United States v. Delaware, Lackawanna Western Railroad Company

• Decision Date: 21 June 1915
• Docket Number: No. 517,517
• Citation: 238 U.S. 516,35 S.Ct. 873,59 L.Ed. 1438
• Parties: UNITED STATES, Appt., v. DELAWARE, LACKAWANNA, & WESTERN RAILROAD COMPANY and the Delaware, Lackawanna, & Western Coal Company
• Court: U.S. Supreme Court

238 U.S. 516

35 S.Ct. 873

59 L.Ed. 1438

UNITED STATES, Appt.,

v DELAWARE, LACKAWANNA, & WESTERN RAILROAD COMPANY and the Delaware, Lackawanna, & Western Coal Company.

No. 517.

Argued December 9 and 10, 1914.

Decided June 21, 1915.

[Syllabus from pages 516-518 intentionally omitted] The appellee was chartered not only as a railroad company, but was authorized to mine and sell coal. The commodity clause of the Hepburn act of 1906 [34 Stat. at L. 584, chap. 3591, Comp. Stat. 1913, § 8563] made it unlawful for the carrier to haul its own coal beyond the limits of the state of Pennsylvania, and desiring to continue the business of mining and transporting coal, the railroad adopted a plan under which it was to make a sale and devest itself of title to the coal, at the mouth of the mines, before transportation began. Accordingly it caused to be incorporated, under the laws of New Jersey, the Delaware, Lackawanna, & Western Coal Company with a capital stock of $6,800,000, divided into shares of $50 each. The railroad company then invited its own stockholders to subscribe to the capital stock of the coal company at the rate of one share of the latter for each four shares of the former. Ninety-nine per cent of these stockholders did, as was expected, subscribe for the stock of the coal company, their subscriptions being paid for in full out of a cash dividend of $13,600,000 previously declared by the railroad company. The new corporation was then organized by electing the vice president of the railroad company as president of the coal company, and other officers and directors of the coal company were also officers and directors of the railroad company.

As soon as the organization was completed, the railroad company prepared and submitted to the coal company a contract by which the railroad company, reserving what it needed for its railway locomotives, 'agreed to sell and the coal company agreed to buy, f. o. b. the mines, all coal which, during the term of the contract, the railroad company should produce from its own mines or purchase from anyone else.' The price for prepared sizes—the more important commercial coal—was fixed at 65 per cent of the price in New York on the day of delivery at the mines. The railroad company also leased to the coal company all its trestles, docks, and shipping facilities.

The contract—thus prepared by the railroad company—was then signed by both corporations, and, on August 2, 1909, the coal company took possession of the leased property; those who had been agents of the railroad in its sales department became agents of the coal company in its sales department, and the two corporations, with managing officers in common, also had offices in common in the city of New York.

Thereafter the railroad company continued its mining business, annually producing about 7,000,000 tons and purchasing about 1,500,000 tons from operators whose mines were located on its railway. After retaining what was needed for use on its railway engines, it sold the balance, aggregating about 7,000,000 tons, to the coal company at the contract prices f. o. b. the mines. The coal thus sold by the railroad company was then transported by the railroad company to destination, where it was delivered to the coal company, which paid the regular tariff freight rate and the contract prices on the 20th of each month. This course of dealing continued until February, 1913, when the government filed a petition, against both corporation, alleging that the two were practically one, and attacking the validity of the contract.

The petition alleged that the coal business was extremely profitable, and in order to continue it, in all its branches, the railroad company (which was controlled by a group of 25 persons, owning a majority of its stock) had determined 'to cause the organization of a new corporation to be under their own control, whose stockholders would be substantially the same as those of the railroad company, and through it to conduct the business theretofore carried on by the railroad sales department, thus securing, in effect, the continued unity of mining, transporting, and selling, in substance, as theretofore, and depriving the public of the benefits which the commodity clause was intended to produce.'

The petition alleged that when the contract was made, in August, 1909, the stockholders of the two corporations were practically identical; that a large majority of the stock in both is still owned by the same persons, and that by virtue of the terms and provisions of the contract the railroad had such an interest in the coal as to make it unlawful for it to transport such commodity in interstate commerce.

