the "rule of reason," and established the principle that only contracts, etc., in unreasonable restraint of trade are forbidden by the Sherman Act.

UNITED STATES v. JOINT TRAFFIC ASSOCIATION

1

This case grew out of an agreement creating an association to fix rates and fares on competitive interstate traffic east of Chicago. The agreement, to which some thirty railroads were parties, expressly declared that it was entered into only to establish and maintain reasonable rates, fares, rules, and regulations on state and interstate traffic, and that the powers conferred on the managers should not be construed to permit violation of the interstate commerce act or any other act that might be applicable. The government instituted a suit in equity to have the agreement declared void, and to enjoin its execution. The railroads in their defense argued that the Joint Traffic Association was fundamentally different in nature_from_the Trans-Missouri Freight Association; that the former was not in restraint of trade at all, and was not therefore affected by the decision of the court to the effect that all restraints, reasonable and unreasonable, were illegal; that the Sherman Act, as it had been construed in the Trans-Missouri case, was unconstitutional; and that the decision in the Trans-Missouri case should be reconsidered by the Court. In none of these positions were they sustained by the Supreme Court. The Court proceeded at considerable length to state the interpretation which it had put on the Anti-trust Act. It referred to its decision in Hopkins v. United States, rendered on the same day. "In Hopkins v. United States we say that the statute applies only to those contracts whose direct and immediate effect is a restraint upon interstate commerce, and that to treat the act as condemning all agreements under which, as a result, the cost of conducting an interstate commercial business may be increased, would enlarge the application of the act far beyond the fair meaning of the language used. The effect upon interstate commerce must not 1171 U. S. 505-578 (October 24, 1898).

2171 U. S. 578-604.

be indirect or incidental only. An agreement entered into for the purpose of promoting the legitimate business of an individual or corporation, with no purpose to thereby affect or restrain interstate commerce, and which does not directly restrain such commerce, is not, as we think, covered by the act, although the agreement may indirectly and remotely affect that commerce. We also repeat what is said in the case above cited, that 'the act of Congress must have a reasonable construction, or else there would scarcely be an agreement or contract among business men that could not be said to have, indirectly or remotely, some bearing upon interstate commerce, and possibly to restrain it.' To suppose, as is assumed by counsel, that the effect of the decision in the Trans-Missouri case is to render illegal most business contracts or combinations, however indispensable and necessary they may be, because, as they assert, they all restrain trade in some remote and indirect degree, is to make a most violent assumption and one not called for or justified by the decision mentioned, or by any other decision of this court.'

The Court went on to say that the natural, direct, and immediate effect of competition is to lower rates, and thereby to increase the demand for commodities, the supplying of which increases commerce, and an agreement, whose first and direct effect is to prevent this play of competition, restrains instead of promoting trade and commerce. Inasmuch as the natural, direct, and necessary effect of the provisions of this agreement was to prevent any competition whatever between the parties to it for the whole time of its existence, it was illegal and void.

From this opinion Justices White, Gray, and Shiras dissented, but they wrote no dissenting opinion. Justice McKenna, who had succeeded Justice Field, took no part in the determination of the case. The decision, therefore, was 5-3.

ADDYSTON PIPE AND STEEL COMPANY 7. UNITED STATES

2

The organization and nature of the cast iron pipe pool (the Addyston Pipe and Steel Company) has already been described."

171 U. S. 568. 2175 U. S. 211-248 (December 4, 1899).

3 See p. 12.

The government instituted proceedings against this pool, and requested the court to dissolve it and perpetually to enjoin its members from transporting cast iron pipe in interstate transportation in accordance with the provisions of the agreement. The lower court dismissed the petition,' but was reversed by the Circuit Court of Appeals.2 Thereupon the Addyston Company appealed to the Supreme Court.

The defense of the Addyston Company was threefold: first, that the power of Congress to regulate interstate commerce did not include the general power to prohibit private contracts between citizens, even though such contracts resulted in a direct and substantial obstruction to or regulation of that commerce; second, that even if the combination affected interstate commerce, it was only a reasonable restraint upon a ruinous competition among themselves; and, third, that the agreement had no direct relation to interstate commerce.

