Trusts and The Origins of Antitrust Legislation

Fordham Law Review
Volume 81 | Issue 5 Article 7
2013
Trusts and the Origins of Antitrust Legislation

Wayne D. Collins
Recommended Citation
Wayne D. Collins, Trusts and the Origins of Antitrust Legislation, 81 Fordham L. Rev. 2279 (2013).
Available at: http://ir.lawnet.fordham.edu/flr/vol81/iss5/7
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TRUSTS AND THE ORIGINS OF
ANTITRUST LEGISLATION
Wayne D. Collins*
Between 1888 and 1890, thirteen states and the federal government
enacted antitrust legislation criminalizing combinations among competitors
intended to control prices in the marketplace. These laws were a reaction
to the increasing formation of horizontal combinations, large and small,
throughout the economy in the wake of dramatically changing economic
conditions since the Civil War. Through most of this period, combinations
struggled to find structures that would enable them to operate effectively.
Simple combinations of independent firms, although neither criminal nor
tortious, were often undermined because state common law refused to
enforce the contractual arrangements that would prevent members from
deviating from the rules that would give a combination the power to control
price. Nor could early combinations avail themselves of a unitary
ownership structure, since state corporation law restricted the corporate
form in ways that made it largely unworkable as a combination structure.
In the early 1880s, however, some combinations, beginning with
Standard Oil, adopted a new form of organization, the trust proper, which
had the command and control attributes of a corporation without being
subject to the restrictions of state corporation law. Shortly thereafter, some
states, notably New Jersey, liberalized their corporation laws, making
corporations suitable as a vehicle for housing a business combination.
States and the federal government responded with legislation that adopted
the common law prohibitions against combinations in restraint of trade,
extended these prohibitions to combinations organized as trusts proper and
holding companies, and criminalized violations in order to enable
government challenges. Despite these extensions of the law, early
enforcement was virtually nonexistent, even against most combinations that
had achieved widespread public notoriety. After the turn of the last
century, however, the new laws set the stage for an aggressive enforcement
policy following a massive horizontal consolidation movement that began in
1895.
* Partner, Shearman & Sterling LLP; Adjunct Professor of Law, New York University
School of Law. My colleagues Vittorio Cottafavi and John Mellyn, as well as David Merkin
in the Shearman & Sterling LLP law library, have been extraordinarily tenacious and
successful in locating many of the sources and economic data used in this Article. I am in
their debt, although they bear no responsibility for any errors in the final product.
2279
2280 FORDHAM LAW REVIEW [Vol. 81
TABLE OF CONTENTS
INTRODUCTION ........................................................................................ 2280
I. A CHANGING ECONOMY: ECONOMIC CONDITIONS PRIOR TO 1890 ... 2281
II. THE “TRUST” MOVEMENT ................................................................. 2288
III. FORMS OF COMBINATION AND PRE-ANTITRUST REGULATION ........ 2292
Simple Combinations .............................................................. 2293
A.
Pools ....................................................................................... 2307
B.
Corporations........................................................................... 2309
C.
Trusts ...................................................................................... 2315
D.
E.
Holding Corporations and the Liberalization of
Incorporation Laws............................................................... 2329
IV. THE LEGISLATIVE RESPONSE ........................................................... 2334
A. State Antitrust Legislation ...................................................... 2335
B. Federal Antitrust Legislation .................................................. 2339
V. SOME CONCLUDING OBSERVATIONS................................................. 2342
INTRODUCTION
For much of antitrust history, conventional wisdom has held that the
Sherman Act was passed because of overwhelming popular agitation for
federal legislation to restore a balance in the marketplace between “big
business,” on the one hand, and consumers, farmers, and small businesses,
on the other. When we examine the actual conditions of the time, the state
and federal legislative responses to calls for antitrust regulation, and how
these new statutes were enforced immediately after their enactment, it
becomes apparent that large firms as such were not a target. In both the
years preceding the passage of the Sherman Act in 1890, as well as the
immediate years following its enactment, there was not a single identifiable
case brought under the common law or the new state and federal antitrust
laws that challenged an organically grown firm simply because it was big,
even if it displaced—as many large firms did—smaller competitors.
Rather, the focus was on the combinations of competitors, whether large or
small, that were able to raise the prices at which they sold their output (or
lower the prices at which they purchased their inputs) to an extent regarded
as injurious to the public interest. Regardless of their technical legal form,
these combinations came at the time to be called “trusts.” This Article
examines the economic conditions that gave rise to a pervasive number of
these so-called trusts, the various legal structures in which these
combinations were housed, and the laws in effect prior to the enactment of
state and federal antitrust legislation that attempted to regulate them.
Part I surveys the macroeconomic conditions in the United States in the
two decades prior to the passage of the Sherman Act. The years between
1870 and 1890 were a period of enormous economic growth brought about
by fundamental changes in transportation, communications, population
2013] THE ORIGINS OF ANTITRUST LEGISLATION 2281
growth, production technology, business organization, and finance. During

this period, the country shifted from a predominately agrarian economy to
an industrial one.
Part II examines the microeconomic implications of these changes.
While for some industries, technological innovations resulted in large
increases in optimal firm size and significant displacements of smaller, less
efficient firms, the emergence of large firms and an accompanying increase
in industrial concentration does not appear to be a motivating factor behind
the antitrust laws. Rather, throughout the economy, rapidly expanding
output, coupled with a broadening market reach, put more firms in
competition with one another. This competition, together with the
monetary policies of the day, resulted in a significant decline in price levels
and led to what became known at the time as “ruinous” or “excessive”
competition, that is, competition that prevented producers in the market
from recovering their costs or at least from earning what they considered a
fair profit. In an effort to control excessive competition—and no doubt, in
most cases, to exercise market power and earn supracompetitive profits—
numerous groups of competitors attempted to coordinate their operations to
limit competition, curtail output, and return prices to “reasonable” if not
supracompetitive levels. This marked the beginning of the “trust
movement.”
Part III explores the various means available to competitors to coordinate
their activities, ranging from simple agreements and pools, to corporations,
trusts proper, and holding companies. Regardless of their technical legal
structure, all of these various vehicles became known colloquially at the
time as trusts. This Article also examines the pre–Sherman Act law that
regulated the use of these legal vehicles, most importantly the common law
restrictions on contracts, combinations, and conspiracies in restraint of
trade.
Part IV looks briefly at the thirteen state antitrust statutes and the federal
Sherman Act that were passed in the brief period from 1888 to 1890 in the
wake of the nascent trust movement. All of these statutes had a dominant
single purpose: the criminalization of combinations of competitors that
would have the power to control price in the marketplace. Although the
statutory language varies, the import of each of these laws was to adopt (but
not expand) the substantive common law prohibitions against combinations
in restraint of trade, to extend these prohibitions to combinations organized
as trusts proper and holding companies to ensure that they were reachable,
and to create a criminal cause of action in order to enable government
enforcement. Two state statutes and the Sherman Act also provided for a
private cause of action by injured third parties.
Part V offers a few concluding observations.
I. A CHANGING ECONOMY: ECONOMIC CONDITIONS PRIOR TO 1890

Until the 1870s, businesses largely served an agrarian economy, and
most industrial firms either processed agricultural products or supplied
farmers with food, clothing, and farming inputs. With a few exceptions,
most notably the railroads and some large textile mills, firms were
organized as sole proprietorships or partnerships with a single location
producing a limited line of labor-intensive goods and services.1 For the
most part, the lack of a reliable, inexpensive, high-speed transportation
network confined a firm’s operation to the local area and correspondingly
limited demand for the firm’s product.2 When a business sold in distant
markets, it did so through commissioned merchants or agents that handled
the business of multiple firms.3 No cadre of professional managers existed;
rather, the owners personally managed the business and supervised the
firm’s few employees.4 Nor was there the financial incentive or
wherewithal to create large firms. Production technologies yielding
significant economies of scale either did not exist or were overshadowed by
the high costs of broader geographic distribution.5 Markets for raising
investment capital had yet to emerge, and investment resources were
limited largely to what a family or a small group of partners were willing to
invest.6
Beginning in the 1870s, however, fundamental changes in transportation,
communications, population growth, production technology, business
organization, and finance led to rapid economic growth and a shift from a
predominately agrarian economy to an industrial one. This shift started
before the Civil War, but it was particularly pronounced for several decades
beginning in 1870.
A rapidly expanding transportation network and declining real freight
rates made it increasingly possible and economical to reliably ship products
over long distances for distribution and sale. This, in turn, enlarged the
effective geographic area a single firm could serve from its local vicinity to
regional or even national markets. After connecting the coasts in 1869 by
linking the tracks of the Union Pacific Railroad Company and the Central
Pacific Railroad Company at Promontory Point, Utah, the railroads
increased their track mileage by a factor of three from 52,922 miles in 1870
to 166,703 miles by 1890.7 But this was hardly the whole story. Since
1. See JEREMY ATACK & PETER PASSELL, A NEW ECONOMIC VIEW OF AMERICAN
HISTORY 191–93 (2d ed. 1994); CHRISTOPHER J. SCHMITZ, THE GROWTH OF BIG BUSINESS IN
THE UNITED STATES AND WESTERN EUROPE, 1850–1939, at 31 (1993).
2. See SIDNEY RATNER, JAMES H. SOLTOW & RICHARD SYLLA, THE EVOLUTION OF THE
AMERICAN ECONOMY 183–84 (1979).
3. See GLENN PORTER & HAROLD C. LIVESAY, MERCHANTS AND MANUFACTURERS 15–
17 (1971); Alfred D. Chandler, Jr., The Role of Business in the United States: A Historical
Survey, 98 DÆDALUS, WINTER 1969, at 26.
4. See GLENN PORTER, THE RISE OF BIG BUSINESS, 1860–1910, at 11–12 (1973).
5. See ALFRED D. CHANDLER, JR., THE VISIBLE HAND: THE MANAGERIAL REVOLUTION
IN AMERICAN BUSINESS 49 (1977); SCHMITZ, supra note 1, at 54–55.
6. See PORTER, supra note 4, at 8; SCHMITZ, supra note 1, at 44.
7. U.S. BUREAU OF CENSUS, HISTORICAL STATISTICS OF THE UNITED STATES, EARLIEST
TIMES TO THE PRESENT: MILLENNIAL EDITION 4-916 ser. Df874 (2006) [hereinafter
HISTORICAL STATISTICS]. The underlying data for most of the statistics cited in this Article
come from Historical Statistics, which is widely regarded as collecting the best time series
statistics available. Even so, given the problems of systematic data collection as we go back
railroads did not have to follow meandering rivers, they could, in many
cases, cut effective travel distances for bulk transportation by large margins.
A trip from New York to Philadelphia could take a week to ten days by
road in 1800, while the same trip took less than a day by rail in the late
1850s.8 Railroads also were not subject to the vicissitudes of rivers
freezing over or roads made impassable by rain or snow and could reliably
deliver passengers and freight in all but the most extreme weather. Freight
rates also dropped precipitously. Nominal freight rates averaged $0.15 per
ton/mile by road in the 1830s, $0.04 per ton/mile by rail in 1850, and
$0.015 per ton/mile by rail by 1880.9
Growing alongside the railroads was an equally expanding
communications network. The broadening communications system not
only permitted the railroads to manage their train traffic but also allowed
suppliers to better understand and respond to current market conditions in
distant markets.10 Samuel F.B. Morse built the first electromagnetic
telegraph demonstration line in 1844, connecting Washington and
Baltimore.11 By the beginning of the Civil War, the telegraph network was
essentially nationwide; by 1870, multiplexing allowed multiple telegraph
messages to be sent simultaneously over the same line.12 For the most part,
telegraph companies built their lines on the railroad rights-of-way, and most
communications occurred between railroad stations.13 The early telegraph
companies, however, were plagued by bankrupting competition between
parallel lines and incompatible technologies and coordination problems
when messages were transmitted over the interconnecting lines of different
operators, so that, by the mid-1850s, they had largely consolidated into six
major companies.14 In 1857, these six companies, in what became known
as the “Treaty of the Six Nations,” divided the eastern half of the United
States among themselves into six disjoint exclusive regions and then
in time, the early statistics in this Article (say, those for years prior to 1900) generally should
only be considered indicative and not exact. The notes in Historical Statistics provide the
underlying source of each data series.
8. SCHMITZ, supra note 1, at 11.
9. HISTORICAL STATISTICS, supra note 7, at 4-781 ser. Df17 & Df21. For more on the
development of railroads during this period, see ATACK & PASSELL, supra note 1, at 427‒56;
ROBERT FOGEL, RAILROADS AND AMERICAN ECONOMIC GROWTH: ESSAYS IN ECONOMETRIC
HISTORY (1964); JOHN F. STOVER, AMERICAN RAILROADS (2d ed. 1997); ALBERT FISHLOW,
AMERICAN RAILROADS AND THE TRANSFORMATION OF THE ANTE-BELLUM ECONOMY (1965);
Albert Fishlow, Productivity and Technological Change in the Railroad Sector, 1840–1910,
in OUTPUT, EMPLOYMENT, AND PRODUCTIVITY IN THE UNITED STATES AFTER 1800 (Dorothy
S. Brady ed., 1966), available at http://www.nber.org/chapters/c1578.pdf.
10. See Alexander James Field, The Magnetic Telegraph, Price and Quantity Data, and
the New Management of Capital, 52 J. ECON. HIST. 401, 411 (1992).
11. DAVID HOCHFELDER, THE TELEGRAPH IN AMERICA, 1832–1920, at 2 (2012).
12. Id. at 2–3, 42–43.
13. See CHRISTOPHER H. STERLING, PHYLLIS W. BERNT & MARTIN B.H. WEISS, SHAPING
AMERICAN TELECOMMUNICATIONS: A HISTORY OF TECHNOLOGY, POLICY, AND ECONOMICS
41–42 (2006); ROBERT LUTHER THOMPSON, WIRING A CONTINENT: THE HISTORY OF THE
TELEGRAPH INDUSTRY IN THE UNITED STATES, 1832–1866, at 203–16 (1947).
14. THOMPSON, supra note 13, at 187–202.
ultimately consolidated into a single company, Western Union, in 1866.15

From 1870 to 1890, Western Union increased the miles of wire from
112,000 to 679,000 and its number of offices from 3,972 to 19,382.16
During the same period, Western Union increased the number of messages
it handled more than five-fold from 9.1 million to 55.9 million a year.17
The telephone, which was invented in 1876, was also rapidly developing.
By 1890, the American Telephone and Telegraph Company, which had
acquired the patent rights to the telephone, had 332,000 miles of telephone
lines and 227,900 telephones in operation and handled an average of
1.4 million local calls daily.18
Between 1870 and 1890, the U.S. population almost doubled from
38.6 million to 63.0 million, for a compound average growth rate of
2.5 percent over the twenty-year period.19 This population growth increased
both the supply of labor as well as aggregate demand for goods and
services. Net immigration during the period was 7.1 million people, or
about 30 percent of the population growth.20 Increasing population density
and urbanization also helped to concentrate demand and further reduced the
costs of serving distant markets. From 1870 to 1890, the urban population
more than doubled from 9.9 million to 22.1 million, and rose from
25.7 percent to 35.1 percent of the total U.S. population.21 The rural
population, while still increasing from 28.7 million to 40.9 million, declined
from 74.3 percent to 64.9 percent of the total U.S. population.22 Overall,
population density increased from 13.0 per square mile in 1870 to 21.2 per
square mile in 1890.23
The growth in the economy is also reflected in total energy consumption.
From 1870 to 1890, energy consumption from fossil fuel sources in the
United States rose from 1,059 trillion BTU to 4,475 trillion BTU, for a
compound average growth rate over the period of 7.5 percent.24 Leaving
fuel wood aside, the vast bulk of energy consumed in the United States
15. Id. 310–30, 406–26.

