United States v. E. C. Knight Co. & the Scope of the Sherman Antitrust Act

Business Monopoly Law Antitrust Act Commerce

The Regulation of Monopolies

One of the chief functions of our government is to ensure a fair and equitable market in which businesses may compete to offer goods and services to consumers. Our law has been developed and shaped in accord with this function. In order for free enterprise to flourish, our government must see that the marketplace is kept competitive and that attempts to obstruct or excessively limit competitiveness be swiftly eradicated. In the late nineteenth century, one particular law – the so-called Sherman Antitrust Act of 1890 – was passed with the purpose of promoting business competitiveness. The law forbade individuals from creating (or attempting to create) a monopoly of any part of the trade or commerce among the states or with foreign nations. This law stood in its original form until 1914 when it was expanded in scope by the Clayton Antitrust Act.

Very soon after the Sherman act was passed, disputes arose which required that the scope of the act be clarified. The case of the United States v. E. C. Knight Co. (1895) was one of these disputes. As we will see, the ruling of this case showed that the scope of the Sherman act was not so far-reaching that it could suppress a monopoly of the manufacture of a good.

Facts

E. C. Knight Company (the defendant) was acquired by the American Sugar Refining Company. This acquisition gave the company control over approximately 98 percent of the sugar refining industry. The U.S. government (plaintiff) attempted to utilize the provisions of the Sherman act to prevent the acquisition and thwart the creation of the virtual monopoly. The key question was whether the Sherman act allowed the government to interfere with a monopoly of the manufacture of a good as opposed to its distribution across state lines.

Law

The U.S. Constitution grants the Congress the power to regulate commerce among the states. The Sherman Antitrust Act included provisions which were ultimately in agreement with this basic power. The second section of the Sherman act reads as follows: “…Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony…”

The scope of the Sherman act clearly extends to monopolies of the distribution of a good; but did the Sherman act extend to monopolies of the manufacture of a good on a strictly local level?

Ruling

The court ruled that the Sherman act did not apply to this type of locally defined activity. However, since the acquisition resulted in a monopoly over the manufacture of a “necessity of life” (in the words of the court), this meant that the acquisition could be subject to individual state regulation.

In effect, the ruling of this case significantly curtailed the authority of the Congress to regulate the national economy as it declared manufacturing monopolies to be local matters. This restrictive view on Congressional authority to regulate commerce would remain unchanged until the late 1930s.

The case of the United States v. E. C. Knight Co. shows clearly some of the difficulties involved in trying to balance the ideals of a competitive marketplace and limited government. And for this reason the legacy of E. C. Knight Co. represents different things to people on different places of the ideological spectrum. However it is interpreted in any individual instance, there can be no denying its stature as a pivotal case in U.S. judicial history.

Image credit: VasenkaPhotography

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Seattle CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.

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