The Supreme Court, in an unanimous decision, set aside all these claims. With respect to the first it held that Congress under its grant of power to regulate interstate commerce "may enact such legislation as shall declare void and prohibit the performance of any contract between individuals or corporations where the natural and direct effect of such a contract will be, when carried out, to directly, and not as a mere incident to other and innocent purposes, regulate to any substantial extent interstate commerce. . . We do not assent to the correctness of the proposition that the constitutional guaranty of liberty to the individual to enter into private contracts limits the power of Congress and prevents it from legislating upon the subject of contracts of the class mentioned. ... On the contrary, we think the provision regarding the liberty of the citizen is, to some extent, limited by the commerce clause of the Constitution, and that the power of Congress to regulate interstate commerce comprises the right to enact a law prohibiting the citizen from entering into those private contracts which directly and substantially, and not merely indirectly, remotely, incidentally

1 78 Fed. Rep. 712.

285 Fed. Rep. 271.

and collaterally, regulate to a greater or less degree commerce among the States."

The second objection, that the restraint upon interstate commerce, if any, was reasonable received scant consideration at the hands of the Court. The facts as set forth in the decision of the Circuit Court of Appeals "show conclusively," it said, "that the effect of the combination was to enhance prices beyond a sum which was reasonable."

With regard to the claim of the defendants that the combination was not a direct restraint on interstate commerce the Court said: "the direct effect of the agreement or combination is to regulate interstate commerce, and the case is therefore not covered by that of United States v. E. C. Knight Company, supra. . . . The direct purpose of the combination in the Knight case was the control of the manufacture of sugar. There was no combination or agreement, in terms, regarding the future disposition of the manufactured article; nothing looking to a transaction in the nature of interstate commerce. . . . The case was decided upon the principle that a combination simply to control manufacture was not a violation of the act of Congress, because such a contract or combination did not directly control or affect interstate commerce, but that contracts for the sale and transportation to other States of specific articles were proper subjects for regulation because they did form part of such

commerce.

"We think the case now before us involves contracts of the nature last above mentioned, not incidentally or collaterally, but as a direct and immediate result of the combination engaged in by the defendants."

This was the first decision of the Supreme Court since the Knight case that related directly to an industrial combination. Though it came too late to prevent the establishment of numerous trusts (the trust movement had already reached its crest), nevertheless it strengthened the Sherman Act, and increased the power of the government to deal with the trusts already established. In addition, it undoubtedly restrained somewhat the further creation of trusts, though it did not discourage their

formation entirely, as is shown by the fact that quite a number were organized even after the rendering of this decision.

The National Harrow Company of New Jersey owned patents on the manufacture of "float spring tooth harrows." It and Bement had entered into contracts whereunder Bement, by observing certain conditions, was licensed to manufacture and sell these implements. The conditions were, in part, that Bement would maintain the prices fixed in the license, and would not engage in the manufacture of any other type of float spring tooth harrow than that which he was authorized to manufacture. The National Harrow Company claimed that Bement had violated the contract; and it brought suit to recover damages, and to restrain the future violation thereof. The New York Court of Appeals awarded damages, whereupon an appeal was taken to the Supreme Court of the United States.

Bement in his defense argued that the contracts referred to violated the Sherman Act, and were therefore void. This, said the Court, would be a good defense, if true. The question before the Court was, therefore, did the terms of the license contracts violate the law? In endeavoring to answer this question the Court stated that the most material fact to be noted was that the agreements concerned articles protected by letters patent. The National Harrow Company was the absolute owner of the letters patent relating to the float spring tooth harrow business. "It was, therefore, the owner of a monopoly recognized by the Constitution and by the statutes of Congress. An owner of a patent has the right to sell it or to keep it; to manufacture the article himself or to license others to manufacture it; to sell such article himself or to authorize others to sell it. . . . The general rule is absolute freedom in the use or sale of rights under the patent laws of the United States. The very object of these laws is monopoly, and the rule is, with few exceptions, that any conditions which are not in their very nature illegal with regard to this kind

1 186 U. S. 70-95 (May 19, 1902). Justices Harlan, Gray, and White did not participate in this decision.