16. HISTORICAL STATISTICS, supra note 7, at 4-1001 ser. Dg11 & Dg13. Thompson is
the leading authority on the early development of the telegraph. THOMPSON, supra note 13.
For other treatments, see HOCHFELDER, supra note 11; RICHARD R. JOHN, NETWORK NATION:
INVENTING AMERICAN TELECOMMUNICATIONS 24–199 (2010); Richard B. Du Boff, Business
Demand and the Development of the Telegraph in the United States, 1844–1860, 54 BUS.
HIST. REV. 459 (1980).
17. HISTORICAL STATISTICS, supra note 7, at 4-1001 ser. Dg9.
18. Id. at 4-1008 ser. Dg39 (miles of telephone lines); id. ser. Dg34 (telephones); id. at
4-1013 ser. Dg51 (average daily local conversations).
19. Id. at 1-26 ser. Aa2. Throughout this Article, I have calculated annual averages for
multiyear time periods using the geometric mean. For quantities (such as population or
GDP) as opposed to rates of change (such as the unemployment rate), the geometric mean is
the same as the compound average growth rate (CAGR).
20. Id. at 1-547 ser. Ad22.
21. See U.S. BUREAU OF THE CENSUS, URBAN AND RURAL POPULATIONS: TABLE 4 (POPULATION:
1790 TO 1990), available at http://www.census.gov/population/censusdata/table-4.pdf.
22. See id.
23. HISTORICAL STATISTICS, supra note 7, at 1-26 ser. Aa3.
24. Id. at 4-338 ser. Db164 (total fossil fuels).
during this period was from fossil fuels, almost entirely coal.25 The
discovery of abundant new coal sources, new mining methods, the
emergence of railroad networks that could provide cheap and reliable
transportation, and the development of new, more efficient coal energy
technologies both reduced the real cost of energy and freed energy-
consuming businesses to locate away from rivers (which provided
hydropower) and closer to other factors of production (including labor and
transportation). Moreover, since hydropower could be subject to
interruptions caused by limited waterfall, ice, and other weather-related
conditions, firms demanding a steady, reliable source of power often
switched to coal energy technologies even when hydropower was
available.26
New innovations in production technology, such as the Bessemer process
of steelmaking, new distillation methods in petroleum refining, and
Hungarian reduction techniques in flour milling, lowered average
production costs and created substantial economies of scale.27 At the same
time, new economies of integration led to vertical growth within the chain
of manufacturing and distribution, especially in industries where new
product developments found no existing system for their distribution or
after-sales support or where new process developments or economies of
scale overwhelmed the existing distribution system with increased
production rates.28 Some industries also vertically integrated into raw
materials to ensure the inputs necessary for large-scale production.29
Finally, apart from economies from new technologies and vertical
25. Compare id., with id. ser Db165 (coal).

26. See Jeremy Atack, Industrial Structure and the Emergence of the Modern Industrial
Corporation, 22 EXPLORATIONS ECON. HIST. 29, 38 (1985). For more on the development of
energy during the period, see ATACK & PASSELL, supra note 1, at 197–201; SAM H. SCHURR
& BRUCE C. NETSCHERT, ENERGY IN THE AMERICAN ECONOMY, 1850–1975 (1960); Jeremy
Atack, Fred Bateman & Robert A. Margo, Steam Power, Establishment Size, and Labor
Productivity Growth in Nineteenth Century American Manufacturing, 45 EXPLORATIONS
ECON. HIST. 185 (2008).
27. For an excellent brief survey of the technical developments of the late nineteenth
century, see John A. James, Structural Change in American Manufacturing, 1850–1890,
43 J. ECON. HIST. 433 (1983). See generally ALFRED D. CHANDLER, JR., STRATEGY AND
STRUCTURE: CHAPTERS IN THE HISTORY OF THE AMERICAN INDUSTRIAL ENTERPRISE (1962);
PETER GEORGE, THE EMERGENCE OF INDUSTRIAL AMERICA: STRATEGIC FACTORS IN
AMERICAN ECONOMIC GROWTH SINCE 1870 (1982); H.J. HABAKKUK, AMERICAN AND BRITISH
TECHNOLOGY IN THE NINETEENTH CENTURY: THE SEARCH FOR LABOUR-SAVING INVENTIONS
(1967); PORTER, supra note 4.
28. See CHANDLER, supra note 5, at 302–12, 364. Most progressive and revisionist
historians, as well as contemporary observers, have focused on horizontal integration as the
foundation of big business. The first historian to emphasize the important role played by
vertical integration was Alfred D. Chandler, Jr. See Alfred D. Chandler, Jr., The Beginnings
of “Big Business” in American Industry, 33 BUS. HIST. REV. 1 (1959). See generally ALFRED
D. CHANDLER, JR., SCALE AND SCOPE (1990); CHANDLER, supra note 27; CHANDLER, supra
note 5; MANAGERIAL HIERARCHIES (Alfred D. Chandler, Jr. & Herman Daems eds., 1980).
29. See NAOMI R. LAMOREAUX, THE GREAT MERGER MOVEMENT IN AMERICAN
BUSINESS, 1895–1904, at 38, 144–47 (1985) (examining vertical integration at the Carnegie
steel plants).
integration, significant productivity gains and scale economies resulted

from a shift in production from artisan shops to factories.30 The larger-
scale factory operations enabled labor efficiencies from learning-by-doing
by increasing repetition through the subdivision of tasks and increased
specialization. This specialization, in turn, later opened opportunities for
additional efficiencies by mechanizing many tasks. The larger workforces
also required monitoring and supervision to ensure performance, which
resulted in the emergence of salaried managers responsible for improving
productivity.31
Figure 1: United States Real GDP (in billions of 2005 dollars)32
The rapid pace of industrialization is reflected in real gross purchases of

structures and equipment used in manufacturing, which increased (in 2005
constant dollars) from $2.2 billion to $11.0 billion between 1880 and 1890,
a factor of five for a compound average growth rate of 17.5 percent over the
ten-year period.33 Manufacturing production, according to the commonly
30. See Jeremy Atack, Economies of Scale and Efficiency Gains in the Rise of the
Factory in America, 1820–1900, in QUANTITY & QUIDDITY: ESSAYS IN U.S. ECONOMIC
HISTORY 286 (Peter Kilby ed., 1987); Kenneth L. Sokoloff, Productivity Growth in
Manufacturing During Early Industrialization: Evidence from the American Northeast,
1820–1860, in LONG-TERM FACTORS IN AMERICAN ECONOMIC GROWTH 679 (Stanley L.
Engerman & Robert E. Gallman eds., 1986).
31. See Atack, supra note 30.
32. HISTORICAL STATISTICS, supra note 7, at 3-24 to -25 ser. Ca9 (data originally
reported in 1996 dollars).
33. See id. at 4-680 ser. Dd687 (data originally reported in 1958 constant dollars).
Unfortunately, the data series for this period does not include depreciation or the real net
value of assets. Throughout this Article, real dollars refer to 2005 dollars. When the data
was originally reported in constant dollars other than 2005 dollars, I converted to 2005
dollars by multiplying the reported data by the ratio of the GDP deflator for 2005 to the GDP
deflator for the constant dollar year of the reported data:
used Frickey index, grew by over 50 percent and had a compound average
growth rate of 4.4 percent.34 By 1885, the United States had replaced Great
Britain as the world’s largest manufacturing nation, accounting for
29 percent of the world’s industrial production.35
Agricultural production also soared, aided by the development of the
western lands and an efficient transportation network, new mechanized
technologies, and driven by a rapidly expanding population.36 With the
increasing cultivation of land in the West, the number of farms increased by
71.6 percent from 2.7 million in 1870 to 4.6 million in 1890,37 while the
amount of land in farms increased by 52.8 percent from 407.7 million acres
to 623.2 million acres.38 During this period, agricultural production
increased 70.8 percent, for a compound average growth rate of
2.9 percent.39 During the same period, the agricultural labor force increased
from 6.8 million to 10 million, for a compound average growth rate of
1.9 percent.40 This suggests that labor productivity grew at about
1.0 percent per year, which was probably due largely to increased
mechanization. The total capital stock used in agriculture increased from
$218 billion to $379 billion, for a compound average growth rate of
2.8 percent.41 Land employed in agriculture increased at about the same
rate, but machinery and equipment grew from $0.6 billion to $1.3 billion,
for a compound average growth rate of 3.9 percent, again consistent with
the idea that increased mechanization significantly increased farm labor
productivity.42
Conversion Ratio
Year GDP Deflator (to 2005 dollars)
1929 10.593 9.4402
1958 18.157 5.5075
1996 83.154 1.2026
2005 100 1
The relevant GDP deflators are reported in U.S. DEPT. OF COMMERCE, BUREAU OF ECONOMIC
ANALYSIS tbl.1.1.4 (Price Indexes for Gross Domestic Product, with 2005=100), available at
www.bea.gov/itable/. For example, to convert $100 in constant 1958 dollars to 2005 dollars,
multiply $100 by the conversion ratio of 5.5075 to yield $550.75.
34. See HISTORICAL STATISTICS, supra note 7, at 4-652 ser. Dd497. Historical Statistics
uses the data series developed in EDWIN FRICKEY, PRODUCTION IN THE UNITED STATES, 1860–
1914, at 54 (1947).
35. W.W. ROSTOW, THE WORLD ECONOMY: HISTORY & PROSPECT 52 (1978).
36. For a review of the post–Civil War agricultural technologies, see RATNER ET AL.,
supra note 2, at 264–65 (1979).
37. HISTORICAL STATISTICS, supra note 7, at 4-43 ser. Da16.
38. Id. ser. Da17.
39. See id. at 4-204 ser. Da1117.
40. See id. at 2-110 ser. Ba817. Historical Statistics uses the data series developed in
Stanley Lebergott, Labor Force and Employment, 1800–1960, in OUTPUT, EMPLOYMENT,
AND PRODUCTIVITY IN THE UNITED STATES AFTER 1800, supra note 9, at 117, available at
http://www.nber.org/chapters/c1567.pdf.
41. See JOHN W. KENDRICK, PRODUCTIVITY TRENDS IN THE UNITED STATES 367 tbl.B-III
(1961), available at http://www.nber.org/books/kend61-1.
42. See id.
These changes introduced a period of extraordinary economic growth for

the nation. Between 1870 and 1890, real annual GDP more than doubled,
increasing from $113.0 billion to $277.3 billion (in 2005 dollars), for an
impressive compound average growth rate of 4.5 percent.43 Even with a
rapidly growing population, real annual per capita GDP during the same
period increased from $2,856 to $4,397, for an average annual growth rate
of 2.2 percent.44 Real total net capital stock of capital consumption,
including capital for industry, agriculture, and housing, grew from
$255 billion to $642 billion, for a compound average growth rate of
4.7 percent.45 On a per laborer basis, net capital stock grew from $26,600 to
$37,900, for a compound average growth rate of 1.8 percent.46 Over the
period, overall output per unit of labor input increased by 43.4 percent, for a
compound average growth rate of 1.8 percent, while output per unit of
capital increased by 26.3 percent, for a compound average growth rate of
1.2 percent.47
Table 1: Economic Indicators for 1870–1890
CAGR
Indicator 1870–1890
Real GDP 4.5%
Real GDP per capita 2.2%
Population 2.5%
Manufacturing output 5.2%
Agricultural output 2.9%
Real net capital stock 4.7%
Real net capital stock per laborer 1.8%
Output per unit of labor 1.8%
Output per unit of capital 1.2%
II. THE “TRUST” MOVEMENT

But these were also turbulent economic times. Notwithstanding the
enormous increases in production and productivity, the period from 1870 to
1890 was marked by deep recessions and declining prices. The Warren-
Pearson wholesale price index for all commodities fell from 135 to 82, for a
compound average rate of decline of 2.5 percent.48 Certainly much of this
43. See HISTORICAL STATISTICS, supra note 7, at 3-24 to -25 ser. Ca9 (data originally
reported in 1996 dollars).
44. See id. at ser. Ca11 (data originally reported in 1996 dollars).
45. SIMON KUZNETS, CAPITAL IN THE AMERICAN ECONOMY: ITS FORMATION AND
FINANCING 64 tbl.3 (1961) (data originally reported in 1929 constant dollars).
46. Id.
47. KENDRICK, supra note 41, at 332 tbl.A-XXI.
48. HISTORICAL STATISTICS, supra note 7, at 3-182 to -183 ser. Cc113.
price decline was due to the tight monetary policy that the United States
followed, at least until 1879, as part of the return to the gold standard from
the “greenback” standard after the Civil War.49 In the Long Depression
from 1873 to 1879, this caused an asset price deflation even as unit
production was increasing. Between 1873 and 1878, nominal GDP
declined 2.5 percent while real GDP increased 17.9 percent.50 After 1879,
when specie payments resumed, the price deflator exhibited a much slower,
but still downward, trend until around 1896.
Figure 2: GDP Price Deflator (2005 = 100)51
But at least some of the price decline during the period was due to
rapidly expanding aggregate output, which exceeded the rate of population
and export growth, coupled with broadening geographic markets that
brought more firms into competition with one another. David A. Wells, a
prominent popular economist at the time, believed that the primary cause of
declining prices was overproduction and underemployment, both caused by
technological advances.52 Moreover, where an increasingly large
investment was necessary to build minimum efficient scale factories, it was
in the interest of profit-maximizing firms to continue to produce as long as
price exceeded variable costs, even if the firm could not cover its fixed
49. See MILTON FRIEDMAN & ANNA JACOBSON SCHWARTZ, A MONETARY HISTORY OF
THE UNITED STATES, 1867–1960, at 15–88 (1963).
50. See HISTORICAL STATISTICS, supra note 7, at 3-24 ser. Ca13 (price deflator with
1996 =100); id. ser. Ca10 (nominal GDP); id. ser. Ca9 (real GDP).
51. Id. ser. Ca13 (data originally reported with 1996 = 100).
52. See David A. Wells, The Economic Disturbances Since 1873 (pts. 1–5), 31 POPULAR
SCI. MONTHLY 289, 433, 577, 768 (1887), 32 POPULAR SCI. MONTHLY 1 (1887). Other
contemporary analyses, while acknowledging the popular strength of Well’s argument, more
properly identified the problem. See, e.g., MORETON FREWEN, THE ECONOMIC CRISIS 165–94
(1888) (responding to Well’s argument).
costs.53 These factors gave rise to what became popularly known as

“ruinous,” “destructive,” or “excessive” competition, that is, competition
that drives prices below a level that permits the producer to make a fair
return on its productive efforts, assuming that it can stay in business at all.54
The sugar industry provides a vivid illustration of the problem. In 1867,
there were about fifty-two firms operating sixty refineries in the United
States and collectively producing about 421,000 short tons of refined
sugar.55 Over the next twenty years, the introduction of new batch
processing technology reduced the length of the refining process from two
weeks to twenty-four hours or less, depending on the type of sugar being
refined.56 By 1890, total production increased by almost a factor of four to
1,617,000 short tons, far in excess of population and export growth.57 As
production increased, supply soon significantly outstripped demand at
existing prices, competition among the sugar refineries became heated, and
prices rapidly declined. Profit margins reportedly dropped by almost 80
percent from $0.03 per pound in 1876 to $0.00685 in 1887.58 Despite
production tripling, some thirty-six refineries went out of business.59 The
companies that survived had invested in large-scale production
technologies, with the largest producing about 8,000 barrels a day, while
the refineries that failed produced only about 75 to 400 barrels daily.
Moreover, as the turn of the decade approached, it was obvious that some of
the remaining refineries would not survive. Reserving for the moment
whether it was in the public interest to allow the remaining refineries to
consolidate and coordinate which plants would continue to operate, the
private incentive to achieve some central coordination was compelling.60
53. See PORTER, supra note 4, at 10–11; see also Chandler, supra note 3, at 28 (noting
the expense of shutting down a factory and observing that from the mid-1870s to the mid-
1890s the supply of goods outstripped the demand and prices fell sharply). This is the well-
known “empty core” problem. See LESTER G. TELSER, ECONOMIC THEORY AND THE CORE
41–87 (1978). See generally Abagail McWilliams & Kristen Keith, The Genesis of the
Trusts: Rationalization in Empty Core Markets, 12 INT’L J. INDUS. ORG. 245 (1994).
54. Later, in some contexts “destructive” competition came to mean primary or
secondary line price discrimination designed to competitively disadvantage rivals if not drive
them out of business. This is the sense in which the Industrial Commission used the term at
the turn of the century. See, e.g., 19 U.S. INDUS. COMM’N, FINAL REPORT OF THE INDUSTRIAL
COMMISSION 660–62 (1902) (supplemental statement of Thomas W. Phillips).
55. PAUL L. VOGT, THE SUGAR REFINING INDUSTRY IN THE UNITED STATES 9–11 (1908)
(number of refineries); see also HISTORICAL STATISTICS, supra note 7, at 4-627 ser. Dd369
(refined sugar production).
56. VOGT, supra note 55, at 17.
57. See HISTORICAL STATISTICS, supra note 7, at 4-627 ser. Dd369.
58. VOGT, supra note 55, at 18.
59. Id.
60. For more on the sugar industry in the late nineteenth century, see generally ALFRED
S. EICHNER, THE EMERGENCE OF OLIGOPOLY: SUGAR REFINING AS A CASE STUDY (1978);
VOGT, supra note 55; David Genesove & Wallace P. Mullin, Testing Static Oligopoly
Models: Conduct and Cost in the Sugar Industry, 1890–1914, 29 RAND J. ECON. 355, 368
(1998); John E. Searles, American Sugar, in ONE HUNDRED YEARS OF AMERICAN COMMERCE
257 (Chauncey M. Depew ed., 1895); Richard Zerbe, The American Sugar Refinery
Company, 1887–1914: The Story of a Monopoly, 12 J.L. & ECON. 339 (1969).
Table 2: Changing Conditions in the Sugar Industry
Number Industry Output Average Output

