United States v. E. C. Knight Co. (1895)

Summary

United States v. E.C. Knight Co. was a U.S. Supreme Court case that limited Congressional Authority under the Sherman Antitrust Act of 1890 and its application of the Commerce Clause (Article I, Section 8) of the United States Constitution. Through a narrow interpretation of the Commerce Clause Chief Justice Melville Fuller along with 7 concurring Justices asserted that manufacturing was not an element of commerce that could be regulated by Congress pursuant to the Commerce Clause.

The Sherman Antitrust Act of 1890 was established to regulate trust (monopolies) formation that had seen an increase in the past decade which in turn had been burdening competition and interstate commerce. The rise in powerful trusts barred entry into the free market and allowed small groups of industry elites to regulate prices and supply. This legislation made it illegal to create trusts, combinations (monopolies), or pursue any action that would restrain interstate and foreign trade. This landmark case was the first in which the Sherman Antitrust Act was applied. 

In an 8-1 decision The Supreme Court of the United States ruled in favor of E.C. Knight Company. The majority opinion, written by Chief Justice Fuller, uses reasoning that manufacturing should be regulated by the state, and declared that there is a distinction between commerce, which is defined as the buying and selling of goods, and manufacturing. He further declared that manufacturing has no hand in commerce in the determination of congressional power. Chief Justice Fuller further stated that Congress is granted the power to suppress monopolies of commerce, but there is no enumerated or implied power to regulate monopolies of manufacturing due to the distinction between manufacturing and commerce. In his strong and influential dissenting opinion Justice Harlan argued that manufacturing affected interstate commerce and therefore should be able to be regulated by the government. 

Timeline 1

Background

The 1890s and decades prior were a time of economic fluctuation uncertainty in the United States and abroad. Many corporations saw opportunity amidst the hardships that competitors and smaller companies within their industry were facing. This period saw an increase in trust formation and the unprecedented growth of large companies gaining extensive control over their respective markets. Congress sought to limit the growth and unethical formation of these trusts and passed the Sherman Antitrust Act of 1890This act prohibited business actions considered as anti-competitive by the Federal Government and allowed for congressional regulation under the powers of the Commerce Clause.

The creation of monopolies was now a felony. In the late 19th century the government was concerned with the creation of monopolies and the loss of competition in the free market. If the federal government had made the connection between the formation of the manufacturing monopoly and interstate commerce, they would have the constitutional power to regulate the local monopoly.

Not long after the passing of the Sherman Antitrust Act was passed, 1892, the American Sugar Refining Company bought most of the stock from the four major sugar-refining companies in Philadelphia. After the purchase the American Sugar Refining Company gained control of 98% of the national sugar manufacturing industry. President Grover Cleveland immediately directed the Attorney General to prosecute the E. C. Knight Company under the Sherman Antitrust Act. The government’s goal was to make the purchase of the stocks invalid and break down the monopoly.

President Grover Cleveland, serving his second term at the time (1893 – 1897), ordered Attorney General Richard Olney to prosecute the E.C. Knight Company under Sherman Antitrust Act.

Procedural History

Certificate of Incorporation, American Sugar Refining Company 

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August 15, 1884 – Filed Jan 9, 1891

 

Bill of Complaint

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– Filed March 2, 1892

Supreme Court Appellant Record Transcript (1895)

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Circuit Court 3rd Circuit – January 30, 1894

United States v. E.C. Knight co. et al.

Judge William Butler – Text of Opinion

Circuit Court 3rd Circuit – March 26, 1894

United States v. E.C. Knight co. et al.

Judge George M. Dallas – Text of Opinion

The Circuit Court twice held that the combination or “conspiracy to restrain or monopolize trade or commerce” violated no terms of the Commerce Clause and dismissed the bill. The Federal Government appealed to the Supreme Court.

Supreme Court – Argued: October 24, 1894 Decided: January 21, 1895

United States v. E.C. Knight company

Appeal from the Circuit court of appeals for the third circuit. No. 657

Issues

In the case of U.S. v. E.C. Knight Co. 156 U.S. 1 (1895), the court addressed whether or not Congress holds the power to halt a manufacturing monopoly in the states under the Sherman Antitrust Act of 1890.

Arguments by Petitioner

From the petitioner, United States:

  • Protested against the E. C. Knight Company, for violating the Sherman Antitrust Act, which enforces the protection of both commerce and trade against unlawful restraints and monopolies.
  • Argues that the American Sugar Refining Company, could gain complete control of the price of sugar in the United States, and from this process monopolize the manufacture of sugar in the United States.
  • Alleged that the American Sugar Refining Company with the help of the other defendants, ultimately wanted to restrain trade and commerce of sugar with in the United States and other foreign nations. The purpose of this action, would drive up the regular price of sugar, allowing for increased profit to be gained from State of Pennsylvania, all of the other States within United States, and from all other purchasers.

