Today in 1911: SCOTUS orders breakup of Standard Oil trust

May 15, 2015

Today in Legal HistoryDuring the late 19th and early 20th centuries, breaking up monopolies gained significant support among the American public.  The Supreme Court was directly responsible for several notable break ups, not least among these was the dissolution of Standard Oil into 34 different companies – some of which include the companies now known as Exxon, Mobil, Amoco, and Chevron.

The ruling dissolving Standard Oil, Standard Oil Co. of New Jersey v. U.S., is celebrating its 104th anniversary today, having been decided on May 15, 1911.  And 104 years later, the prevailing public opinion of the decision seems to invite the view that it represented a major victory for the American public against an oppressive monopoly, harkening back to a time in U.S. history when, unlike today, the government had the wherewithal to stand up to the moneyed interests of major corporations.

But is this perception accurate?

First, a look at Standard Oil’s beginnings: John Rockefeller and a business partner started a shipping company in Cleveland, Ohio shortly before the Civil War – an event that provided a significant amount of revenue for the fledgling business.  In 1863, Rockefeller and his partner invested in another company that refined crude oil from Pennsylvania into kerosene for lamps (before automobiles, oil was used predominantly for this purpose).  By 1870, Rockefeller, along with some additional business partners, were operating two oil refineries in Cleveland – the biggest center for refineries in the nation.  This is when Standard Oil was born, incorporated in the state of Ohio.

Rockefeller secretly contracted with the Pennsylvania Railroad, which was responsible for shipping the crude oil into Cleveland from Pennsylvania, to provide him with very favorable rates (specifically, to double the freights on oil to all customers, but to repay Standard Oil one dollar for every barrel of oil it had shipped, and one dollar for every barrel any of its competitors shipped).

This massive financial edge, coupled with further shrewd business dealings on Rockefeller’s part, eventually resulted in more than 20 Cleveland refineries being intimidated into being bought out by Standard Oil by March of 1872 – an event known as the “Cleveland Massacre.”  Thanks to this mass buyout, Standard controlled 25% of the U.S. oil industry.

Rockefeller continued to acquire as many refineries as he could, and to this end, Standard began acquiring new oil pipelines, which allowed Standard to choke the oil supply off from refineries that Rockefeller wanted to buy.  Eventually, Standard came to own all pipelines in the nation.  By 1880, Standard owned or controlled 90% of the U.S. oil refining business – which actually violated its Ohio incorporation charter, which barred the company from doing business outside of the state.  In response, Rockefeller and the rest of the shareholders moved operations to New York and created a “trust” – an organization that held and directed the operations of Standard Oil and 40 other companies.

The Standard Oil trust devoted significant resources to buying out competitors or driving them out of business, often by manipulating market prices or supplies.

By the early 20th century, public sentiment had turned significantly against “trusts” like Standard Oil, thanks in part to investigative journalists.  As a result, the Justice Department was finally forced to take legal action against Standard, and, after a trial with over 400 witnesses, the trial judge ruled that the trust was operating in violation of the Sherman Antitrust Act, and recommended that it be broken up into independent, competing companies.  A unanimous federal appeals court agreed, and the Supreme Court agreed to review the case.

Popular opinion holds that the Supreme Court simply affirmed the lower courts’ opinions, leaving Standard utterly defeated.  However, while the Court did indeed affirm the lower court, it also added “unreasonable” into the reading of the Sherman Act’s prohibition on “restraint of trade or commerce among the several states.”  In other words, the Supreme Court changed the meaning of the Sherman Act from prohibiting all restraint of trade to only that which is “unreasonable.”

Thus, although the Court dissolved the trust (for being “unreasonable”), the decision made any government action against future monopolies very difficult.  What’s more, the government allowed the original shareholders of the Standard Oil trust to retain their respective share of their interest in Standard in the 34 new companies – meaning that these companies, which were expected to compete with one another, all shared the same owners.  In fact, the decision was received at the time as being very pro-“big business.”

But that’s not how popular history remembers the ruling, this so-called “victory” for the American public against repressive monopolies.  But as many modern-day Supreme Court observers will tell you, masking its true intentions behind the guise of a seemingly conflicting purpose is nothing new for the Court.