Year of Refineries (000 short tons) per Plant
1860 41 394 9.6
1870 59 598 10.1
1880 49 994 20.3
1887 24 1507 62.8
There was considerable sympathy at the time regarding the problem of

excessive competition, and many saw merit in allowing businesses to
organize to prevent excessive competition.61 Classical economic thinking,
then prevalent, held that in normal markets the law of supply and demand
would set a natural price at a reasonable and remunerative level, while
excessive competition drives the price below remunerative levels. Under
this view, although excessive competition benefits customers temporarily
through lower prices, competitors who cannot survive exit the market, and
when enough competitors have left, the remaining firms raise prices above
remunerative levels until new entry appears and the cycle repeats itself.62
But even apart from declining prices and profits, competing firms had yet
another reason to consolidate: the prospect of supracompetitive profits.
Once scale economies had been exhausted and the markets reequilibrated
with a smaller number of firms (albeit larger ones), the ability to control
market supply can result in supracompetitive profits. Where other firms are
present in the marketplace, the ability to control supply is limited by the
competitive interactions of the firms. If one firm attempts to decrease
production in an effort to reduce supply, other firms in the market have an
incentive to take up some or all of the slack. As a result, it is seldom in the
interest of one firm in a defragmented, multi-firm market to reduce supply
below its competitive level. But, at least in principle, if firms supplying a
sufficient amount of the market supply cooperate in reducing production,
they can decide upon a joint profit-maximizing strategy that would
significantly increase each of their profits above the competitive level.
Likewise, while firms in some industries may face incentives to vertically
integrate into raw materials or distribution channels because of lower costs
through economies of integration, a firm that obtains control over essential
raw materials or distribution channels may be able to create barriers to entry
61. See REPORT OF THE COMMITTEE ON GENERAL LAWS RELATIVE TO COMBINATIONS

COMMONLY KNOWN AS TRUSTS, S. 112-64, at 5 (N.Y. 1889) [hereinafter NEW YORK 1889
REPORT] (“Such contests [from excessive competition] often result in wounds which it takes
long years to heal, and from them the public not only receive no real benefit, but positive
injury rather, for sooner or later the public are expected to make good the losses which such
ruinous policies entail.”).
62. See id. at 6.
to new competition and enable the firm to earn supracompetitive profits

even in the absence of economies of integration.63
III. FORMS OF COMBINATION AND PRE-ANTITRUST REGULATION

The increasing competition among firms and the decline in nominal
prices and the threat to producers’ profits, if not survival—so-called
excessive competition—created strong incentives in many industries to
coordinate and centralize operations in order to reduce capacity, control
overproduction, and reduce competitive pricing pressure. A New York
State Senate committee studying trusts at the time reported that
“[c]ombination rarely exists except as the result of excessive
competition.”64 Similarly, although outside of our period of study, at the
turn of the century, the U.S. Industrial Commission cited excessive
competition as the most important factor in prompting mergers and
acquisitions among competitors in the merger wave beginning in 1895.65
But given these incentives to coordinate, there remained the question of the
means of coordination.
Prior to 1879, there were three vehicles for competitors wishing to
coordinate their operations: simple combinations, pools, and corporations.
As discussed below, simple agreements and pools suffered from serious
incentive compatibility problems that could not be overcome by contract,
since almost all U.S. courts refused to enforce a combination’s underlying
agreements. Housing the combination in a corporation would have solved
the enforceability problem by eliminating the independence of the member
firms and substituting a command-and-control management structure. But
at the time, corporations were strictly limited by state law in their size,
scope of operations, and ability to hold stock in other corporations, and
hence were unsuitable for combinations of any size and geographic scope.
In 1879, the Standard Oil combination created the trust proper, which
enabled the combination to exercise command and control over its
operations much like a corporate holding company but without being
hindered by the constraints imposed on corporations by state corporation
laws. Within the next decade, several major, and an unknown number of
more minor, combinations had emulated Standard Oil and adopted a trust
structure. But the trust structure was soon attacked by several states that
sought to revoke the charters of corporations organized under their laws for
participating in a trust. Just at the same time, however, New Jersey began
to significantly liberalize its corporation laws, which enabled large
63. Economies of scale were probably not a reason to combine, at least in “loose”
combinations where member firms remained separate albeit collaborating entities. For the
most part, economies of scale occur at the plant or factory level. SCHMITZ, supra note 1, at
57. Since loose combinations did not integrate the facilities of their members, there probably
were little or no economies of scale to be gained.
64. NEW YORK 1889 REPORT, supra note 61, at 6.
65. See 19 U.S. INDUS. COMM’N, supra note 54, at 604. For a modern analysis drawing
the same conclusion, see LAMOREAUX, supra note 29, at 87.
combinations to adopt a corporate form. Collectively, these four vehicles

became known as “trusts,” and they were the vehicles at which the coming
antitrust legislation was aimed.
A. Simple Combinations
The simplest form of combination is an agreement among firms that
remain otherwise legally independent of one another. These agreements
tend to have simple terms, such as not selling below a certain price,
producing above a certain level, or allocating customers or sales territories
to particular participating firms. To allow the agreement to be more
flexible and enable the participating firms to respond to changing market
conditions, sometimes the contracting members would form an
unincorporated association and use its governance mechanism to centrally
fix prices and perhaps allocate sales quantities or customers among the
members.66 The idea behind these simple combinations is that if the
contracting members adhere to the agreement, they will make more profits
than they would in the absence of the agreement. Each member, however,
remains individually responsible for operating its own business and the
profits it earns are the profits generated by that business (that is, it does not
share in the profits of other combination members). We recognize these
arrangements today as garden-variety horizontal cartels.
A significant problem that contractual combinations face is cheating on
the combination’s rules. Each participating firm has an incentive to breach
its agreement by secretly shaving prices, increasing production above the
agreement’s allocation limits, or making sales to customers that have been
allocated to other members. After all, if everyone else in the combination
follows the rules, a firm that breaches the agreement can undercut its
competitors and sell more output at less than the combination’s price (but
still at higher prices than would exist with unregulated competition) and
make much higher profits than it could if it followed the rules. Since all
participants face similar incentives, this can make the combination very
unstable.67
This incentive incompatibility is the well-known prisoner’s dilemma
problem for cartels.68 The obvious solution to the cheating problem is to
66. The Articles of Association of the Manufacturers of Gunpowder, adopted on April

23, 1872, provides an example. See INDUSTRIAL COMBINATIONS AND TRUSTS 2 (William S.
Stevens ed., 1913) (reprinting articles of association). A variation is where one of the firms,
rather than an association, attempts to corner a market by entering into agreements with its
competitors, whereby the competitors would agree over the term of the contract to supply the
cornering firm with a certain quantity at a fixed (and presumably supracompetitive) price
and not to sell to any other person. See, e.g., Santa Clara Valley Mill & Lumber Co. v.
Hayes, 18 P. 391, 391–92 (Cal. 1888).
67. For more on cheating as the central problem in cartels, see ROBERT C. MARSHALL &
LESLIE M. MARX, THE ECONOMICS OF COLLUSION: CARTELS AND BIDDING RINGS 105–06
(2012).
68. In addition to incentive incompatibility in following the rules, simple combinations
also face a coordination problem: they have to reach agreement on the particular cartel rules
make the combination rules somehow enforceable. A common method

would be for the combination to create a contract with remedies for
breach.69 For example, the contract could provide that each participating
firm deposit a bond that the firm would forfeit to the other members if it
breached the rules70 or for the recovery of liquated damages by compliant
members from a member that breaches the contractually specified rules.71
But to the extent that the enforcement mechanism was an action in court—
say, for recovery on a bond, liquated damages, actual damages, or even
specific performance—most courts of the day would not intervene and grant
relief. With relatively rare exceptions, U.S. courts held that combination
agreements that were designed to raise prices or reduce output were
contrary to public policy and hence unenforceable as a matter of contract
law.
This rule had its origin in the early English common law of contracts in
restraint of trade. The early courts originally saw noncompetition
covenants in connection with a master-apprentice relationship and in
contracts for the sale of a business at a time when all business was
essentially local. Employers, then as now, often develop special skills in
the business as well as a detailed knowledge and close rapport with their
customers. These employers did not wish for their employees, after
learning the business and the customers, to go into competition against
them when the employees left their employment. To guard against this,
employers often required their employees to agree not to compete against
them for some number of years after the employee left their service.
Similarly, if a seller of a business opened a nearby competing
establishment, the seller could attract his old customers away from the
buyer and deprive the buyer of the benefit of his bargain. To deal with this
problem of retained goodwill, buyers included covenants in their purchase
agreements that prevented the seller from competing with his old business
at least for a certain period of time. These noncompetition covenants
became known as ancillary restraints, since they were connected to the
creation of an employment relationship or to the sale of a business.
Courts initially were hostile to ancillary noncompetition covenants.
Dyer’s Case,72 decided when the Black Death made labor scarce, is the first
they propose to follow. Even if the rules are followed, since different rules can have
different profit consequences for the members individually, reaching agreement on the rules
can be a major hurdle in cartel formation. For more on problems of cartel formation, see, for
example, MICHAEL D. WHINSTON, LECTURES ON ANTITRUST ECONOMICS 20–26 (2006). See
generally George J. Stigler, A Theory of Oligopoly, 72 J. POL. ECON. 44 (1964).
69. Contracts are not the only cartel enforcement mechanism. Another possibility is
preagreed reaction strategies by the conforming cartel members to punish members that
breach the cartel rules. See, e.g., Robert H. Porter, Optimal Cartel Trigger Price Strategies,
29 J. ECON. THEORY 313 (1983).
70. See, e.g., Palmer v. Stebbins, 20 Mass. (3 Pick.) 188, 188 (1825); Diamond Match
Co. v. Roeber, 13 N.E. 419, 420 (N.Y. 1887); De Witt Wire-Cloth Co. v. N.J. Wire-Cloth
Co., 14 N.Y.S. 277, 278 (C.P. 1891).
71. See, e.g., Cent. Ohio Salt Co. v. Guthrie, 35 Ohio St. 666, 668 (1880).
72. Y.B. 2 Hen. 5, fol. 5, Pasch, pl. 26 (1414) (Eng.).
reported case on contracts in restraint of trade. Although the report of the

case is meager, it appears that the court refused to enforce a debt on a bond
when the defendant allegedly broke his agreement not to practice the trade
of dyeing in his hometown for half a year.73 As late as 1602, English courts
held that it was against the law to prohibit any lawful trade at any time or at
any place.74 Very likely, this hostility had its origins in the English law of
apprenticeship. No one without an exemption could practice a regular trade
or craft without serving a long apprenticeship and obtaining membership in
the appropriate guild or company. At a time when guilds were local in their
jurisdiction and very reluctant to admit strangers to their membership, a
covenant not to compete, even when confined to a limited geographic area,
was tantamount to a ban on employment within the profession. This not
only deprived the community of the services of a skilled laborer but also
threatened the community with an additional welfare burden.
As the English economy became more developed, the opportunities for
employment and trade expanded and competition increased, causing the
reasons for the original strict rule against contracts in restraint of trade to
gradually disappear.75 By the beginning of the eighteenth century, some
courts were enforcing these ancillary restraints when they were supported
by adequate consideration and were reasonable under the circumstances to
balance the interests of the contracting parties and the community. The first
innovation on the old rule came in the 1614 case of Rogers v. Parrey.76 The
plaintiff had leased a house in London to the defendant for a term of
twenty-one years, for which the defendant paid ten pounds and promised
not to allow the adjoining shop to be used for the trade of a joiner.77 After
73. See id.

74. See Colgate v. Bacheler, (1602) 78 Eng. Rep. 1097 (K.B.) 1097 (voiding a bond
given by a haberdasher to abstain in the County of Kent on the cities of Canterbury and
Rochester from the use of his trade for four years or pay a bond of twenty). For other cases
between 1414 and 1601, see, for example, Anonymous, (1587) 72 Eng. Rep. 555 (K.B.) 555
(voiding a bond on a noncompetition covenant by one blacksmith to another in Southmins
not to compete in the town), and Anonymous, (1578) 72 Eng. Rep. 476 (K.B.) 477 (holding
unenforceable a covenant by an apprentice not to exercise his craft in Nottingham for four
years, a period longer than the law of apprenticeship recognized). Both cases cite Dyer’s
Case as the supporting authority. See Anonymous, 72 Eng. Rep. at 476; Anonymous, 72 Eng.
Rep. at 555.
75. This common law evolutionary process was recognized, at least retrospectively, in
the cases. See, e.g., Nat’l Benefit Co. v. Union Hosp. Co., 47 N.W. 806, 807 (Minn. 1891);
Nordenfelt v. Maxim Nordenfelt Guns & Ammunition Co., [1894] 1 A.C. 535 (H.L.) 547;
8 WILLIAM S. HOLDSWORTH, A HISTORY OF ENGLISH LAW 56 (1925) (observing that “the law
as to contracts in restraint of trade has, more than any other class of contracts, been moulded
by changing ideas of public policy”).
76. (1613) 80 Eng. Rep. 1012 (K.B.). The case is also reported at (1613) 79 Eng. Rep.
278 (K.B.). Rogers was also the earliest recorded action of assumpsit on a contact in
restraint of trade. See ALFRED W.B. SIMPSON, A HISTORY OF THE COMMON LAW OF
CONTRACT: THE RISE OF THE ACTION OF ASSUMPSIT 522 (1975).
77. Rogers, 80 Eng. Rep. at 1012–13.
the defendant broke his covenant, the plaintiff sued on assumpsit.78 Edward
Coke, then chief justice of the Court of King’s Bench, held that the
restrictive covenant was valid, since the restrictions were reasonable in light
of the circumstances and limited “for a time certain, and in a place
certain.”79
The most detailed and influential analysis of the relaxed rule appeared
almost a century later in the celebrated 1711 case of Mitchel v. Reynolds.80
Mitchel leased a bakehouse from Reynolds in a parish of London for five
years, and Reynolds agreed that if he worked anywhere in that parish as a
baker during that time he would pay the plaintiff £50 and posted a bond to
secure his promise.81 When Mitchel sued Reynolds to collect on the bond
for breach of his covenant, Reynolds, in defense, pleaded that, since he had
served his apprenticeship as a baker and had been admitted to the guild, no
private person could lawfully prevent him from working at that trade and
that he should not be required to pay the £50.82 Chief Justice Parker
disagreed and ordered that the debt on the bond should be paid.83 To
Parker, a covenant not to compete was reasonable and therefore enforceable
as a matter of contract law, since it restricted the business opportunities of
the covenantor no more than necessary to achieve the legitimate business
objective of ensuring that Mitchel obtained the benefit of his bargain.84 On
the other hand, Parker opined, if the restraint prohibited Reynolds from
competing throughout England, the restraint would have been unlawful
since it reached beyond areas in which Mitchel had a legitimate need for
protection.85
Courts quickly construed Mitchell to apply different rules depending on
whether the challenged restraint was general or partial. General restraints
of trade, that is, restraints that prohibited the covenantor from competing
anywhere in the jurisdiction at any time, were always void and
unenforceable since they both deprived the public of the restricted party’s
industry as well as prevented him from pursuing his occupation and
supporting himself and his family.86 Partial restraints of trade, which were
limited in time and place and so provided the covenantor some opportunity
to work, were presumptively illegal, but the presumption could be rebutted
where the party seeking to enforce the restriction (or collect damages for a
78. Id. Assumpsit is a form of action for the recovery of damages for the
nonperformance of a simple contract (that is, a contract not under seal or of record). See
1 JOSEPH CHITTY, A TREATISE ON PLEADING 111 (5th ed. 1831).
79. Id. at 1013.
80. (1711) 24 Eng. Rep. 347 (K.B.).
81. Id. at 347.
82. Id.
83. Id. at 348.
84. Id.
85. Id.
86. See, e.g., Or. Steam. Navigation Co. v. Winsor, 87 U.S. (20 Wall.) 64, 68 (1873);
Alger v. Thacher, 36 Mass. (19 Pick.) 51, 53–54 (1837) (also noting that general restraints
can “prevent competition and enhance prices” and “expose the public to all the evils of
monopoly”); Lange v. Werk, 2 Ohio St. 520, 532 (1853).
breach) could demonstrate that the restraint was ancillary to a legitimate

business purpose and was reasonable in light of its scope, the business
purpose it furthered, and the interest of the public. The seminal statement
of the common law reasonableness test was provided by Chief Judge Tindal
for the Court of Common Pleas in Horner v. Graves87:
[W]e do not see how a better test can be applied to the question whether
reasonable or not, than by considering whether the restraint is such only
as to afford a fair protection to the interests of the party in favour of
whom it is given, and not so large as to interfere with the interests of the
public. Whatever restraint is larger than the necessary protection of the
party, can be of no benefit to either, it can only be oppressive; and if
oppressive, it is, in the eye of the law, unreasonable. Whatever is
injurious to the interests of the public is void, on the grounds of public
policy.88
Many American courts, as well as English courts, adopted the Horner
formulation.89 Over time—as markets continued to broaden, businesses
grew bigger, and labor mobility generally improved—some (but not all)
courts moved away from the strict distinction between general and partial
restraints and relied more on the reasonableness test to determine the
enforceability of ancillary restraints.90 Courts first began to apply a
87. (1831) 131 Eng. Rep. 284 (C.P.).

