Standard Oil Co Indiana v. United States 13 15, 1931

• Decision Date: 13 April 1931
• Docket Number: No. 378,378
• Parties: STANDARD OIL CO. (INDIANA) et al. v. UNITED STATES. Argued Jan. 13-15, 1931
• Court: U.S. Supreme Court

283 U.S. 163

51 S.Ct. 421

75 L.Ed. 926

STANDARD OIL CO. (INDIANA) et al.

v UNITED STATES.

No. 378.

Argued Jan. 13-15, 1931.

Decided April 13, 1931.

[Syllabus from pages 163-165 intentionally omitted] Messrs. C. B. Ames, of Oklahoma City, Okl., Charles Neave, of New York City, and Louis L. Stephens, of Chicago, Ill, for primary appellants.

Mr. G. H. Dorr, of New York City, for secondary appellants.

The Attorney General and Mr. Thomas D. Thacher, Sol. Gen., of Washington, D. C., for the United States.

Mr. Justice BRANDEIS delivered the opinion of the Court.

This suit was brought by the United States in June, 1924, in the federal court for northern Illinois, to enjoin further violation of section 1 and section 2 of the Sherman Anti-Trust Trust Act July 2, 1890, c. 647, 26 Stat. 209 (15 USCA §§ 1, 2). The violation charged is an illegal combination to create a monopoly and to restrain interstate commerce by controlling that part of the supply of gasoline which is produced by the process of cracking. Control is alleged to be exerted by means of seventy-nine contracts concerning patents relating to the cracking art. The parties to the several contracts are named as defendants. Four of them own patents covering their respective cracking processes, and are called the primary defendants. Three of these, the Standard Oil Company of Indiana, the Texas Company, and the Standard Oil Company of New Jersey, are themselves large producers of cracked gasoline. The fourth, Gasoline Products Company, is merely a licensing concern. The remaining forty-six defendants manufacture cracked gasoline under licenses from one or more of the primary defendants. They are called secondary defendants.

Upon the filing of the answers, which denied the violation charged, the case was referred to a special master to take and report the evidence to the court, together with his findings of fact and conclusions of law. Although the Attorney General had filed an expediting certificate¹ on February 24, 1925, it was not until January 20, 1930, that the District Court entered its final decree. This hearings before the master extended over nearly three years. The evidence, including 327 exhibits, fills more than 4,300 pages of the printed record. The master's report, which occupies 240 pages, is devoted largely to a discussion of the seventy-three patents and seventy-nine license contracts. The master found that the primary defendants had not pooled their patents relating to cracking processes; that they had not monopolized or attempted to monopolize any part of the trade or commerce in gasoline; and that none of the defendants had entered into any combination in restraint of trade. He recommended that the bill be dismissed for want of equity. After a hearing, on 273 exceptions filed by the Government, the District Court granted some of the relief asked. 33 F. (2d) 617. The primary defendants and twenty-five of the secondary defendants appealed to this Court. An order of severance was entered; and the injunction was stayed.

The issues to which most of the evidence was addressed have been eliminated. The violation of the Sherman Act now complained of rests substantially on the making and effect of three contracts entered into by the primary defendants. The history of these agreements may be briefly stated. For about half a century before 1910, gasoline had been manufactured from crude oil exclusively by distillation and condensation at atmospheric presure. When the demand for gasoline grew rapidly with the widespread use of the automobile, methods for increasing the yield of gasoline from the available crude oil were sought. It had long been known that from a given quantity of crude, additional oils of high volatility could be produced by 'cracking'; that is, by applying heat and pressure to the residum after ordinary distillation. But a commercially profitable cracking method and apparatus for manufacturing additional gasoline had not yet been developed. The first such process was perfected by the Indiana Company in 1913; and for more than seven years this was the only one practiced in America. During that period the Indiana Company not only manufactured cracked gasoline an large scale, but also had licensed fifteen independent concerns to use ats process and had collected, prior to January 1, 1921, royalties aggregating $15,057,432.46.

Meanwhile, since the phenomenon of cracking was not controlled by any fundamental patent, other concerns had been working independently to develop commercial processes of their own. Most prominent among these were the three other primary defendants, the Texas Company, the New Jersey Company, and the Gasoline Products Company. Each of these secured numerous patents covering its particular cracking process. Beginning in 1920, conflict developed among the four companies concerning the validity, scope, and ownership of issued patents. One infringement suit was begun; cross-notices of infringement, antecedent to other suits, were given; and interferences were declared on pending applications in the Patent Office. The primary defendants assert that it was these difficulties which led to their executing the three principal agreements which the United States attacks; and that their sole object was to avoid litigation and losses incident to conflicting patents.