 

Arguments by Respondent

From the respondent, E. C. Knight Company:

  • Argues that the results of transaction, which leads to the creation of a monopoly, was “necessary of life”, thus could not be suppressed under the provisions of the Sherman Antitrust Act.
  • Denys that the purchase of Philadelphia refineries by a New Jersey corporation, and business of sugar refining in Pennsylvania, holds any direct relation to commerce between the United States nor any foreign nations.

Decision

No, in a 8-1 vote, with Chief Justice Fuller delivering the opinion of the court. The court ruled that manufacturing activity is apart of intrastate commerce. The Sherman Antitrust Act of 1890 was irrelevant in this case. Justice Harlan dissented in this case because he felt that the E.C. Knight Company was still a monopoly. Being that the E.C. Knight Company controlled over 98% of the sugar refining industries, Harlan felt that this act directly affected persons of all states, finally having an effect on interstate commerce. Congress, in Harlan’s eyes, could cease any activity if it wanted among the states.

Majority Opinion (Fuller)

The court reasoned that the Commerce Clause exclusively authorized federal regulation of the buying, selling, and transportation of goods, as stated in the Sherman Antitrust Act of 1890, between states. Congress was deficient under the Constitution to impose the Sherman Antitrust Act of 1890 against the sugar refinery. Congress was permitted only, under the Commerce Clause to regulate “Interstate Commerce”, however, in the case of E.C. Knight Company (1895), manufacturing operations was intrastate, so therefore, the court asserted that because operations were in one state, Congress lacked power. Congress regulates interstate commerce, not intrastate commerce. Congress regulates the buying, selling, and transportation of goods between states, not manufacturing of good in one state. In this case, intrastate commerce is to be left up to the police powers of the state, hence, Congress lacks jurisdiction.

Dissenting Opinion (Harlan)

Justice Harlan argued that the balance and preservation of authority between the States and the Government is clearly outlined in the Constitution. He argues that the enumerated powers granted by the Constitution “To regulate Commerce with foreign Nations, and among the several states…” should not be interpreted and read so rigidly. He partners this argument with the Necessary and Proper Clause (Article 1, Section 8, Clause 18) to argue that the powers granted to Congress are done so to enable the government the power to act in a way that is, as he cited Chief Justice Marshall “most beneficial to the people.” The root of concern in his dissent lies in the fact that by controlling the free market, this is an act that obstructs the freedom of buying and selling sugar across state lines. This concern draws a direct link between the manufacturing and refinement industry control and the buying and selling of the goods.

Full Text of Opinions

Syllabus

Majority Opinion (Fuller)

Dissenting Opinion (Harlan)

Decision Analysis

In the decision the majority of the Court took molded its jurisprudence within the context of the economic hardships being faced at the time. As the nation saw its economy merging and becoming more centralized and interconnected, it was up to the Court to create a clear distinction between the elements of commerce. This was done by creating a divide between the commercial activities, buying and selling,and the the industrial acts, which the Court ruled that Congress held no authority. The Court narrowed the scope that was broadened by the ruling in Gibbons v. Ogden (1824), which at the time Chief Justice Marshall wrote that Congress had “no limitations, other than are prescribed in the Constitution.”

Justice Harlan, in his dissent, argued in much closer proximity to the precedent set by Chief Justice Marshall and was ahead of his time in his jurisprudence in respect to the concept of “stream of commerce” which would not be applied by the Supreme Court until several years later in Swift & Co. v. United States (1905). Justice Harlan did not agree with the courts narrow interpretation and definition of commerce as strictly the buying, selling, and transportation of goods between states. The Court determined that if the government had authority to regulate production, including refining and manufacturing, then Congress would have too much power leaving little control remaining for the states.

This ruling would effectively be overturned in the early to mid-1900s with decisions such as N.L.R.B. v. Jones & Laughlin Steel Corp (1937) where the Court ruled that commercial activities that share direct or “close and substantial” connections with interstate commerce amy be regulated by the federal government.

It is important to note that Attorney General Richard Olney later revealed that he was always in opposition of the Sherman Act:

“You will observe that the government has been defeated by the Supreme Court on the trust question. I always supposed it would be and have taken the responsibility of not prosecuting under a law which I believed to be no good.”

This lack of administrative diligence combined with a court unbending to national outcry for market stabilization through government regulation is considered to have largely influenced the decision making in this case.