88. Id. at 287.
89. For American cases following the Horner formulation, see, for example, Or. Steam
Navigation, 87 U.S. at 67 & n.†; Craft v. McConoughy, 79 Ill. 346, 349–50 (1875);
Mandeville v. Harman, 7 A. 37, 39 (N.J. Ch. 1886); Brewer v. Marshall, 19 N.J. Eq. 537,
547 (1868); Diamond Match Co. v. Roeber, 13 N.E. 419, 421 (N.Y. 1887); Grasselli v.
Lowden, 11 Ohio St. 349, 357 (1860); Lange, 2 Ohio St. at 528–29; Morris Run Coal Co. v.
Barclay Coal Co., 68 Pa. 173, 185 (1871); French v. Parker, 14 A. 870, 871 (R.I. 1888).
90. In Diamond Match, a leading case at the time, the New York Court of Appeals
explored the decline of the distinction between general and partial restraints in detail.
Diamond Match, 13 N.E. at 419. On the facts, Diamond Match sued William Roeber for
liquated damages and an injunction for violating a noncompetition covenant to which Roeber
had agreed when he sold his New York match manufacturing business. Id. at 419–20. The
covenant restricted Roeber from engaging directly or indirectly in the sale of friction
matches for a period of ninety-nine years anywhere in the United States except in Nevada
and Montana. Id. at 419. Diamond Match sought to enforce the covenant when Roeber
became the superintendent of a rival match manufacturing company in New Jersey. Id. at
420. The court found the restraint on Roeber to be reasonable and enforceable. Id. at 423.
Although the restraint was essentially general in nature (although technically partial because
of the exclusions), the purchaser sold to dealers in multiple states using traveling salesmen
and the restraint was designed to ensure the purchaser of the full benefit of its bargain. Id. at
420. The court also found that the restraint only bound the individual seller and did not
exclude third parties from entering the business, and that there was “little danger that the
public will suffer harm from lack of persons to engage in a profitable industry.” Id. at 422.
For other cases rejecting the rule that general restraints are always unenforceable and relying
solely on the reasonableness test, see, for example, W. Wooden-Ware Ass’n v. Starkey,
47 N.W. 604 (Mich. 1890) (finding restraint overly broad and hence unreasonable and
unenforceable); Leslie v. Lorillard, 18 N.E. 363, 365–66 (N.Y. 1888); Herreshoff v.
Boutineau, 19 A. 712, 713 (R.I. 1890) (same).
reasonableness test to restraints that were unlimited in duration.91 Courts

were more reluctant to apply a reasonableness test to “unlimited” territorial
restraints.92 Indeed, some jurisdictions defined general restraints to include
those that covered the entire territory of the jurisdiction (such as a state)
even when they permitted the restricted party to operate outside of the
jurisdiction.93 Eventually, however, even those restraints became subject to
the reasonableness test94 and the distinction between general and partial
restraints began to diminish in favor of a pure reasonableness test.95
Over time, in applying the reasonableness test, courts also began to defer
increasingly to the contracting parties. The point of departure in a
reasonableness analysis is whether the restriction is overly broad in the
sense that it goes beyond the legitimate protectable interests of the
restriction’s beneficiary. Courts increasingly held that the parties, rather
than the courts, were in the best position in the give and take of their
bargaining to draw the right balance between these opposing interests.96
91. See, e.g., Cook v. Johnson, 47 Conn. 175, 178 (1879); Bowser v. Bliss, 7 Blackf.
344, 346 (Ind. 1845); Guerand v. Dandelet, 32 Md. 561, 567 (1870); Webster v. Buss,
61 N.H. 40, 40 (1881); French, 14 A. at 871.
92. See, e.g., Wiley v. Baumgardner, 97 Ind. 66, 68 (1884); Bishop v. Palmer, 16 N.E.
299, 303–04 (Mass. 1888).
93. See, e.g., More v. Bonnet, 40 Cal. 251 (1870); Wright v. Ryder, 36 Cal. 342, 359
(1868); Taylor v. Blanchard, 95 Mass. (13 Allen) 370, 374–75 (1866); State v. Neb.
Distilling Co., 46 N.W. 155, 160 (Neb. 1890); Dunlop v. Gregory, 10 N.Y. 241, 244–45
(1851) (dictum); Lange, 2 Ohio St. at 530. The idea was that a noncompetition covenant
deprived a state’s citizens of the restricted party’s productive endeavors as would a covenant
that covered the entire county which drove the restricted party to another state. Taylor,
95 Mass. at 374–75.
94. See, e.g., Or. Steam Navigation, 87 U.S. at 64 (upholding noncompetition restraint
that covered California and other areas); Morse Twist Drill & Mach. Co. v. Morse, 103
Mass. 73 (1869) (upholding unlimited territorial restriction); Beal v. Chase, 31 Mich. 490
(1875) (upholding a noncompetition covenant in connection with the sale of a printing
business that covered the entire state); Bailey v. Collins, 59 N.H. 459 (1879); Diamond
Match, 13 N.E. at 421–23 (upholding a covenant in connection with the sale of a New York
match factory not to compete in the sale of friction matches anywhere within the United
States except Nevada and Montana); Herreshoff, 19 A. at 713 (holding noncompetition
covenant in connection with employment not void simply because it covered the entire
state). Some courts were also willing to view the territorial restriction as divisible, so if a
contract named a smaller area that was reasonable and a larger area that was overly broad
(e.g., “the City of Jacksonville, or anywhere in the United States”), the court would enforce
the restriction as to the smaller area but not the larger one. See, e.g., Wiley, 97 Ind. at 69
(1884) (noting rule); Peltz v. Eichele, 62 Mo. 171, 173 (1876) (reducing covered territory
from “any other place” to St. Louis); Lange, 2 Ohio St. at 531 (reducing covered territory
from the United States to one county).
95. See, e.g., Gibbs v. Consolidated Gas Co., 130 U.S. 396, 409 (1889) (“The question is
whether, under the particular circumstances of the case and the nature of the particular
contract involved in it, the contract is or is not unreasonable.”); W. Wooden-Ware Ass’n,
47 N.W. at 604; Herreshoff, 19 A. at 713; Leslie, 18 N.E. at 365–66; Diamond Match,
13 N.E. at 421. In England, the House of Lords eliminated the distinction in 1894.
Nordenfelt v. Maxim Nordenfelt Guns & Ammunition Co., [1894] 1 A.C. 535.
96. See, e.g., Beal, 31 Mich. at 523 (Christiancy, J.) (“[W]here such a contract is the
result of fair bargaining, the reasonable presumption is, that each party, in view of all the
circumstances which were within his own intimate knowledge, was able to see how the
bargain was to result to his advantage, and that the party resigning the business did not do so
The idea was that the beneficiary would have to pay the restricted party
more consideration as the restriction became broader, and that a beneficiary
therefore would not seek a restrictive covenant that was broader than his
legitimate interest.97 So by the 1890s, the case results were heavily
weighted toward enforcing ancillary restraints negotiated by the parties, at
least in the typical situation of the sale of a business.
But it is important to keep in mind that the litigants in these cases were
almost always the contracting parties, not the state or injured third parties.
An action on the condition of a bond, assumpsit, or specific performance
could only be brought by a party with an enforceable contractual right. The
existence of an enforceable obligation necessitated a valid contract, which
in turn required mutuality of consideration. The early courts did not
recognize executory obligations on the part of the covenantee to be legally
sufficient consideration. Consequently, the purchase of a business and the
employment for pay were two of the few types of nonexecutory
consideration that could support the covenantee’s side of the bargain for a
noncompetitive covenant from the other party.98 In these cases, a decision
not to enforce a restrictive covenant would have relieved the restricted party
from an obligation that it had freely accepted at the time the contract was
entered or would otherwise work a significant injustice to an essentially
innocent party.99
Enforcing a noncompetition covenant in connection with the sale of a
business or an employment contract also was unlikely to threaten the public
interest by reducing competition, raising prices, or reducing market output.
The buyer replaced the seller in the operation of the business, and the
employer continued to work in the town training apprentices, with the
graduating apprentices moving elsewhere to work. In these cases, although
the effect on the public interest remained part of the reasonableness test,
there was no reason for courts to take competitive effects (as we understand
them today) into the analysis. There was the rare case where an agreement
could adversely affect competition, but in these cases the courts could rely
on the public interest leg of the test to find the contract unenforceable. For
example, a company could buy up all of its competitors, bind each one of
them to a noncompetition covenant, and (at least temporarily) become the
only seller in the marketplace allowing it to raise prices. This was the
situation in Richardson v. Buhl,100 where the Michigan Supreme Court
refused to enforce a noncompetition covenant in connection with the sale of
a business, since the purchase and the covenant were part of a broader
without being fully satisfied that he was receiving full equivalent, which would be more
advantageous to him than the property and the business sold.”).
97. See id. at 522–23.
98. Occasionally, a case would arise when the covenantee would simply pay the
restricted party not to compete. See, e.g., Leslie, 18 N.E. at 364 (where a new competitor
allegedly engaged in predatory conduct in order to coerce a payment in return for exiting
business from the incumbent steamship company).
99. See, e.g., Manchester & L.R.R. v. Concord R.R., 20 A. 383 (N.H. 1890).
100. 43 N.W. 1102 (Mich. 1889).
scheme to monopolize the U.S. market for matches by purchasing the assets
of most match manufacturing companies in the country.101 Courts also
opposed ancillary restraints that indirectly imposed restrictions on third
parties.102 As a general rule, courts held that public policy favored
competition because competition tended to provide consumers with the
lowest possible prices, and opposed monopolies, which tended to raise
prices.103
Courts began to see more contracts that could substantially affect
competition once the courts accepted reciprocal executory commitments as
valid consideration for the purposes of mutuality in the eighteenth century.
This created the possibility of contracts consisting of reciprocal
noncompetition covenants: the commitment of A not to compete with B
could be the requisite consideration for B’s commitment not to compete
with A and vice versa. These reciprocal noncompetition commitments,
which did not promote capital mobility or labor training, made the
elimination of competition the primary, if not only, purpose of the contract
between the parties. To distinguish them from restraints ancillary to
business sales or employment relationships, some courts called
arrangements involving these reciprocal, noncompetition covenants
combinations or conspiracies in restraint of trade, although many courts
drew no distinction and continued to call these restraints simply contracts in
restraint of trade. However denominated, the distinguishing factor was that
these restraints were nonancilliary in the sense that they did not promote
the sale of a business, the hiring of employees, or any other primary
business purpose; rather, their primary purpose was to eliminate
competition among the convenantors.
When confronted with nonancilliary reciprocal noncompetition covenants
that threatened to raise prices and reduce output, courts generally refused to
enforce them. By 1890, most courts in the United States agreed that, when
the challenged restraints encompassed all or materially all of the
competitors in a trading area and completely determined the members’
manner of trade, the restraints were void as contrary to public policy and
hence unenforceable. Courts often reached this result after finding that the
purpose of the combination was to artificially enhance prices, often through
limiting supply either by reducing their own production or sales or by
101. Id. at 1110.

102. See, e.g., Crawford & Murray v. Wick, 18 Ohio St. 190 (1868) (declaring unlawful a
covenant in a contract for the lease of coal lands that obligated the lessee to require his
employees to purchase all of their supplies at the lessor’s store).
103. See, e.g., Anderson v. Jett, 12 S.W. 670, 672 (Ky. 1889) (“That public policy that
encourages fair dealing, honest thrift, and enterprise among all the citizens of the
commonwealth, and is opposed to monopolies and combinations, because unfriendly to such
thrift and enterprise, declares all combinations whose object is to destroy or impede free
competition between the several lines of business engaged in utterly void.”); Cent. Ohio Salt
Co. v. Guthrie, 35 Ohio St. 666, 672 (1880) (“Public policy, unquestionably, favors
competition in trade, to the end that its commodities may be afforded to the consumer as
cheaply as possible, and is opposed to monopolies, which tend to advance market prices, to
the injury of the general public.”).
contracting with third parties not to sell into the area.104 Then, as today,
courts were reluctant to engage explicitly in a balancing analysis under the
reasonableness test for a restraint of trade, so they almost always decided
cases at the corners: they found these types of restraints unenforceable
because they were general restraints of trade105 or because the restraint was
not ancillary to any legitimate business purpose and deprived the public of
the benefits of competition.106 On the other hand, courts typically upheld
restraints that were partial, involved less than all of the sellers in the market,
had a legitimate business purpose, and did not restrict third parties from
competing with the contracting parties.107
In addition to analyzing noncompetition agreements among combinations
under a reasonableness test for restraints of trade, many courts also
characterized the ability of a combination to raise prices or restrict market
104. See, e.g., Anderson, 12 S.W. at 670 (finding void a combination to eliminate all
competition and pool profits between two rival steamboat companies on the Kentucky river);
India Bagging Ass’n v. B. Kock & Co., 14 La. Ann. 168 (1859) (summarily finding
unenforceable an agreement whereby eight firms agreed for a period of three months not to
sell their holdings of India bagging without the consent of the majority); Pittsburgh Carbon
Co. v. McMillin, 23 N.E. 530 (N.Y. 1890) (combination of nine carbon companies that
consolidated their management and control of their respective businesses in a trustee); Arnot
v. Pittston & Elmira Coal Co., 68 N.Y. 558 (1876) (holding that a contract providing that
P&E would purchase up to a fixed amount of coal per month from its competitor and that the
competitor would not sell coal into the Elmira market was in furtherance of a corner by P&E
designed to create artificially high prices in the Elmira market and hence illegal); Stanton v.
Allen, 5 Denio 434 (N.Y. Sup. Ct. 1848) (finding void for public policy a pooling agreement
among all transportation lines on the Erie and Oswego canals).
105. See, e.g., W. Union Tel. Co. v. Am. Union Tel. Co., 65 Ga. 161, 163 (1880) (“Such
contracts are not favored by the law; they are against the public policy, because they tend to
create monopolies, and are in general restraint of trade.”); Cent. Ohio Salt, 25 Ohio St. at
672–73 (refusing to enforce a voluntary association agreement among salt manufacturers in a
large trading area where the association could regulate member production, and all produced
salt, when packed in barrels, became the property of the association to be sold only at retail
and at fixed prices); see also Skrainka v. Scharringhausen, 8 Mo. App. 522, 525 (Ct. App.
1880) (characterizing restraints held void and unenforceable in Craft, Morris Coal, Arnot,
and Stanton as “restraints in the general sense”).
106. See, e.g., Craft v. McConoughy, 79 Ill. 346 (1875) (finding illegal an agreement to
form a secret partnership of all grain dealers in the town and surrounding area to pool profits
in the sale of grain in Rochelle, Illinois); Morris Run Coal Co. v. Barclay Coal Co., 68 Pa.
173 (1871) (finding illegal an association agreement among five coal companies to allocate
coal regions that they controlled and to sell coal only in amounts and at prices set by the
association).
107. See, e.g., People’s Gaslight & Coke Co. v. Chi. Gaslight & Coke Co., 20 Ill. App.
473 (1886) (noting actual competition from other sellers and enforcing mutual
noncompetition covenants between two gas companies), rev’d on other grounds, 13 N.E.
169 (1887) (finding restraints, although partial, prejudicial to the public interest and hence
unenforceable given the public nature of the services involved and also finding
noncompetition covenants outside of the authority of the corporate charters of the
contracting parties); Hubbard v. Miller, 27 Mich. 15, 20–21 (1873) (holding that a partial
restraint is “not specially injurious to the public” where “every other person except the
[covenantor] is still at liberty to engage in the same business within the same limits”); see
also Chappel v. Brockway, 21 Wend. 157, 163 (N.Y. Sup. Ct. 1839) (finding no monopoly
where the noncompetition covenant “only secures the plaintiff in the exclusive enjoyment of
his business as against a single individual, while all the world beside are left at full liberty to
enter upon the same enterprise”).
supply as creating a monopoly and held that agreements in furtherance of

