United States v. Socony-Vacuum Oil Co., 310 U.S. 150 (1940),, reversing 105 F.2d 809 (7th Cir. 1939), reversing 23 F. Supp. 937 (W.D. Wis. 1938). is a 1940 United States Supreme Court decision widely cited for the proposition that price-fixing is illegal per se.See, e.g., Northern Pacific Ry. v. United States, 356 U.S. 1, 5 (1958) (citing Socony) ("[T]here are certain agreements or practices which, because of their pernicious effect on competition and lack of any redeeming virtue, are conclusively presumed to be unreasonable, and therefore illegal, without elaborate inquiry as to the precise harm they have caused or the business excuse for their use. This principle of per se unreasonableness not only makes the type of restraints which are proscribed by the Sherman Act more certain to the benefit of everyone concerned, but it also avoids the necessity for an incredibly complicated and prolonged economic investigation into the entire history of the industry involved, as well as related industries, in an effort to determine at large whether a particular restraint has been unreasonable – an inquiry so often wholly fruitless when undertaken. Among the practices which the courts have heretofore deemed to be unlawful in and of themselves are price-fixing."). Socony has been cited and quoted many times for its statements, such as those that follow in text, that the rule against price-fixing is sweeping. The Socony case was, at least until recently, the most widely cited case on price fixing.Court Listener listed over 1300 citations, as of June 27, 2016.
The language used in the Socony opinion has been widely quoted in subsequent judicial opinions. Some of the most widely quoted passages from Socony follow:
Whatever economic justification particular price-fixing agreements may be thought to have, the law does not permit an inquiry into their reasonableness. They are all banned.310 U.S. at 224.
For almost 60 years after the Socony decision, the categorical language of that decision's statements, such as those quoted above, went substantially without qualification. At the end of the 20th century, however, the Supreme Court began to qualify the absoluteness of the Socony rules. In State Oil Co. v. Khan,522 U.S. 3 (1997) (fixing of maximum resale prices). and then Leegin Creative Leather Products, Inc. v. PSKS, Inc.,551 U.S. 877 (2007) (all vertical price restraints are to be judged according to the rule of reason). the Supreme Court held that vertical price fixing (for example, agreed upon between manufacturers and retailers of their products) is no longer to be considered a per se violation of the Sherman Act, but should be evaluated under a rule of reason. Horizontal price fixing among competing sellers, however, is still considered a per se violation of the Sherman Act.Leegin. 551 U.S. at 893 ("A horizontal cartel among competing manufacturers or competing retailers that decreases output or reduces competition in order to increase price is, and ought to be, per se unlawful.").
Background
In the 1920s and 1930s, the US oil industry had two principal components: (1) the so-called majors, "large vertically integrated companies that operated at every level of production and distribution," such as Socony, Standard of Indiana, Continental Oil, Gulf, Shell, and Phillips, that extracted oil, refined it into gasoline, and sold it to consumers through their stations; and (2) so-called independents, smaller firms that were not vertically integrated: independent refiners, wholesalers (so-called jobbers), and retail stations. In addition to distributing gasoline through their vertically integrated organizations, the majors distributed to independent jobbers under long-term contractsThese contracts usually ran for a year or more and covered all of the jobber's gasoline requirements during the period. 310 U.S. at 192. at a price based on the current spot-market price (for example, 2 cents above spot market), which fluctuated in response to the volume being put on the market by the independent refiners.
In the 1920s, oil production had surged "as the automobile replaced the horse and buggy as the common person's means of transportation." But in 1929, the Great Depression began and "demand for oil fell precipitously." In 1930, "the largest oil field in history was discovered in East Texas." As a result of these two events, oil prices had fallen to 10 to 15 cents per barrel and gasoline was selling in Texas for 2 cents per gallon.Crane at 3.
"[T]o stem the overproduction and consequent price decline that followed the development of the vast East Texas oilfield, discovered in October 1930," states established regulatory programs with production quotas. Production and shipment in excess of the quotas became illegal and was termed "hot oil."Texas State Historical Ass'n, Hot Oil in . See also Panama Ref. Co. v. Ryan, 293 U.S. 388. 418 (1935). The independent refiners responded to the pressure of falling demand by flooding the market with hot oil. Although hot oil represented only about 5% of the market, its existence significantly depressed both the wholesale and retail prices of gasoline.Crane at 4.
First, informally based on the provisions of the 1933 National Industrial Recovery Act (NIRA) forcing industries to raise prices on goods, and later on their own after the Supreme Court held the NIRA unconstitutional in 1935, the majors established a cartel program to divert hot oil from the market. The large, vertically integrated refiners bought "excess" or "distress" oil from the small, non-vertically integrated refiners that lacked sufficient storage capacity and were dumping oil on the market. This cartel program became known as the "dancing partner" program. It was estimated that "between 600 and 700 tank cars of distress oil flooded the Midwestern spot market every month from 17 independent refiners in the mid-continent field," and that removal of this oil from the market was needed to stabilize prices. A Socony official gave a speech explaining what the majors needed to do to alleviate their problem with prices. He said the oil industry was like an "old country dance." At this dance:
The majors had each asked some of the larger independent refiners to dance. But there were 7 or 8 smaller independent refiners – "wallflowers" . . . that no one wanted to dance with. . . . [We need] to introduce some of these wallflowers to some of the strong dancers, so that everybody can dance.Crane at 7.
