
In 1919, Reynolds accounted for approximately 40% of all domestic cigarette sales in the United States, with its production in 1917 exceeding the national output from 1911 by 50%. Notable brand developments during this period included American's introduction of Lucky Strikes in 1916, Liggett's transition of Chesterfield to a burley blend, and Lorillard's launch of Old Gold cigarettes in 1926. The key players in the cigarette industry at that time, referred to as the "Big Three," included American (with brands like Lucky Strike and Pall Mall), Liggett (with Chesterfield and others), and Reynolds (with Camel and various tobacco products). Additional companies mentioned are Philip Morris (with Philip Morris and Paul Jones), British-American Tobacco (including Brown & Williamson), and several others producing lower-priced cigarettes. The document also outlines that appeals of equity suits involving the Sherman Anti-Trust Act can only be made to the Supreme Court within sixty days of a district court's final decree. If the Supreme Court lacks a quorum, the case is transferred to the circuit court of appeals, which will appoint three judges to hear the appeal, and their decision will be final with no further review.
The provision from 32 Stat. 823, amended by 58 Stat. 272 and noted in 15 U.S.C. Supp. IV. 29, was added by Public Law 332 on June 9, 1944, and made applicable to all cases pending before the U.S. Supreme Court at the time of enactment. The case against the Aluminum Company of America was among those pending and was certified to the Circuit Court of Appeals for the Second Circuit on June 12, 1944, due to a lack of a quorum of Justices to consider it. This case was tried by senior judges Learned Hand, Swan, and Augustus N. Hand, marking it as the only case adjudicated under this provision. Following the death of petitioner Edward H. Thurston in case No. 19, the Court granted a motion to dismiss the writ of certiorari concerning him on February 11, 1946. The Circuit Court of Appeals and the District Court for the Eastern District of Kentucky are tasked with taking further necessary actions in accordance with the law and justice, as referenced in the cases Singer v. United States and United States v. Johnson.