schemes to monopolize the market were void and unenforceable.108 These
courts analogized a de facto exclusive right to sell goods or services in an
area to a monopoly created by a prerogative or legislative grant and held
that the contracts that furthered a private monopoly were void and
unenforceable in the absence of a legislative grant.109 Still other courts
analogized these restraints to forestalling, regrating, and engrossing—old
English statutory crimes with a long and storied history that some
nineteenth century observers equated with “cornering” a market.110
Whether or not forestalling, regrating, or engrossing technically remained
108. See, e.g., W. Union Tel. Co., 65 Ga. at 162–63 (finding that agreements “entered into
to cripple and prevent competition, and that they thereby enable the plaintiff in error to fix its
tariff of rates at a maximum . . . are not favored by the law; they are against the public
policy, because they tend to create monopolies, and are in general restraint of trade”); Craft,
79 Ill. at 349 (characterizing a combination of all of the grain merchants in a town to fix
prices and pool profits as an illegal attempt “to control and monopolize the entire grain trade
of the town and surrounding country”); Richardson v. Buhl, 43 N.W. 1102 (Mich. 1889)
(finding that the purpose of the Diamond Match Company was to monopolize the
manufacture and sale of friction matches in the United States and holding that contracts in
furtherance of this scheme were void and unenforceable); Arnot, 68 N.Y. at 567–69 (holding
that where a defendant’s purpose was to obtain control over the sale of all anthracite coal in
the Elmira market in order to raise prices, and where the plaintiff had knowledge of this
purpose, a contract between the plaintiff and defendant that prevented the plaintiff from
selling coal in Elmira was void and unenforceable); Cent. Ohio Salt, 35 Ohio St. at 672
(finding that the “clear tendency” of an agreement among essentially all of the territory’s salt
manufacturers to fix prices and control production through an association was “to establish a
monopoly, and to destroy competition in trade, and for that reason, on grounds of public
policy” refusing to enforce the agreement); see also State v. Neb. Distilling Co., 46 N.W.
155, 161 (Neb. 1890) (finding that the purpose of the Whiskey Trust was “to control prices,
prevent production, and create a monopoly of the most offensive character”).
109. See, e.g., W. Union Tel. Co., 65 Ga. at 162–63 (holding void and unenforceable
contracts providing Western Union the exclusive right to erect telegraph lines along the
rights of way of the contracting railroads); FREDERICK H. COOKE, THE LAW OF TRADE AND
LABOR COMBINATIONS 94–95 (1898) (“Within a comparatively recent period, the conception
of a monopoly has been extended from a right created by government to a condition
produced by the acts of mere individuals; thus, where, within a given area, all sales of a
given article are made by a single individual or set of individuals.” (footnote omitted)).
110. See, e.g., Raymond v. Leavitt, 9 N.W. 525, 526 (Mich. 1881). Originally,
forestalling was the buying or selling of foodstuffs and other necessities of life outside of an
officially established fair or other marketplace and then reselling them in the market,
presumably at higher prices; regrating was a form of arbitrage: the buying of necessities in
one fair and reselling them in the same area; engrossing was a form of forward contract: the
buying of crops in the field with the intent to resell them once harvested. See 5 & 6 Edw. 6,
c. 14 (1552) (Eng.), reprinted in 5 Stat. 377 (1763) (Eng.) (defining terms). Higher prices,
while often incidental to these practices, were not the harm the English statutes sought to
prevent. Rather, in the medieval period when these laws emerged, local authorities such as
manors, cities, and guilds had legally enforceable prerogative grants or customary rights to
organize local markets, set conditions of trade, and collect taxes on goods sold. Forestalling,
regrating, and engrossing almost surely were declared crimes more to protect the rights of
market organizers than to protect consumers from monopoly pricing. Later economic and
political changes made these crimes obsolete, and by the early 1700s they had largely fallen
into disuse and many of the statutes were repealed. Even so, some later English courts held
that these practices violated the common law if not statutory law. See R v. Waddington,
(1800) 102 Eng. Rep. 56 (K.B.) 65; Rex v. Rusby, (1799) 170 Eng. Rep. 241.
indictable common law crimes under state law,111 the idea that cornering
the market to increase prices above reasonable levels was against public
policy and that the implementing restraints should not be enforceable
retained traction.
Overall, by the time of the passage of the Sherman Act in 1890, the
common law governing contracts, combinations, and conspiracies in
restraint of trade in the United States was reasonably uniform in
application, if not in principle.112 Restrictive covenants that were freely
negotiated, ancillary to a legitimate business purpose, and did not threaten
higher prices, reduced output, and other “evils of monopoly”113 were
generally enforced, while those that restricted enough competitors to enable
a contracting party or combination to harm the public interest by raising
prices or reducing output were almost always held to be void as contrary to
public policy. But there are four aspects of the late nineteenth century
common law worthy of note.
First, for ancillary restraints in nonexecutory agreements (such as in the
sale of a business), there was a tendency for courts to view, if not legally
presume, freely negotiated restraints as reasonable and enforceable,
regardless of how they constrained the contracting parties, in the absence of
a showing that the effects of the restraints went beyond the parties and
materially harmed the public interest.114 A reading of the cases at the time
111. In 1844, Parliament passed legislation reaffirming the repeal of all statutes
prohibiting forestalling, regrating, and engrossing and declaring that these activities were not
to be found criminal at common law. 7 & 8 Vict., c. 24 (1844) (U.K.). The old notions of
these crimes did not entirely disappear in the United States. See Taggart v. City of Detroit,
38 N.W. 714, 718 (Mich. 1888) (noting that the charter of the City of Detroit always had the
authority to prevent forestalling and regrating and that the city always had ordinances on
these practices with respect to the city-operated public market to ensure that consumers
could always deal directly with farmers and not through middlemen); NEW YORK 1889
REPORT, supra note 61, at 7 (suggesting that forestalling, regrating, and engrossing were still
indictable as common law misdemeanors in New York State). For more on forestalling,
regrating, and engrossing, especially as it relates to antitrust law, see Edward A. Adler,
Monopolizing at Common Law and Under Section Two of the Sherman Act, 31 HARV. L.
REV. 246, 251–63 (1917); Wendell Herbruck, Forestalling, Regrating and Engrossing,
27 MICH. L. REV. 365 (1929).
112. See Tex. & Pac. Ry. Co. v. S. Pac. Ry. Co., 6 So. 888, 891 (La. 1889) (“We have
been at great pains, and have devoted long and tedious labor, to examine all the authorities,
consisting mainly of decisions rendered on the point by courts of last resort in this country,
which were submitted to us by counsel in the case, and we reach the conclusion that
American jurisprudence has firmly settled the doctrine that all contracts which have a
palpable tendency to stifle competition, either in the market value of commodities or in the
carriage or transportation of such commodities, are contrary to public policy, and are
therefore incapable of conferring upon the parties thereto any rights which a court of justice
can recognize or enforce.”).
113. See, e.g., Alger v. Thacher, 36 Mass. (19 Pick.) 51, 54 (1837); see also Bishop v.
Palmer, 16 N.E. 299, 304 (Mass. 1888) (citing Alger, 36 Mass at 54); Newell v. Meyendorff,
23 P. 333, 334 (Mont. 1890) (quoting Alger, 36 Mass. at 54).
114. See Leslie v. Lorillard. 18 N.E. 363, 366 (N.Y. 1888) (“[C]ourts should refrain from
the exercise of their equitable powers in interfering with and restraining the conduct of the
affairs of individuals or of corporations, unless their conduct, in some tangible form,
threatens the welfare of the public.”).
indicates that the burden of proving harm to the public interest from an
ancillary restraint was a heavy one. Significantly, however, no such
presumption appears in combination cases for reciprocal, nonancilliary
noncompetition restraints. If anything, just the opposite was true.115
Second, harm to the public interest almost always meant significant harm
to competition reflected through increased prices and reduced output. The
judicial analysis of a restraint’s effect on prices and output, however, was
not particularly sophisticated. Courts depended on rather rudimentary
notions of competitive constraint. If, for example, the court found that there
was sufficient actual rivalry between the combination and independent third
parties to ensure price competition so that the combination could increase
prices, the restraint did not threaten the public interest and hence was
enforceable. Even if actual competition from third parties was not present,
if the court found that barriers to entry were low, and the challenged
restraints did not affect third parties, the court could uphold the
combination on the ground that a new entry would occur to protect the
public if the combination raised prices above reasonably remunerative
levels.116 Conversely, where the combination comprised most, if not all, of
the competitors in the market, barriers to entry were high, and prices were
fixed at levels not reflecting a competitive market, courts tended to find the
restraints contrary to the public interest and unenforceable. 117
Third, and somewhat relatedly, courts did not regard all price increases
and output reductions as necessarily contrary to the public interest. As
discussed in the beginning of this section, there was significant concern in
115. See, e.g., Cleveland, C., C. & I. Ry. Co. v. Closser, 26 N.E. 159, 163 (Ind. 1890)
(observing that the justification for a horizontal price-fixing combination “must be upon an
affirmative showing, and one so full, complete, and clear as to remove the presumption (to
which its existence of itself gives rise) that it was formed to do mischief to the public by
repressing fair competition”). England did adopt the presumption that a freely negotiated
horizontal combination was reasonable. See Mogul Steamship Co. v. McGregor, [1892] 1
A.C. 25.
116. See, e.g., Goodman v. Henderson, 58 Ga. 567, 570 (1877) (“It was argued that it
tended to a monopoly, as the contracting parties were the only active parties engaged in
purchasing such hides; but any others, we suggest, could engage, if they wished, and, if
prices warranted, they certainly would do so.”); Leslie, 18 N.E. at 366 (finding a
noncompetition clause enforceable where it restricted only the covenantee and did not
exclude other competition); Diamond Match Co. v. Roeber, 13 N.E. 419, 422 (N.Y. 1887)
(“To the extent that the contract prevents the vendor from carrying on the particular trade, it
deprives the community of any benefit it might derive from his entering into competition.
But the business is open to all others, and there is little danger that the public will suffer
harm from lack of persons to engage in a profitable industry. Such contracts do not create
monopolies. They confer no special or exclusive privilege.”). The Northern District of Ohio
applied similar reasoning when it rejected an application for removal of the defendant to
stand trial in the District of Massachusetts in a Sherman Act challenge to the Whiskey Trust,
finding that the indictment was insufficient, as it did not allege that the Whiskey Trust
exerted any control over production or prices of the 25 percent of distilleries in the country
that it did not own. In re Corning, 51 F. 205, 210–11 (N.D. Ohio 1892).
117. See, e.g., Anderson v. Jett, 12 S.W. 670 (Ky. 1889); Cent. Ohio Salt Co. v. Guthrie,
35 Ohio St. 666 (1880); Craft v. McConoughy, 79 Ill. 346 (1875); Morris Run Coal Co. v.
Barclay Coal Co., 68 Pa. 173 (1871); India Bagging Ass’n v. B. Kock & Co., 14 La. Ann.
168 (1859); Stanton v. Allen, 5 Denio 434 (N.Y. Sup. Ct. 1848).
the years prior to the passage of the Sherman Act about “ruinous,”
“destructive,” or “excessive” competition, that is, competition that reduced
prices to a level at which many producers in the market could not cover
their costs or at least could not earn a fair or reasonable profit on their
business. Some courts observed that restraints designed to eliminate
excessive competition and stabilize prices at a “reasonable” level among
competitors served a legitimate public purpose and supported the
reasonableness of a restrictive combination.118 While many of these same
118. See, e.g., Cleveland, 26 N.E. at 163 (assuming without deciding that there is a
defense for a horizontal price-fixing combination, “it can only be so where it is affirmatively
shown that its object was to prevent ruinous competition, and that it does not establish
unreasonable rates, unjust discriminations, or oppressive regulations”); Sayre v. Louisville
Union Benevolent Ass’n, 62 Ky. (1 Duv.) 143, 147 (1863) (“The public interest does not, we
believe, forbid carriers from guarding themselves against undue competition, reducing
freights below the standard of fair compensation; and we should hesitate to condemn an
agreement between carriers not to carry goods for less than a certain, reasonable price.”);
Cent. Shade-Roller Co. v. Cushman, 9 N.E. 629, 631 (Mass. 1887) (overruling a demurrer to
enforce an agreement among three competing patentee-manufacturers to combine their
patents and charge a uniform fixed price where the purpose of the arrangement was allegedly
“to prevent the injurious effects, both to producers and consumers, of fluctuating prices
caused by undue competition”); Skrainka v. Scharringhausen, 8 Mo. App. 522, 523–24, 527
(Ct. App. 1880) (finding an agreement of twenty-three stone quarry operators in a district of
St. Louis that did not embrace all competitors in St. Louis and was limited in time to be a
partial restraint of trade and reasonable, where its purpose was to “secure a fair,
proportionate sale of the produce of all quarries at uniform prices and living rates” and did
not apparently tend “to deprive men of employment, unduly raise prices, cause a monopoly,
or put an end to competition”); Manchester & L.R.R. v. Concord R.R., 20 A. 383, 384 (N.H.
1890) (observing that “the lessons of experience, as well as the deductions of reason, amply
demonstrate that the public interest is not subserved by competition which reduces the rate of
transportation below the standard of fair compensation”); see also Beal v. Chase, 31 Mich.
490, 521 (1875) (Christiancy, J.) (“The public is quite as much interested in the prosperity of
its citizens in their various avocations as it can possibly be in their competition. The latter
may bring low prices to purchasers, but may also bring them so low that capital becomes
unprofitable and business men fail, to the general injury of the community.”); Leslie, 18 N.E.
at 366 (“I do not think that competition is invariably a public benefaction, for it may be
carried on to such a degree as to become a general evil.”); ELISHA GREENHOOD, THE
DOCTRINE OF PUBLIC POLICY IN THE LAW OF CONTRACTS 683 (1886) (stating that the
elimination of ruinous competition is a legitimate purpose of a restraint); 2 VICTOR
MORAWETZ, A TREATISE ON THE LAW OF PRIVATE CORPORATIONS § 1131, at 1096–97 (2d ed.
1886) (same with respect to competing railroads). Interestingly, Chief Judge Parker in
Mitchel v. Reynolds arguably recognized destructive competition as legitimate grounds for a
noncompetition covenant, at least when connected to the sale of a business. Mitchel v.
Reynolds, (1711) 24 Eng. Rep. 347 (K.B.) 350 (finding as the fourth grounds for upholding
the restraint “to prevent a town from being overstocked with any particular trade”); accord
Holmes v. Martin, 10 Ga. 503 (1851). For an early American view, see Palmer v. Stebbins,
20 Mass. (3 Pick.) 188, 192 (1825) (“I am rather inclined to believe, that in this country at
least, more evil than good is to be apprehended from encouraging competition among rival
tradesmen or men engaged in commercial concerns.”). The court qualified its view in
Palmer, which involved a contract providing for the exit of a rival boatman and an exclusive
dealing covenant, by supposing that the beneficiary of the restrictive covenants would not
enter into so many contracts as to obtain a monopoly. Id.; see also NEW YORK 1889 REPORT,
supra note 61, at 5 (“Such contests [from excessive competition] often result in wounds
which it takes long years to heal, and from them the public not only receive no real benefit,
but positive injury rather, for sooner or later the public are expected to make good the losses
which such ruinous policies entail.”).
courts recognized that a combination could raise prices above a reasonable

