Standard Oil Co. v. United States, 337 U.S. 293 (1949), more commonly referred to as the Standard Stations case to distinguish it from a 1911 case with the same caption, Standard Oil Co. v. United States, is a 1947 decision of the United States Supreme Court in which requirements contracts for gasoline stations (Standard Stations) were held to violate section 3 of the Clayton Act.. That statute prohibits selling goods on the condition that the customer must not deal in the goods of a competitor of the seller, such as in a requirements contract, if the effect is to "substantially lessen competition" or "tend to create a monopoly." The doctrine of this case has been referred to as "quantitative substantiality," and its exact contours were unsettled and controversial for many yearsSee, e.g., Milton Handler, Quantitative Substantiality and the Celler-Kefauver Act—A Look at the Record, 7 279, 288 (1956) ("[I]n Standard Stations 6.7% of the market for gasoline, 5% of lubricating oil and 2% of tires and batteries were all deemed substantial. If these decisions are reliable guides, then both horizontal and vertical integrations involving relatively small shares of the market would be vulnerable if quantitative substantiality were the prevailing doctrine. ...Do we want to strait-jacket the American economy by prohibiting integration, both vertical and horizontal, of this slight dimension?"); Stanley N. Barnes Highlights of Clayton Act Developments and Current Status—Quantitative Substantiality, 8 , Washington, D.C., Apr. 5-6, 1956, at 21 (1956) (criticizing Handler analysis and concluding "the 'quantitative substantiality' debate adds more heat than light"); 141 (1955) ("a perplexing opinion whose rationale is not clear"); Earl W. Kintner, Exclusive Dealing, Remarks Before N.Y.C. Bar Assn., Apr. 11, 1956, p. 5 ("To me, Standard Stations and Motion Picture Advertising Service, read together, frame Section 3's competitive injury test in realistic terms of substantial market foreclosure."). until the Supreme Court authoritatively explained it in United States v. Philadelphia National Bank..
The importance of the decision and its place in antitrust jurisprudence have been characterized in these terms:
Standard Stations is the richest and the most difficult of all the vertical integration cases. Each of the tensions that has been mentioned within the structure of antitrust is revealed in the Standard Stations decision. As the leading case on integration by contract, it has been the subject of extensive commentary and controversy. The decision may raise as many problems as it settles, but the rule of Standard Stations is one which must be reckoned with in all vertical integration cases, and comprehension of this rule is essential to evaluation of the impact of antitrust upon integration.Friedrich Kessler and Richard H. Stern, Competition, Contract, and Vertical Integration , 69 L.J. 1, 24 (1959).
The case has been the subject of extensive scholarly commentary.See, e.g., Louis B. Schwartz, Potential Impairment of Competition—The Impact of Standard Oil Co. of California v. United States on the Standard of Legality Under the Clayton Act, 98 U. 10 (1949); William B. Lockhart & Howard R. Sacks, The Relevance of Economic Factors in Determining Whether Exclusive Arrangements Violate Section 3 of the Clayton Act, 65 913 (1952); Richard McLaren, Related Problems of "Requirements" Contracts and Acquisitions in Vertical Integration Under the Anti-Trust Laws, 45 141 (1950).
Background
Defendant Standard Stations, Inc., a wholly owned subsidiary of defendant Standard Oil Company of California (Socal) (now named Chevron Corporation), managed gasoline filling stations that Socal owned and leased to independent businessmen. It also supplied gasoline to locally owned and operated filling stations that used the Standard Stations brand nameStandard Stations, 337 U.S. at 295 and n.1. See also id at 319 (dissenting opinion of Justice Douglas).
The Standard Stations case involved the distribution of petroleum products and automobile accessories. The US oil industry had relatively few producers, each having substantial shares of the market. They were integrated with their retail outlets by requirements contracts. These contracts bound the retail outlets to obtain all of the products they sold from the integrating producer.Kessler, 69 at 25 (citing Standard Stations, 337 U.S. at 295).
Defendant Standard's contracts covered 16 percent of all the retail gasoline outlets in the Western US,The Western US was defined as Arizona, California, Idaho, Nevada, Oregon, Utah and Washington. Standard Stations, 337 U.S. at 295. 6.7 percent of the gasoline sold in the Western US, and about $58 million in annual sales. Standard's sales through outlets that its parent owned and to industrial users brought its total share of the Western US gasoline market up to 23 percent, while its six leading competitors, who employed similar exclusive dealing arrangements, accounted for 42 percent of that market. Together, the seven major companies sold 65 percent of gasoline in the Western US. Industrial gasoline sales of the seven majors brought the total above 65 percent.Kessler, 69 at 25 n.97. In terms of retail outlets, the seven majors controlled 76 percent of all stations in the West.Kessler, 69 at 25.
The US Justice Department's Antitrust Division brought suit under section 1 of the Sherman Act. and section 3 of the Clayton Act to enjoin Standard from entering into or enforcing these exclusive contracts. The district court found for the Government as to both sections 1 and 3.United States v. Standard Oil Co., 78 F. Supp. 850 (S.D. Calif. 1948). The defendants then appealed to the Supreme Court.