Significance / Impact

Had this decision created a precedent that maintained its status through the next century, the governments expansive control over the economy would have been much more limited and the door that cases such as NLRB v. Jones & Laughlin Steel Corp (1937) and Swift & Co. v. United States (1905) opened up would been much more narrow and the powers pursuant to the Commerce Clause would not have seen such broad application. Additionally, the case played a major in the subsequent shift and fluctuation of congressional power under the commerce clause.  See: Katzenbach v. McClung, Hammer v. Dagenhart,United States v. Lopez, Wickard v. Filburn, and Heart of Atlanta Motel v. United States.

The precedent set in this case was one to limit Congress authority over commerce and to fortify the state’s power over intrastate business regulation. In order for a case to be proven unconstitutional pursuant to the Commerce Clause it must have an effect on commerce that is interstate and that is an economic activity that has an direct effect on commerce.

The large amount of public opposition to the ruling and the outcry for limitations to be placed on those seeking to gain control of the free-market that the influence commerce was strong during this time. Negative attention accompanied by the dissenting opinion of Justice Harlan may be the strongest influential component that led to future rulings regarding competition and antitrust law.

The “pro-business” labeled Supreme Court avoided the topic avidly during the period hearing only 18 cases against businesses during the Presidencies of Harrison, Cleveland, and McKinley. Of the first 8 cases heard, the government lost 7 of them. The window of opportunity spurred a movement amongst businesses and from 1880 to 1902 there were approximately 5,000 small businesses that were combined into roughly 300 corporations through trusts. The majority of these trusts were formed 8-10 years after the passage of the Sherman Antitrust Act.

Rapid increase in trust formation continued to grow and the monopolistic price control by the large corporations began to disenfranchise small businesses and create economic strain on purchasers. The economic climate along with the death of President William McKinley (September 6, 1901) set the stage for President Theodore Roosevelt’s (1901 – 1909) address to Congress on December 3, 1901. His aggressive stance and attacks on these large corporations earned himself the nickname the “trust-buster.” Under President Roosevelt’s leadership the United States would prosecute businesses under the Sherman Act much more extensively leading to the largest trust busting victory, Standard Oil Co. of New Jersey v. United States (1911).

Timeline 2

Constitutional Provision(s)

Article 1, Section 8, Clause 3 – Commerce Clause

Scholarly Commentary and Debate

Major Statute Under Review

Sherman Anti-Trust Act (1890)

Important Precedents

Gibbons v. Ogden (1824)

Brown v. Maryland (1827)

Kidd v. Pearson (1888)

Coe v. Errol (1886)

Important Subsequent Cases

Swift & Company v. U.S. (1905)

Standard Oil Co. of New Jersey v. United States (1911)

Stafford v. Wallace (1922)

Northern Securities Company v. United States (1904)

National Labor Relations Board v. Jones & Laughlin Steel Corp. (1937)

Web Resources

  • “United States v. E. C. Knight Company”, Accessed 2016
    https://www.law.cornell.edu/supct/search/display.html?terms=sugar&url=/supct/html/historics/USSC_CR_0156_0001_ZS.html
  • “Sherman Anti-Trust Act (1890).” Our Documents. http://www.ourdocuments.gov/doc.php?doc=51.
    U.S. National Archives & Records Administration.
  • “The Sherman Antitrust Act.” Sherman Antitrust Act and Monopolies. June 17, 2004. http://www.linfo.org/sherman.html. The Linux Information Project.
  • “Supreme Court Case: U.S. v. E.C. Knight and Co. 1895.” Accessed 2016. http://www.let.rug.nl/usa/documents/1876-1900/supreme-court-case-us-v-ec-knight-and-co-1895.php.
    1994-2012 GMW – University of Groningen – Humanities Computing.

Academic Books, Articles and Law Reviews

  • Currie, David P. The Constitution in the Supreme Court: The Second Century, 1888-1986. Chicago: University of Chicago Press, 1990.
  • Duncan, William L. Enterprise Optimization: Making Acquisitions Pay off. Indianapolis: Dog Ear Publishing, 2006.
  • Library of Congress. Division of Bibliography. List of References on Federal Control of Commerce and Corporations: Special Aspects and Applications. By Herman H. B. Meyer. Washington: Govt. Print. Off., 1914. L.C. card, 13-35005
  • Nevins, Allan. Study in Power: John D. Rockefeller. Vol. 2. New York: Charles Scribner’s Sons, 1953. p. 362.
  • Olson, James Stuart. Encyclopedia of the Industrial Revolution in America. Westport, CT: Greenwood Press, 2002.
  • Schultz, David A. Encyclopedia of the United States Constitution. A-L ed. Vol. 1. New York, NY: Facts On File, Infobase Publishing., 2009.

Contributors

Spring 2016: Ceilidh Cayenne, Robert Jimison, Anna Warner, Adrian Wright

Fall 2015: Kristeria Floyd, Casey Hall, Brianna Robinson, Ashley Thorne

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