price and that the restrictive covenants underlying such combinations
should not be enforced,119 the idea that firms could legitimately combine to
mitigate ruinous competition and raise prices minimally provided at least a
moral justification for many combinations of the day. But very few cases
raised the defense that the combination was justified on the grounds of
mitigating ruinous competition, and the common law did not develop any
standard to determine whether a combination’s increased prices were within
a permissible range.
Fourth, despite the increasing dominance of the reasonableness test and
its expansion to include the public’s interest in competition, the common
law of contracts, combinations, and conspiracies in restraint of trade, the
test never lost its mooring to the protection of the covenantor from
unreasonably broad restraints limiting its freedom of action in the
marketplace. As a result, contracts that imposed an unreasonable restraint
on trade, while void and unenforceable, were not criminal, and therefore not
subject to challenge by the state, nor did they give rise to a cause of action
for damages or injunctive relief by injured third parties.120 It is difficult to
find common law actions by a competitor excluded from the market due to
restrictive covenants or by customers who paid higher prices than they
would have in the absence of the restraint. Although several jurisdictions,
including New York, had enacted general conspiracy laws making it a
misdemeanor for two or more persons to conspire to commit any act
“injurious to . . . trade or commerce,”121 these statutes were rarely used to
challenge anticompetitive combinations.122
119. See, e.g., Cleveland, 26 N.E. at 163; Sayre, 62 Ky. at 146–47; Cent. Shade-Roller
Co., 9 N.E. at 631 (suggesting in dictum that if the purpose of the combination was to
“unduly raise the price” above a fair level to the public detriment the combination would not
be enforceable); see also Skrainka, 8 Mo. App. at 523–24, 527 (noting that restraint did not
“unduly raise prices, cause a monopoly, or put an end to competition”).
120. See United States v. Addyston Pipe & Steel Co., 85 F. 271, 279 (6th Cir. 1898),
aff’d, 175 U.S. 211 (1899); In re Greene, 52 F. 104, 111 (C.C.S.D. Ohio 1892). For a
contemporary review of the case law concluding that unlawful restraints of trade were
generally not indictable at common law, see Arthur M. Allen, Criminal Conspiracies in
Restraint of Trade at Common Law, 23 HARV. L. REV. 531 (1909). But cf. Raymond v.
Leavitt, 9 N.W. 525, 526 (Mich. 1881) (noting that forestalling and engrossing were
indictable misdemeanors under early English common law).
121. See Act of Dec. 10, 1828, § 8(6) (originally codified at 2 N.Y. REV. STAT. 689, 691–
92 (1829)); see also Act of Mar. 9, 1885, ch. 240, § 138 (originally codified at MINN. STAT.
§ 6423(6) (1894)); An Act Concerning Crimes and Punishments, ch. 28, § 110, 1861 Nev.
Stat. 79 (originally codified at NEV. GEN. STAT. § 4660 (1885)); An Act for the Punishment
of Crimes (originally codified at N.J. REV. STAT. 256, 275, § 61 (1847), and recodified at
N.J. REV. STAT. 121, 185, § 191 (1874)); Penal Code § 225(6) (1877) (originally codified at
N.D. REV. CODE § 7037(6) (1895)); OKLA. STAT. ch. 25, § 2071(5) (1890)); Act of Feb. 17,
1877 (originally codified at S.D. COMPILED LAWS § 6425(5) (1887)); Tenn. Code
§§ 4789(7), 4825(6) (1858); Penal Code § 84 (originally codified at UTAH COMPILED LAWS
§ 1914(5) (1876)). Mississippi enacted a similar statute in 1892. See Act of Apr. 2, 1892
(originally codified at MISS. CODE ANN. § 1006 (1892)).
122. For cases brought under the New York statute, see, for example, Leonard v. Poole,
21 N.E. 707 (N.Y. 1889); Stanton v. Allen, 5 Denio 434 (N.Y. Sup. Ct. 1848); Hooker &
There were also various artifacts in the laws of some jurisdictions

lingering from much older English cases. For example, some courts held
that restrictive covenants among competitors could be void for public
policy and unenforceable only if they were unreasonable and involved a
staple or prime necessity.123 Some courts held that an otherwise valid
partial restraint of trade would be unlawful and unenforceable if it involved
goods or services with a “public” nature and the restraint was prejudicial to
the public interest.124 But cases of this type do not detract from the central
tendency of courts as a whole to refuse to enforce noncompetition
covenants in combination agreements designed to increase prices and
perhaps reduce output, even though the courts almost always enforced
noncompetition agreements in connection with the sale of a business. The
upshot is that combinations could not depend on contracts to solve their
enforceability problems.
B. Pools
A special type of contractual combination is a pool. In a pool, as in a
simple combination, the contracting parties retain ownership of their
properties and other assets and merely agree to abide by the rules laid down
by the pool contract in conducting their respective business affairs. What
makes pools unique is that they aggregate some common attributes related
to production, typically profits or output, and then reallocate the common
factor to the pool members in agreed proportions, independently of what
any individual firm may have actually contributed. In the late nineteenth
century, pools were used extensively by the railroads and other businesses,
some national and some local, including cordage, anthracite coal,
meatpacking, cast iron pipe, steel rails, whiskey, sandpaper, wallpaper, and
bagging.125
The Michigan Salt Association provides an excellent example of a pool’s
operation.126 In 1860, salt production began in the extensive brine fields
Woodward v. Vandewater, 4 Denio 349 (N.Y. Sup. Ct. 1847); People v. Fisher, 14 Wend. 9
(N.Y. Sup. Ct. 1835); see also Morris Run Coal Co. v. Barclay Coal Co., 68 Pa. 173 (1871)
(holding that a contract entered into in New York, between Pennsylvania coal companies,
that violates the New York statute will not be enforced by Pennsylvania courts). In
interpreting the New York statute, New York courts looked to the common law. See N.Y.
STATE BAR ASS’N, REPORT OF THE SPECIAL COMMITTEE TO STUDY THE NEW YORK ANTITRUST
LAWS 3a (1957).
123. See Cent. Shade-Roller Co. v. Cushman, 9 N.E. 629, 631 (Mass. 1887); see also
Raymond v. Leavitt, 9 N.W. 525, 526 (Mich. 1881) (noting the sensitivity of the common
law to restraints on wheat and other “indispensable” articles).
124. See, e.g., Chi. Gaslight & Coke Co. v. People’s Gaslight & Coke Co., 13 N.E. 169,
175 (Ill. 1887); W. Va. Transp. Co. v. Ohio River Pipe Line Co., 22 W. Va. 600, 620 (1883).
125. A number of early pooling agreements are reprinted in INDUSTRIAL COMBINATIONS
AND TRUSTS, supra note 66, at 4–10 (agreement between distillers); id. at 10–12 (agreement
between envelope manufacturers).
126. A detailed analysis of the operation of the Michigan salt pool is contained in J.W.
Jenks, The Michigan Salt Association, 3 POL. SCI. Q. 78 (1888).
around Saginaw.127 Salt production involves pumping the brine out of the
ground and refining it into purified product. Capital costs of a production
facility were relatively small, making entry easy. Operating costs were also
small, since the primary variable cost was energy, which most salt-well
operators obtained from burning sawdust and other waste products from the
Michigan sawmills.128 Production was limited only by the capacity to
pump and refine, since the brine was virtually inexhaustible in the
underground brine fields. As a result of these conditions, over time
competition among salt-well operators became intense and prices fell to
levels around marginal costs, making it difficult for producers to make a
meaningful profit or perhaps even cover their fixed costs. To deal with this
situation—a paradigmatic case of what was viewed at the time as excessive
competition—in 1876, the Michigan producers organized the Michigan Salt
Association.129 Under the Association’s bylaws, shares in the association
could be held only by member salt manufacturers, with one share issued for
each barrel of the member’s average daily production.130 Upon becoming a
member, each manufacturer was required to contract to sell its entire
production to the Association, which would then be responsible for selling
it.131 Members received profits from the Association’s sales as dividends
on their shares. This pooling of sales mitigated each member’s incentive to
increase production and increased the incentive to cooperate with other
members to reduce production in order to increase the market price.
Pools suffer from the same incentive compatibility problems as simple
agreements: each individual member has an incentive to cheat on the pool’s
rules by producing extra product and selling outside of the pool while
taking advantage of the higher prices that the pool created. The apparent
advantage of a pool is that cheating is easier to detect, since individual
members have ostensibly less independence. Even so, the collective effect
of several cheaters caused many pools to disintegrate.132 But, as in the case
of simple combinations designed to restrict output and raise prices, courts
were hostile and almost always found pooling agreements void and
unenforceable as contracts or combinations restraining trade under the
common law.133 Indeed, pools were found by some courts to be even more
127. See id. at 79–80.

128. See id. at 86.
129. See id. at 83–84.
130. See id. at 85.
131. See id. at 85–86.
132. For one example, see ELIOT JONES, THE ANTHRACITE COAL COMBINATION IN THE
UNITED STATES 40–58 (1914).
133. See, e.g., Craft v. McConoughy, 79 Ill. 346, 346–47 (1875) (entering a profit pooling
agreement among grain dealers); Anderson v. Jett, 12 S.W. 670 (Ky. 1889) (profit pooling
among competing riverboats on the Kentucky River); Tex. & Pac. Ry. Co. v. S. Pac. Ry. Co.,
6 So. 888 (La. 1889) (pooling between two competing railroads); Stanton v. Allen, 5 Denio
434 (N.Y. Sup. Ct. 1848) (pooling among all transportation lines on the Erie and Oswego
canals); Emery v. Ohio Candle Co., 24 N.E. 660 (Ohio 1890) (per curiam) (pooling
agreement among candle manufacturers); Cent. Ohio Salt Co. v. Guthrie, 35 Ohio St. 666
(1880) (pooling agreement among Ohio salt manufacturers); Hoffman v. Brooks, 3 Ohio
nefarious than price-fixing combinations: when an agreement fixes only

the prices to be charged, rivals can compete away excess profits by
engaging in non-price competition; however, the common property resource
nature of a pool eliminates much of the incentive to engage in either price
or non-price competition.134
C. Corporations
Nor was the corporation generally available as a vehicle in which to
organize combinations. A corporation is an artificial legal person created
by the state distinct from the persons who own or operate it. As an artificial
person, a corporation has only the powers and attributes that the state
confers on it, either expressly in the corporation’s charter or incidental to
the corporation’s express powers.135 In creating corporations, states
typically permitted them to hold property, sue and be sued, adopt rules for
their internal governance, exist independently of the persons that created it,
and, in many states by the mid-nineteenth century, limited the liability of
shareholders to the corporation’s creditors.136 Corporations, with
ownership interests that are readily divisible, transferable, and expandable
and an existence that is defined by a charter without regard to the lives of
the shareholders, are especially attractive vehicles for businesses that
require large amounts of investment capital and pay returns over long
periods of time. Individuals and even partnerships typically could not
muster the resources to engage in many capital intensive enterprises,
particularly in transportation and finance. Unless the state found some
other private vehicle to undertake the activity, it would be forced into
providing the service itself. Private corporations provided the vehicle.
Private corporations could raise the required capital in private markets,
assume the business risks of the endeavor, and relieve state and local
governments from the need for providing financing and operating the
enterprise. To aid private corporations in their public endeavors, states
often included in the early corporation charters such benefits as a favorable
tax status or exemption from taxation altogether, exclusivity rights to shield
the corporation from competition, and particularly in the case of public
Dec. Reprint 517 (Super. Ct. 1884) (pooling agreement among Cincinnati tobacco
warehousemen) (full report in 23 Am. L. Reg. (N.S.) 648 (1884)); McBirney & Johnston
White Lead Co. v. Consol. Lead Co., 9 WKLY. CINCINNATI L. BULL. 258 (Super. Ct. 1883);
Morris Run Coal Co. v. Barclay Coal Co., 68 Pa. 173, 175–78 (1871) (pooling agreement
among five coal companies).
134. See, e.g., Anderson, 12 S.W. at 671.
135. The seminal expression is in Trustees of Dartmouth College v. Woodward, 17 U.S.
(4 Wheat.) 518, 636 (1819) (“A corporation is an artificial being, invisible, intangible, and
existing only in contemplation of law. Being the mere creature of law, it possesses only
those properties which the charter of its creation confers upon it, either expressly, or as
incidental to its very existence.”); accord Horn Silver Mining Co. v. New York, 43 U.S. 305,
312 (1892) (“A corporation being the mere creature of the legislature, its rights, privileges,
and powers are dependent solely upon the terms of its charter.”).
136. See Phillip I. Blumberg, Limited Liability and Corporate Groups, 11 J. CORP. L. 573,
592–94 (1986).
utility and transportation companies, an award of designated state police