The first contract was executed by the Indiana Company and the Texas Company on August 26, 1921; the second by the Texas Company and Gasoline Products Company on January 26, 1923; the third by the Indiana Company, the Texas Company, and the New Jersey Company, on September 28, 1923. The three agreements differ from one another only slightly in scope and terms. Each primary defendant was released thereby from liability for any past infringement of patents of the others. Each acquired the right to use these patents thereafter in its own process. Each was empowered to extend to independent concerns, licensed under its process, releases from past, and immunity from future claims of infringement of patents controlled by the other primary defendants. And each was to share in some fixed proportion the fees received under these multiple licenses. The royalties to be charged were definitely fixed in the first contract; and minimum sums per barrel, to be divided between the Taxes and Indiana companies, were specified in the second and third. These royalty provisions, and others, will be detailed later.

First. The defendants contend that the agreements assailed relate solely to the issuance of licenses under their respective patents; that the granting of such licenses, like the writing of insurance, New York Life Insurance Co. v. Deer Dodge County, 231 U. S. 495, 34 S. Ct. 167, 58 L. Ed. 332, is not interstate commerce; and that the Sherman Act is therefore inapplicable. This contention is unsound. Any agreement between competitors may be illegal if part of a larger plan to control interstate markets. Montague & Co. v. Lowry, 193 U. S. 38, 24 S. Ct. 307, 48 L. Ed. 608; Shawnee Compress Co. v. Anderson, 209 U. S. 423, 28 S. Ct. 572, 52 L. Ed. 865. Such contracts must be scrutinized to ascertain whether the restraints imposed are regulations reasonable under the circumstances, or whether their effect is to suppress or unduly restrict competition. Chicago Board of Trade v. United States, 246 U. S. 231, 238, 38 S. Ct. 242, 62 L. Ed. 683; Paramount Famous Lasky Corp. v. United States, 282 U. S. 30, 43, 51 S. Ct. 42, 75 L. Ed. 45. Moreover, while manufactre i § not interstate commerce, agreements concerning Ed. 145. Moreover, while manufacture is to fix the price of goods entering into interstate commerce, or which have been executed for that purpose, are within the prohibitions of the Act. Swift & Co. v. United States, 196 U. S. 375, 397, 25 S. Ct. 276, 49 L. Ed. 518; Coronado Coal Co. v. United Mine Workers, 268 U. S. 295, 310, 47 S. Ct. 551, 69 L. Ed. 963; United States v. Trenton Potteries Co., 273 U. S. 392, 47 S. Ct. 377, 71 L. Ed. 700, 50 A. L. R. 989. And pooling arrangements may obviously result in restricting competition. Compare Northern Securities Co. v. United States, 193 U. S. 197, 326, 24 S. Ct. 436, 48 L. Ed. 679. The limited monopolies granted to patent owners do not exempt them from the prohibitions of the Sherman Act and supplementary legislation. Standard Sanitary Manufacturing Co. v. United States, 226 U. S. 20, 33 S. Ct. 9, 57 L. Ed. 107; Virtue v. Creamery Package Manufacturing Co., 227 U. S. 8, 33 S. Ct. 202, 57 L. Ed. 393; Compare United Shoe-Machinery Co. v. United States, 258 U. S. 451, 42 S. Ct. 363, 66 L. Ed. 708; United States v. General Electric Co., 272 U. S. 476, 47 S. Ct. 192, 71 L. Ed. 362.² Hence the necessary effect of patent interchange agreements, and the operations under them, must be carefully examined in order to determine whether violations of the Act result. Standard Sanitary Manufacturing Co. v. United States, 226 U. S. 20, 33 S. Ct. 9, 57 L. Ed. 107.³

Second. The Government contends that the three agreements constitute a pooling by the primary defendants of the royalties from their several patents; that thereby competition between them in the commercial exercise of their respective rights to issue licenses is eliminated; that this tends to maintain or increase the royalty charged secondary defendants and hence to increase the manufacturing cost of cracked gasoline; that thus the primary defendants exclude from interstate commerce gasoline which would, under lower competitive royalty rates, be produced; and that interstate commerce is thereby unlawfully restrained. There is no provision in any of the agreements which restricts the freedom of the primary defendants individually to issue licenses under their own patents alone or under the patents of all the others; and no contract between any of them, and no license agreement with a secondary defendant executed pursuant thereto, now imposes any restruction upon the quantity of...