Under the dancing-partner program, if a small refiner had hot oil that it was prepared to dump on the market, its dancing partner would buy up the oil and sequester it. It soon became apparent that buying up the potential hot oil from only the Mid-Continent oil field. would be insufficient to stabilize the Midwestern market. It was necessary to include the East Texas field. as well. Part of the dancing-partner arrangement was to meet weekly to determine what price should be paid for the hot oil. The dancing-partner program went into effect in March 1935 and oil prices began to stabilize. "Between March and June, prices rose from about 3 cents per gallon to about 4. By the middle of January, 1936, prices were above 5 cents."Crane at 8. According to the Supreme Court, "The conclusion is irresistible that defendants' purpose was not merely to raise the spot market prices but, as the real and ultimate end, to raise the price of gasoline in their sales to jobbers and consumers in the Mid-Western area."310 U.S. at 190.
Despite the downfall of the NIRA, the majors continued to operate the dancing partner program to stabilize oil prices on a voluntary basis. (It had always been voluntary.) Although the majors accomplished their goal of price stabilization by decreasing the amount of gasoline placed on the market, the reduced volume caused some independent jobbers to complain. The dancing-partner cartel benefited the majors and the small, independent refiners. But the jobbers were compensated on a cost-plus basis. They sold to retailers at approximately 3 cents per gallon over the spot-market wholesale price that jobbers paid refiners. When gasoline prices were depressed, consumers bought more gasoline, and jobbers made more money; when gasoline prices were higher, consumers bought less gasoline, and jobbers made less money. By increasing the spot market price and hence lessening demand, the dancing-partner program hurt the jobbers.Crane at 12.
In December 1936, the United States filed a grand jury's indictment in Madison, Wisconsin, charging that 27 corporations and 56 individuals "formulated and carried into effect an unlawful conspiracy to fix prices of gasoline." The indictment alleged "two substantially simultaneous buying programs or pools, one in the so-called Mid-Continent field, and the other in the so-called East Texas field." The defendants did this "for the purpose of artificially raising and fixing the price of gasoline at artificially high and non-competitive levels in the so-called spot tank car market and in the wholesale and retail market"; the major oil companies conspired to and did "buy gasoline in large quantities from time to time, in the Mid-Continent area in that spot market and in the East Texas field . . . in that spot market, which gasoline was not required to meet the needs of the respective major companies at the time, and that this was done for the sole purpose of bringing about an arbitrary and controlled rise in prices of gasoline." The conspiracy, as executed, "enabled these major companies, through the concerted purchase of a very small percentage of the total available gasoline for distribution in the Standard of Indiana territory, to raise the price to controlled levels and thereby unreasonably and unlawfully to profit on the sale of their own products."United States v. Standard Oil Co., 23 F. Supp. 937, 940 (W.D. Wis. 1938).
Proceedings in district court and court of appeals
The trial lasted nearly four months, during all of which time the jury was kept sequestered and in the custody of the marshal. The record ran to more than 12,000 pages, in addition to over 1,000 exhibits.23 F. Supp. at 938. The district court found the evidence sufficient to support the verdict and denied the defendants' motions for an order setting aside the verdicts and for a new trial, as to the verdicts of guilty against 12 of the indicted corporations and 5 individuals.23 F. Supp. at 944.
The United States Court of Appeals for the Seventh Circuit reversed the judgment.United States v. Socony-Vacuum Oil Co., 105 F.2d 809 (7th Cir. 1939). The court of appeals assumed that the dancing-partner program provided for the purchase of from one-fifth to nearly one-third of the gasoline sold by independent refiners in the Mid-Western field and one-fifth in the East Texas field. The spot market was from 5% to 7% of the gasoline sold in the relevant territory. The defendants sold about 80% of all gasoline in that territory.105 F.2d at 821.
Because the spot-market prices varied from day to day, so did the prices at which the defendants sold. These facts, the court of appeals said, made the case dissimilar to United States v. Trenton Potteries Co.,. in which price fixing had been held illegal per se. Here the price was not fixed at a definite level as it was in Trenton Potteries. Therefore, the per se rule of that case should not be applied here.105 F.2d at 823. Rather, the case here is similar to Appalachian Coals, Inc. v. United States,. which allowed an arrangement by coal companies to eliminate distress coal in "making, an honest effort to remove abuses, to make competition fairer, and thus to promote the essential interests of commerce."105 F.2d at 824-25.