powers such as eminent domain.137 These benefits enabled the corporation
more easily to attract investment and lower its costs of money and
operation.138
For the same reasons that corporations were attractive for use in “public”
enterprises, they were distrusted for use in pursuing private interests.
Corporations were suspect in the mind of the public because of their
universally large size and their taint of state prerogative.139 The corporate
form provided opportunities for the accumulation and concentration of
wealth that were not available to natural entities, and which threatened a
fundamental shift in the balance of economic and political power from
individual to business enterprises. The special powers conferred on some
corporations in their charters added insult to injury, for while many used
their state-granted powers for good, there undoubtedly were other instances
when special corporations either obtained benefits that were not
indispensable or took untoward advantage of those that were required.
Originally, corporations were individually created by the grant of a
corporate charter by the incorporating state legislature.140 Corporations
created by a tailored, individual charter are known as “special
corporations.” For most of the history of special business corporations,
these special charters were rarely granted and were always issued to enable
the new corporation to perform a quasipublic function that required
significantly more capital than a family or group of associates could
raise.141 Special corporations were typically chartered to operate banks,
insurance companies, transportation companies, and public works.142 The
function of a special corporation was specifically identified in the
corporation’s charter, and a corporation was not authorized to engage in
activities that were not reasonably incidental to the corporation’s chartered
functions. Given the public nature of their functions, special corporations
were often granted special powers and privileges, which could include
quasigovernmental powers. In the case of a transportation company, for
example, the charter might provide the corporation with the power of
137. See, e.g., Hugh L. Sowards & James S. Mofsky, Factors Affecting the Development
of Corporation Law, 23 U. MIAMI L. REV. 476, 480–81 (1969); see also EDWIN MERRICK
DODD, AMERICAN BUSINESS CORPORATIONS UNTIL 1860, at 44 (1954).
138. See, e.g., Sowards & Mofsky, supra note 137, at 480–81; see also DODD, supra note
137, at 202–41 (1954).
139. See J. WILLARD HURST, THE LEGITIMACY OF THE BUSINESS CORPORATION IN THE LAW
OF THE UNITED STATES, 1780–1970, at 30–47 (1970).
140. See JOHN W. CADMAN, JR., THE CORPORATION IN NEW JERSEY: BUSINESS AND
POLITICS, 1791–1875, at 6–7 (1949) (recounting the New Jersey experience); DODD, supra
note 137, at 196.
141. See HURST, supra note 139, at 15, 17–18; SEAVOY, THE ORIGINS OF THE AMERICAN
BUSINESS CORPORATION, 1784–1855, at 47–48, 73–74 (1982).
142. See Leslie v. Lorillard, 18 N.E. 363, 365 (N.Y. 1888) (“In the granting of charters
the legislature is presumed to have had in view the public interest, and public policy is (as
the interest of stockholders ought to be) concerned in the restriction of corporations within
chartered limits, and a departure therefrom is only deemed excusable when it cannot result in
prejudice to the public or to the stockholders.”).
eminent domain and the authority to set toll rates.143 With the increasing
use of the power loom in the early nineteenth century, some states, notably
Massachusetts, began granting charters to manufacturing corporations to
enable the creation of capital-intensive factories, presumably to increase the
wealth and employment in local economies.144
Gradually, states began to recognize that, by making corporate vehicles
more freely available and eliminating any special powers, corporations
would lose any advantages associated with their scarcity and positions of
privilege. States first began granting increasing numbers of special
corporation charters, taking care not to include in these charters provisions
that would confer monopoly privileges. To this end, states often chartered
multiple corporations to build competing gas lines or other public works in
a given city or chartered multiple railroads to build competing lines.145
Courts also construed these charters narrowly and refused to find monopoly
rights by implication.146
Once the demand for special charters began to overwhelm state
legislatures, some states started to dispense with the need for individually
enacted charters and instead made corporate charters with standardized
powers and limitations automatically available upon request.147
Corporations created in this manner are known as “general corporations”
and are created pursuant to a general corporation law. In 1811, New York
143. See, e.g., Bonaparte v. Camden & A. R. Co., 3 F. Cas. 821 (C.C.D.N.J. 1830)
(No. 1617) (upholding eminent domain powers of railroad corporation); Chesapeake & O.
Canal Co. v. Key, 5 F. Cas. 563 (C.C.D.D.C. 1829) (No. 2649) (upholding eminent domain
power granted to canal corporation); State v. Town of Hampton, 2 N.H. 22 (1819)
(upholding eminent domain powers granted to a turnpike corporation).
144. For more on the power loom, see 1 VICTOR S. CLARK, HISTORY OF MANUFACTURES
IN THE UNITED STATES 428–30 (1916); CAROLINE F. WARE, THE EARLY NEW ENGLAND
COTTON MANUFACTURE: A STUDY IN INDUSTRIAL BEGINNINGS 63–64 (1931). For more on
the history of Massachusetts manufacturing in the wake of the mechanization of the textile
industry, see E. Merrick Dodd, The Evolution of Limited Liability in American Industry:
Massachusetts, 61 HARV. L. REV. 1351, 1355‒56 (1948).
145. See, e.g., Chic. Gaslight & Coke Co. v. People’s Gaslight & Coke Co., 13 N.E. 169,
174 (Ill. 1887) (noting that the Illinois state legislature specially chartered two gas
companies to supply gas to Chicago in order to end a monopoly). But cf. The Slaughter-
House Cases, 83 U.S. (16 Wall.) 36 (1872) (upholding a twenty-five-year monopoly grant by
the Louisiana legislature for slaughter-houses as a valid exercise of the state’s police power).
146. See, e.g., Proprietors of Charles River Bridge v. Proprietors of Warren Bridge,
36 U.S. (11 Pet.) 420, 548–49 (1837) (construing the corporate charter for Charles River
Bridge to not preclude construction of Warren Bridge over the Charles River); see also
People ex rel. Peabody v. Chi. Gas Trust Co., 22 N.E. 798, 804 (Ill. 1889) (noting the Illinois
policy after 1870 of not granting exclusive privileges to corporations of any kind).
147. The burden on the legislature could be substantial. Larcom reports that between
1885 and 1897, when Delaware adopted a constitutional provision prohibiting special
incorporation, acts authorizing special incorporations and those granting divorces accounted
for roughly half of the laws passed by the Delaware legislature. RUSSELL CARPENTER
LARCOM, THE DELAWARE CORPORATION 7 (1937). Political influence in obtaining special
incorporation and the powers and privileges granted also appeared to be a problem. See
CADMAN, supra note 140, at 10–11; LARCOM, supra, at 5–7 (1937); Henry N. Butler,
Nineteenth-Century Jurisdictional Competition in the Granting of Corporate Privileges,
14 J. LEGAL STUD. 129, 141 (1985).
passed the first general corporation law, although it was limited to certain
types of manufacturing (principally in textile, glass, metal, and paint
industries) and imposed a maximum capitalization of $100,000.148 In 1837,
Connecticut dispensed with the purpose limitations when it passed a general
incorporation statute enabling anyone to form a corporation for any “lawful
business.”149 By 1875, twenty-five of the then thirty-seven states had
adopted constitutional provisions either prohibiting special charters
altogether or granting them with only rare exceptions.150 By the end of
1890, thirty-four of the then forty-four states had adopted similar
constitutional provisions.151
The emerging general corporation laws, however, did not satisfy the
needs of most large multistate business combinations. The original idea of
a general corporation was limited: general corporations were conceived not
as massive business enterprises but rather as local “incorporated
partnerships.”152 Corporations formed under these laws were typically
subject to low capitalization limitations. New York had one of the highest
maximum capitalization limits, but it was only $2 million in 1875 and
$5 million in 1881.153 Many states limited the duration of corporate
148. Act of Mar. 22, 1811, ch. 67, 1811 N.Y. Laws 151; see Slee v. Bloom, 19 Johns.
456, 457 (N.Y. 1822). See generally W.C. Kessler, A Statistical Study of the New York
General Incorporation Act of 1811, 48 J. POL. ECON. 877 (1940); Ronald E. Seavoy, Laws
To Encourage Manufacturing: New York Policy and the 1811 General Incorporation
Statute, 46 BUS. HIST. REV. 85 (1972).
149. Act of June 10, 1837, ch. 63, 1837 Conn. Pub. Acts 49, § 2.
150. See Liggett Co. v. Lee, 288 U.S. 517, 550 n.5 (1932) (Brandeis, J., dissenting)
(collecting provisions); LARCOM, supra note 147, at 3 n.7 (listing adoptions of state
constitutional provision by year). New York, in its Constitution of 1846, appears to be the
first state to adopt a constitutional provision requiring incorporation under the general laws
and prohibiting special incorporation except under limited circumstances. See N.Y. CONST.
of 1846, art. VIII, § 1. The constitutions of Maine and Maryland also permitted special
incorporation when the objects of incorporation could not be obtained through general
incorporation. See LARCOM, supra note 147, at 3 n.7.
151. Liggett, 288 U.S. at 550 n.5; LARCOM, supra note 147, at 3 n.7. For more on the
development of general incorporation laws, see, for example, JOSEPH STANCLIFFE DAVIS,
ESSAYS IN THE EARLIER HISTORY OF AMERICAN CORPORATIONS (1917); HURST, supra note
139; SEAVOY, supra note 141; Butler, supra note 147, at 154–56; E. Merrick Dodd, Jr.,
Statutory Developments in Business Corporation Law, 1886–1936, 50 HARV. L. REV. 27, 28
(1936); Oscar Handlin & Mary F. Handlin, Origins of the American Business Corporation,
5 J. ECON. HIST. 1 (1945); Charles M. Yablon, The Historical Race Competition for
Corporate Charters and the Rise and Decline of New Jersey: 1880–1910, 32 J. CORP. L. 323
(2007).
152. See Slee, 19 Johns. at 473 (“The object and intention of the legislature in authorizing
the association of individuals for manufacturing purposes, was, in effect, to facilitate the
formation of partnerships, without the risks ordinarily attending them, and to encourage
internal manufactures.”).
153. Act of May 18, 1881, ch. 295, § 11, 1881 N.Y. Laws 400, 400 (increasing maximum
to $5 million); General Business Corporation Act of June 21, 1875, ch. 611, § 11, 1875 N.Y.
Laws 755, 758 (increasing maximum to $2 million); Liggett, 288 U.S. at 550–54 & nn.5–26
(reviewing state capitalization limitations).
existence to periods of twenty to fifty years.154 Many states also limited the
indebtedness of a corporation to an amount not to exceed the corporation’s
capital stock or, in some states, even a lower amount.155 To ensure that
corporations were not undercapitalized, the “trust fund” doctrine denied
shareholders limited liability by making them personally responsible for the
acts of the corporation in cases of insolvency to the extent that they had
failed to pay the full value for their shares, and some states imposed double
liability on shareholders until the corporation was fully capitalized.156
States retained the power to revoke the charter of a corporation that the state
created if the corporation operated in violation of state law or beyond the
scope of its charter.
Moreover, until the late nineteenth century, corporations were effectively
unable to conduct any substantial operations outside of their state of
incorporation.157 Businesses for the most part were local and, when
incorporated, states expected their corporations to operate within their
jurisdictions. Some states simply did not permit their corporations to
conduct out-of-state operations, and those that did often imposed
restrictions on how much business could be conducted in a foreign state.158
The Supreme Court spoke to the ability of states to regulate corporations
operating within their jurisdiction in 1839 in the landmark case of Bank of
Augusta v. Earle.159 Chief Justice Roger Taney observed that a corporation
“can have no legal existence out of the boundaries of the sovereignty by
which it is created,”160 and, assuming that its charter permits so, it may
operate in another state but only with the authorization of the host state.161
The Court also rejected the argument that a corporation was entitled to the
protections of the Privileges and Immunities Clause of Article IV of the
Constitution162 as the corporation’s incorporators would themselves be.163
In 1851, in the equally significant case of Cooley v. Board of Wardens,164
the Supreme Court reaffirmed that states had broad discretion in regulating
businesses within their jurisdiction, so long as the regulated conduct was so
local in nature as to admit diverse treatment and not impinge on interstate
154. In 1903, twenty-two of the then forty-five states limited corporate existence to
periods of twenty to fifty years, although some states permitted renewals. See REPORT OF THE
COMM. ON CORP. LAWS OF MASS. 162–64 (1903) [hereinafter MASS. CORP. REPORT].
155. See id. at 165–67.
156. 1 CHARLES FISK BEACH, JR., COMMENTARIES ON THE LAW OF PRIVATE CORPORATIONS
§ 116 (1891).
157. See, e.g., MASS. CORP. REPORT, supra note 154, at 18 (noting that the operation of
foreign corporations in Massachusetts was “not general” until after 1893 or so).
158. In 1865, for example, New Jersey amended its general incorporation law to permit
its corporations to operate in part out of the state, but required that “a majority of the persons
associated in the organization of such company shall be citizens and residents of this state.”
Act of Mar. 16, 1865, 1865 N.J. Laws 354, ch. 201, § 1.
159. 38 U.S. (13 Pet.) 519 (1839).
160. Id. at 588.
161. Id. at 588–89.
162. U.S. CONST. art. IV, § 2, cl. 1.
163. Bank of Augusta, 38 U.S. at 586–87.
164. 53 U.S. (12 How.) 299 (1851).
commerce.165 The clearest statement of the state’s authority to regulate

foreign corporations came in Paul v. Virginia,166 decided in 1868, when the
Supreme Court unanimously held that a foreign corporation was not a
“citizen” of any state for the purposes of the Privileges and Immunities
Clause of the Fourteenth Amendment167 and therefore was not protected by
that clause from discriminatory licensing and bonding requirements
favoring domestic corporations.168 Paul reaffirmed that the recognition of
foreign corporations was purely a matter of comity and not required as a
matter of federal law. As a result of these cases, through most of the time
prior to the passage of the Sherman Act in 1890, state and local officials
acted freely to improve the competitive positions of local businesses
relative to foreign firms by enacting appropriately restrictive, if not outright
discriminatory, inspection, consumer protection, licensing, and even tax
laws.169
Nor could corporations circumvent the problems by creating
domestically incorporated subsidiaries. During the 1870s and 1880s, states
continued to restrict corporations in their ability to hold stock in other
corporations, so that a multistate combination could not use a holding
company structure to secure the advantages of domestic incorporation for
its operating subsidiaries. The law was well-settled that corporations had
no implied right to purchase or hold shares in another corporation for the
purpose of controlling its management or even as an investment,170 and
explicit charter authorizations to hold shares were rare.171 In addition,
where a consolidation was to be effected through the acquisition of assets
165. See id. at 320–21.