It was further charged that the transportation of the coal sold to the coal company was not only a violation of the commodity clause, but that the contract tended to create a monopoly and unlawfully to hinder and restrain trade in coal, in violation of the provisions of the anti-trust act [26 Stat. at L. 209, chap. 647, Comp. Stat. 1913, § 8820]. In this connection it was also charged that the railroad company not only mined coal, but purchased the product of other mines located along its railway, and had acquired the output of other collieries on its line, giving to it the disposition of more than 90 per cent of the market, with power to arbitrarily fix prices. The petition averred:

'By reason of the arrangements described, the support of the railroad company, and the peculiar advantages and facilities acquired, the coal company at once secured and has ever since maintained an unlawful monopoly of the sale of coal produced along defendant's railroad, and has completely dominated the markets at all points thereon not reached by any other railroad. Its position, power, and support, render effective competition with it practically impossible, and the monopoly which it now holds will continue indefinitely unless restrained.'

Both defendants answered. There was practically no dispute as to the facts, though both corporations contended that the facts alleged and proved did not support the legal conclusions sought to be drawn therefrom by the government. Each insisted that the two corporations were separate in law and in fact; contended that the railroad company had no interest in the coal, and insisted that the coal company acted independently of the railroad company and was not subject to its control.

At the hearing there was evidence that at the date of the making of the contract all except 2,249 shares in the coal company were held by those who held stock in the railroad company. By reason of sales of both stocks, it appeared that in October, 1913, 88,116 shares of the railroad stock were held by those who were not then interested in the coal company, and 6,907 shares of stock in the coal company were held by those who were not owners of the railroad stock.

There was also evidence that many of the officers of the coal company were not officers of the railroad company; that the management of the two corporations was separate and distinct; that the coal company kept its own books, deposited its funds in its name in banks of its own choosing, and that the profits went solely to its own stockholders. The coal company paid the same rates of freight and demurrage as other shippers, and received no discriminating favors from the railroad company. In 1910 the amount paid to the railroad for the purchase price of coal under the contract was about $20,000,000, and for the freight thereon about $14,000,000. Since the contract was made the coal company has bought coal from other persons, the quantity being 3,847 tons in 1909; 2,267 tons in 1910; 6,600 tons in 1911; 92,004 tons in 1912; 310,645 tons in the first ten months in 1913.

There are about 70,000,000 tons of anthracite coal produced annually, of which 20,000,000 tons are sold at tidewater. Of the 7,000,000 tons sold by the Delaware, Lackawanna, & Western Railroad Company about 2,000,000 tons are transported to tidewater points, and of this 500,000 tons are prepared sizes. The coal company at large expense bought land, built trestles and storage facility at various points in addition to those leased to it by the railroad company.

The district court held that the business of the two corporations had not been so commingled as to make their affairs indistinguishable; that they are two distinct and separate legal beings actually engaged in separate and distinct operation, and that the railroad does not own the coal, either in whole or in part, during its carriage, but has in good faith dissociated itself therefrom before the beginning of the act of transportation.

In answer to the claim that the railroad will be the gainer from a high price at tide, since this will necessarily increase the price at the mines, and therefore that this interest in the price is such an interest in the coal itself as is condemned by the statute, the court said: 'Undoubtedly it is correct to say that the railroad has an interest in the price, but . . . that 'interest' merely means that the railroad will gain by a higher price at tide, and does not mean that the railroad has power to control the coal or the price for which it sells.' The alleged power to increase the price by increasing the freight was held to be ineffective because freight rates were controlled by the Commerce Commission. 'The railroad company does not fix prices; it does not decide how much coal is to go to New York harbor, and it does not determine the sum for which the coal is to be sold at that point.' The 65 per cent basis had its origin many years ago, and affords a convenient basis for calculating the price to be paid for future deliveries. The railroad retains nothing more after the title passes to the coal company at the mines than an interest in the price, and this is not the same thing as an interest in the coal. The commodity clause deals with an 'in- terest, direct or indirect,' in the commodities...