Ruling of Supreme Court
Majority opinion
The majority opinion for the Court by Justice Frankfurter began by summarizing the opinion of the district court:
The District Court held that the requirement of showing an actual or potential lessening of competition or a tendency to establish monopoly was adequately met by proof that the contracts covered "a substantial number of outlets and a substantial amount of products, whether considered comparatively or not." Given such quantitative substantiality, the substantial lessening of competition -- so the court reasoned -- is an automatic result, for the very existence of such contracts denies dealers opportunity to deal in the products of competing suppliers and excludes suppliers from access to the outlets controlled by those dealers. Having adopted this standard of proof, the court excluded as immaterial testimony bearing on "the commercial merits or demerits of the present system as contrasted with a system which prevailed prior to its establishment and which would prevail if the court declared the present arrangement [invalid]."337 U.S. at 298.
The Court then said that the issue before it was "whether the requirement of showing that the effect of the agreements 'may be to substantially lessen competition' may be met simply by proof that a substantial portion of commerce is affected, or whether it must also be demonstrated that competitive activity has actually diminished or probably will diminish.337 U.S. at 299.
Preliminarily, the Court noted that the only two prior Supreme Court cases finding requirements contracts unlawful were not helpful, because they involved defendants with dominant market positions.In Standard Fashion Co. v. Magrane-Houston Co., 258 U.S. 346 (1923), the lower courts had found that "the contracts in question did substantially lessen competition and tend to create monopoly[, which was] amply supported by evidence that the defendant controlled two-fifths of the nation's pattern agencies." Standard Stations, 337 U.S. at 301. In ' Fashion Originators' Guild v. FTC, 312 U.S. 457 (1940), the defendant "association of dress manufacturers . . . sold more than 60% of all but the cheapest women's garments." Standard Stations, 337 U.S. at 302. And in that case, the Court had said, ""The purpose and object of this combination, its potential power, its tendency to monopoly, the coercion it could and did practice upon a rival method of competition, all brought it within the policy of the prohibition declared by the Sherman and Clayton Acts." Id. The present case, the Court said, was not identical:
It is thus apparent that none of these cases controls the disposition of the present appeal, for Standard's share of the retail market for gasoline, even including sales through company-owned stations, is hardly large enough to conclude as a matter of law that it occupies a dominant position, nor did the trial court so find. The cases do indicate, however, that some sort of showing as to the actual or probable economic consequences of the agreements, if only the inferences to be drawn from the fact of dominant power, is important, and, to that extent, they tend to support appellant's position.337 U.S. at 302.
In addition, in another two cases,FTC n v. Sinclair Co., 261 U.S. 463 (1923), and Pick Mfg. Co. v. General Motors Corp., 299 U.S. 3 (1936). no violation was found because dealers could readily sell other or additional brands of gasoline in one case and in the other case no anticompetive effects occurred. In contrast, the Standard Stations Court said, "The present case differs, of course, in the fact that a dealer who has entered a requirements contract with Standard cannot, consistently with that contract, sell the petroleum products of a competitor of Standard's."337 U.S. at 303.
"But then came," the Court said, the most recent exclusive dealing case, International Salt Co. v. United States, 332 U. S. 392 (1947), a patent tying case, in which the country's largest producer of industrial salt sold about $500,000 worth of salt for use in its patented machines, while imposing contracts requiring the customers to use no other company's salt.337 U.S. 305-06. The finding of illegality in that case tended to suggest illegality here:
It is clear therefore that, unless a distinction is to be drawn for purposes of the applicability of § 3 between requirements contracts and contracts tying the sale of a nonpatented to a patented product, the showing that Standard's requirements contracts affected a gross business of $58,000,000 comprising 6.7% of the total in the area goes far toward supporting the inference that competition has been or probably will be substantially lessened.337 U.S. at 306.
The Court then distinguished the economic setting and impact of tie-ins and requirements contracts, concluding that it was inappropriate to use the same legal standard for both. Tie-ins serve little purpose "beyond the suppression of competition," but requirements contracts:
may well be of economic advantage to buyers as well as to sellers, and thus indirectly of advantage to the consuming public. In the case of the buyer, they may assure supply, afford protection against rises in price, enable long-term planning on the basis of known costs, and obviate the expense and risk of storage in the quantity necessary for a commodity having a fluctuating demand. From the seller's point of view, requirements contracts may make possible the substantial reduction of selling expenses, give protection against price fluctuations, and—of particular advantage to a newcomer to the field to whom it is important to know what capital expenditures are justified—offer the possibility of a predictable market. ... Since these advantages of requirements contracts may often be sufficient to account for their use, the coverage by such contracts of a substantial amount of business affords a weaker basis for the inference that competition may be lessened than would similar coverage by tying clauses, especially where use of the latter is combined with market control of the tying device.337 U.S. 305-07.