166. 75 U.S. (8 Wall.) 168 (1868).
167. U.S. CONST. amend. XIV, § 1.
168. Paul, 75 U.S. at 168.
169. For a discussion of local protectionist legislation of the period, see, for example,
Stanley C. Hollander, Nineteenth Century Anti-drummer Legislation in the United States,
38 BUS. HIST. REV. 479 (1964); Charles W. McCurdy, American Law and the Marketing
Structure of the Large Corporation, 1875–1890, 38 J. ECON. HIST. 631 (1978). For an
excellent review of the doctrinal problems confronting corporations operating outside their
state of incorporation, see Note, The Adoption of the Liberal Theory of Foreign
Corporations, 79 U. PA. L. REV. 956 (1931). For an account of corporate tax obligations at
this time, see THOMAS M. COOLEY, A TREATISE ON THE CONSTITUTIONAL LIMITATIONS
WHICH REST UPON THE LEGISLATIVE POWER OF THE STATES OF THE AMERICAN UNION 486
(1868).
170. See, e.g., Sumner v. Marcy, 23 F. Cas. 384 (C.C.D. Me. 1847) (No. 13,609); Cent.
R.R. Co. v. Collins, 40 Ga. 582, 620–21 (1869); People ex rel. Peabody v. Chi. Gas Trust
Co., 22 N.E. 798 (Ill. 1889); Franklin Co. v. Lewiston Inst. for Savings, 68 Me. 43, 45
(1877); Cent. R.R. of N.J. v. Pa. R.R., 31 N.J. Eq. 475, 494 (1879); Franklin Bank of
Cincinnati v. Commercial Bank of Cincinnati, 36 Ohio St. 350 (1881). See generally
CHARLES T. BOONE, A MANUAL OF THE LAW APPLICABLE TO CORPORATIONS § 107 (1881);
1 MORAWETZ, supra note 118, §§ 431, 433; WALTER CHADWICK NOYES, A TREATISE ON THE
LAW OF INTERCORPORATE RELATIONS § 264 (2d ed. 1909).
171. Some corporations also were expressly granted the right to have their stock
subscribed to by other corporations. For an account of the permissibility of stock ownership
by special corporations prior to 1888, see William Randall Compton, Early History of Stock
Ownership by Corporations, 9 GEO. WASH. L. REV. 125 (1940).
rather than voting securities, states could hold the acquisition contract void
and unenforceable if the state determined that the acquisition was made in
furtherance of a scheme of monopolization.172 While a corporation might
be useful as a vehicle for a local combination, all state general corporation
laws restricted the operation of a corporation to “lawful purposes” and a
corporation used to coordinate a combination was subject to attack as
operating ultra vires.173 The general rule was that a corporate purpose that
had the effect of creating a monopoly of the type void under common law
was equally void under state corporation law.174 Moreover, another form
was required to accommodate the demands for a business vehicle capable of
combining and managing large multistate business operations.
D. Trusts
The necessary legal innovation for large multistate combinations came in
1879 with the creation of the original Standard Oil Trust, which was
rewritten in 1882.175 The creation of the Standard Oil Trust is usually
regarded as the beginning of the trust movement.
Trusts are creations of the law of equity that separate the legal and
beneficial interests in a group of assets. The basic notion is that one or
more trustees hold the legal title to the trust property (the trust “res”) for the
benefit of one or more beneficiaries. As a matter of property law, the
trustees have the full legal authority to deal with third parties with respect to
the trust res, but at the same time have a fiduciary obligation to exercise a
high standard of care and selflessness in managing the res for the benefit of
the beneficiaries. The interests of the beneficiaries can be defined at the
trust’s creation, and the trustees’ duty to act as directed in the trust
instrument—or, in the absence of explicit direction, in the best interests of
the beneficiaries—are enforceable in courts of equity. Applied to the world
of business, the trust, like a corporation, is a vehicle in which a large
number of individuals can aggregate their resources in order to create and
manage a large enterprise, with the trustees acting much like the directors of
172. See, e.g., W. Wooden-Ware Ass’n v. Starkey, 47 N.W. 604 (Mich. 1890) (voiding an
asset purchase contract, where the contract contained a covenant restricting seller from
reentering wooden-ware business for five years in any one of seven states); Richardson v.
Buhl, 43 N.W. 1102 (Mich. 1889) (voiding a contract to acquire a friction match plant where
the defendant’s Diamond Match Company had been organized for the purpose of acquiring
all such plants in the United States).
173. See, e.g., Peabody, 22 N.E. at 798, 802–03 (describing a general corporation
organized to hold and sell the capital stock of gas or electric companies operating in Chicago
or elsewhere in Illinois and in fact holding a majority of the stock of all four Chicago
operating gas companies).
174. Id. at 803 (“If contracts and grants, whose tendency is to create monopolies are void
at common law, then where a corporation is organized under a general statute, a provision in
the declaration of its corporate purposes, the necessary effect of which is the creation of a
monopoly, will also be void.”).
175. The 1879 and 1882 trust agreements are reprinted in INDUSTRIAL COMBINATIONS
AND TRUSTS, supra note 66, at 14–27. The 1882 trust agreement is also reprinted in State ex
rel. Att’y Gen. v. Standard Oil Co., 30 N.E. 279, 281–84 (Ohio 1892).
a corporation. But since a trust was not technically a corporation, it did not
require a state grant to exist, was not subject to the state regulation of
corporations, and was not prohibited from holding stock in multiple
corporations in multiple states.
The 1882 Standard Oil Trust, which became the model for other trusts,
illustrates the formation and operation of a trust.176 The 1882 agreement
was joined by all of the stockholders and members of fourteen corporations
and limited partnerships, the controlling stockholders and members of an
additional twenty-six corporations and limited partnerships, and forty-six
individuals, all of whom would be the beneficiaries of the trust. The trust
agreement contemplated that separate corporations would be organized
initially in Ohio, New York, Pennsylvania, and New Jersey. Each trust
beneficiary would transfer its assets to the Standard Oil Company in the
state in which the assets were located, and in return the beneficiary received
stock of the recipient Standard Oil Company equal at par to the appraised
value of the transferred assets. The beneficiaries would then deliver the
stock they received in the constituent corporations to a board of trustees to
be held in trust, and in turn the beneficiary would receive one “Standard Oil
Trust” certificate for every $100 of stock it contributed. Dividends paid on
the constituent Standard Oil Company stock would be received by the
trustees—the legal owners of the stock—who in turn would pay dividends
on the trust certificates. The nine-member board of trustees (each member
to be elected for a staggered three-year term by a majority of votes
representing the outstanding trust certificates) was given full power to vote
the stock of the various Standard Oil Companies in its discretion and
thereby control the operations of these companies. The trust was to
terminate twenty-one years after the death of the last survivor of the original
nine trustees, unless dissolved beforehand by a specified supermajority vote
of the outstanding trust certificates.177 When the Standard Oil Trust was
formally dissolved in 1892, there were some 972,500 trust certificates
176. The details of the 1882 Standard Oil Trust first became public as the result of a New
York State Senate investigation. See REPORT OF THE COMMITTEE ON GENERAL LAWS ON THE
INVESTIGATION RELATIVE TO TRUSTS, S. 111-50, at 8–10 (N.Y. 1888) [hereinafter NEW YORK
1888 REPORT]. As a result, it is common to see 1882 as the year in which the trust
movement started even though there was an earlier trust agreement in 1879. The history of
the Standard Oil Trust is examined in detail in IDA M. TARBELL, THE HISTORY OF THE
STANDARD OIL COMPANY (1904). For other treatments of the Standard Oil Trust, see, for
example, Standard Oil Co. of N.J. v. United States, 221 U.S. 1 (1911); State ex rel. Att’y
Gen., 30 N.E. at 279; INVESTIGATION OF CERTAIN TRUSTS: REPORT IN RELATION TO THE
SUGAR TRUST AND STANDARD OIL TRUST, H.R. REP. NO. 50-3112 (1888); GILBERT HOLLAND
MONTAGUE, THE RISE AND PROGRESS OF THE STANDARD OIL COMPANY (1903); Elizabeth
Granitz & Benjamin Klein, Monopolization by “Raising Rivals’ Costs”: The Standard Oil
Case, 39 J.L. & ECON. 1 (1996); John S. McGee, Predatory Price Cutting: The Standard Oil
(N.J.) Case, 1 J.L. & ECON. 137 (1958).
177. The drafters clearly had the rule against perpetuities in mind when drafting the trust
agreement.
outstanding, representing a beneficial ownership in assets valued far more

than the $97,250,000 represented by the face value of these certificates.178
A true trust organized along the lines of the Standard Oil Trust model is
known as a “trust proper.” Once the Standard Oil Trust structure became
known, it was soon emulated in several other manufacturing industries.179
Before the beginning of the next decade and the passage of the Sherman
Act, groups of competitors had created at least five other major national
trusts proper180:
American Cotton Oil Trust, organized in 1884 with authorized capital of
$40 million.181
Linseed Oil Trust, organized in 1885 with authorized capital of
$18 million182
National Lead Trust, organized in 1887 with authorized capital of
$90 million183
Distillers and Cattle Feeders Trust (the Whiskey Trust), organized in
1887 with authorized capital of $30.726 million.184
Sugar Refineries Company (the Sugar Trust), organized in 1887 with
authorized capital of $50 million.185
178. For the number of outstanding certificates upon dissolution, see U.S. Trust Co. v.
Heye, 181 A.D. 544, 583 (N.Y. App. Div. 1918) (Dowling, J., dissenting), aff’d as modified,
120 N.E. 645 (N.Y. 1918).
179. See Norbert Heinsheimer, The Legal Status of Trusts, 2 COLUM. L. TIMES 51, 53–54
(1888) (describing the typical legal structure of trusts proper).
180. The amount of authorized capital is reported in Luther Conant, Jr., Industrial
Consolidations in the United States, 53 PUBLICATIONS AM. STAT. ASS’N 1, 2–3 (1901).
Seager and Gulick provide a description of the operations of the major trusts organized in the
1880s. See HENRY R. SEAGER & CHARLES A. GULICK, JR., TRUST AND CORPORATION
PROBLEMS (1929).
181. See NEW YORK 1888 REPORT, supra note 176, at 6–7.
182. For a description, see JOHN MOODY, THE TRUTH ABOUT THE TRUSTS 54–55 (1904).
183. For a description of the formation and operation of the National Lead Trust, see
Nat’l Lead Co. v. S.E. Grote Paint Store Co., 80 Mo. App. 247, 250–51 (Ct. App. 1899);
Unckles v. Colgate, 72 Hun 119, 119–23 (N.Y. Sup. Ct. 1893) (reprinting National Lead
Trust agreement).
184. A description of the formation and operation of the Whiskey Trust is found in State
v. Neb. Distilling Co., 46 N.W. 155, 156–59 (Neb. 1890). The trust deed is reprinted in
INDUSTRIAL COMBINATIONS AND TRUSTS, supra note 66, at 36–42. For contemporary
accounts of the Whiskey Trust, see 1 U.S. INDUS. COMM’N, PRELIMINARY REPORT ON TRUSTS
AND INDUSTRIAL COMBINATIONS 74–93, 813–48 (1900); Jeremiah W. Jenks, The
Development of the Whiskey Trust, 4 POL. SCI. Q. 296 (1889). For a modern economic
analysis, see Karen Clay & Werner Troesken, Further Tests of Static Oligopoly Models:
Whiskey, 1882–1898, 51 J. INDUS. ECON. 151 (2003); Karen Clay & Werner Troesken,
Strategic Behavior in Whiskey Distilling, 1887–1895, 62 J. ECON. HIST. 999 (2002); Werner
Troesken, Exclusive Dealing and the Whiskey Trust, 1890–1895, 58 J. ECON. HIST. 755
(1998).
185. The trust deed of The Sugar Refineries Company, dated as of August 16, 1887, is set
forth in People v. N. River Sugar Refining Co., 24 N.E. 834 (N.Y. 1890). For a description
of the trust, see NEW YORK 1888 REPORT, supra note 176, at 5–6; U.S. INDUS. COMM’N,
supra note 184, at 59–74.
The deed of the Sugar Trust set forth its five purposes, which were not
atypical of the public positioning of the major trusts:
(1) To promote economy of administration and to reduce the cost of
refining, thus enabling the price of sugar to be kept as low as is consistent
with reasonable profit. (2) To give each refinery the benefit of all
appliances and processes known or used by others, and useful to improve
the quality and diminish the cost of refined sugar. (3) To furnish
protection against unlawful combinations of labor. (4) To protect against
inducements to lower the standard of refined sugars. (5) Generally to
promote the interests of the parties hereto in all lawful and suitable
ways.186
A variety of more minor consolidations were also created in the late 1880s,
including the Southern Cotton Oil Company, the National Cordage
Company, the American Biscuit and Manufacturing Company, and the
American Tobacco Company.187
The trust proper solved one of the most serious problems undermining
consolidations in the form of simple agreements or pools: enforceability.
As discussed, combinations designed to raise prices and reduce output face
an incentive compatibility problem. The members of the combination each
have a profit-maximizing incentive to cheat on the combination by shaving
prices or increasing output, even though they will all make more profits if
they abide by the combination’s pricing and output rules. Since the
common law did not enforce contracts to implement these simple
combinations and pools, they were often plagued by cheating problems.
Trusts proper did not have this problem, since they did not rely on the
restrictive contracts with legally independent firms as the means of
controlling price and output. Rather, trusts proper relied on control through
ownership. Although their constituent corporations may have been legally
separate corporations or other entities, the trusts proper controlled the
voting rights that elected the governing bodies of these entities. While
technically, as a shareholder, a trust could not command its constituent
corporations to raise their prices, reduce their production, or cease
operation, the trust could ensure that each constituent corporation’s
directors—which the trust elected and which often were the trustees of the
186. People v. N. River Sugar Refining Co., 121 N.Y. 582, 586 (N.Y. 1890).
187. See Conant, supra note 180, at 2–3. While each of these “trusts” was a consolidation
of some form since they issued certificates at the holding company level, I have not
confirmed that they were all organized as trusts proper. Some of them were organized as
corporations, such as the American Tobacco Company, while others may have been
unincorporated associations. There are also common references at the time to a variety of
other trusts, such as the Preservers Trust, the Envelope Trust, the Salt Trust, the Oil-Cloth
Trust, the Paving-Pitch Trust, the School-Slate Trust, the Chicago Gas Trust, the St. Louis
Gas Trust, the New York Meat Trust, and the Paper-Bag Trust. While some of these,
including the Preserver’s Trust, were in fact trusts proper, most of them were likely to have
been simple combinations. The Preservers’ Trust agreement is reprinted in Bishop v. Am.
Preservers Co., 41 N.E. 765, 768–71 (Ill. 1895).
trust188—would implement the trust’s directions. Noncooperative directors

were simply replaced by more compliant ones. This same feature also
increased the ability of the trust and its members to respond rapidly and
effectively to changing business conditions.
Moreover, on the supply side, trusts could take advantage of expanded
trading areas, disseminate new technologies, and exploit new economies of
scale in ways that were difficult if not impossible for simple combinations
and pools. When a trust proper decreased capacity, it could close the least
efficient facilities in the trust network. A common feature, at least of the
major trusts proper, was a reduction in production levels, which was
accomplished by closing the most inefficient facilities until the desired
production level was achieved. To this end, trusts often shut down many
facilities after their acquisition. For example, the Standard Oil Trust closed
thirty-one of its fifty-two refineries within three years after its 1882
reorganization, which reduced its average cost of production of refined oil
from $0.15 to $0.005 per gallon.189 The Cotton Oil Trust, formed in 1884,
closed thirteen of its fifty-two crude oil mills and three of its seven
refineries.190 The Linseed Oil Trust, formed in 1885, closed twenty-one
refineries.191 The Sugar Trust, formed in 1887 with eighteen members,
quickly closed and dismantled seven refineries; combined eight other
refineries into four, larger plants; and intermittently operated three
additional plants to handle peak load demands or cover for plants that were
closed for maintenance.192
Finally, through careful coordination of its operations, trusts could
attempt to exercise monopsony power to suppress the prices of inputs. Just
as a trust could contract production to raise prices of its output, the same
contraction in output also reduced demand for inputs. When a trust
controlled enough purchases in the markets for its production inputs, this
lowered the price of inputs, shifting wealth from suppliers to the trust.
Moreover, even when the trust faced significant competition from third
parties, it could bargain for discriminatorily lower prices than its
competitors paid. The canonical case is where the trust’s competitors were
individually small, but collectively possessed a meaningful share of the
input market, and where there were several suppliers with excess capacity
from which the trust could purchase. By threatening to move its large
volume purchases from one supplier to another, the trust could successfully
obtain significantly lower prices for its inputs than could its competitors.
188. When the Whiskey Trust acquired control of the Nebraska Distilling Co, for
example, the trust replaced the Nebraska company’s board with three Whiskey Trust trustees
and two former shareholders. See, e.g., Neb. Distilling Co., 46 N.W. at 157.
189. ATACK & PASSELL, supra note 1, at 483.
190. 2 VICTOR S. CLARK, HISTORY OF MANUFACTURES IN THE UNITED STATES, 1860–1893,
at 520–21 (1929).
191. WHITNEY EASTMAN, THE HISTORY OF THE LINSEED OIL INDUSTRY IN THE UNITED
STATES 31 (1968).
192. EICHNER, supra note 60, at 114–15.
Finally, an interesting feature of some, if not most trusts proper, is the

issuance of stock or trust certificates as consideration when acquiring the
stock or assets of the original independent trust members. Simple
combinations and pools did not acquire businesses or assets, so they had no
need for a means of financing acquisitions. Trusts proper, on the other
hand, could issue certificates representing an equity interest in the assets
held by the trust and an entitlement to a portion of the trust’s profits. Trusts
could simply create new certificates when they wished to make an
acquisition without the need for seeking outside financing. As long as the
entitlements associated with the new stock did not dilute the interests of the
existing trust certificates given the business or assets that the trust was
acquiring, the existing trust certificate holders should be comfortable if not
supportive of issuing new stock. There were two reasons to believe that the
acquisition would be accretive. First, the major trust certificate holders
were almost always the trustees, who would not want to dilute their own
interests. Second, to the extent that the acquisition increased the market
power and hence the profitability of the trust, the acquisition would be
accretive to existing trust certificate holders even if the trust paid fair value
or even slightly above fair value for the acquisition.
Moreover, the trusts could make their certificates more valuable to
holders who might sell them in the secondary market if the certificates were
“watered.” Stock in corporations at the time was issued with a stated par
value, that is, a value stated on the face of the certificate that purportedly
represented the minimum capital that had been paid into the firm, and trust
certificates also stated a par value. In the early nineteenth century, the usual
practice was for a subscriber to a corporation’s stock to only pay a small
fraction of the par value initially for their subscribed shares, but the
corporation had a call right for additional payments until the subscriber had
paid the stock’s full par value.193 Moreover, under the “trust fund”
doctrine, shareholders could be liable for the difference between the par
value of the outstanding stock and the actual capital of the corporation.194
While assessing whether par value was fully paid was straightforward when
the stock was purchased for cash, it was much less certain and subject to
abuse when the consideration was in kind, such as when a business or
factory was sold for stock.
Stock that was sold or exchanged by the corporation for a total
consideration of less than par value was called “watered stock,” signifying
that the increase in the corporation’s capital was less than the par value of
193. See DODD, supra note 137, at 74–84.

194. The trust fund doctrine was first enunciated by Justice Story in Wood v. Dummer,
30 F. Cas. 435 (C.C.D. Me. 1824) (No. 17,944), and recognized by the Supreme Court in
Sawyer v. Hoag, 84 U.S. 610, 620–21 (1873). As long as the capital paid into the firm was
equal or greater than the aggregate par value of its outstanding stock, however, the stock was
not considered watered and the shareholders not liable even if the original capital had been
depleted or become worthless.
the stock.195 For example, if one share of stock newly issued by a

corporation had a par value of $100 and was sold by the corporation for
cash, then the corporation should have received at least $100. If it received
less than $100, then the stock was watered. Trusts typically issued watered
certificates. A New York State Senate committee reported, for example,
that the Sugar Trust had issued certificates with a par value representing
capital of $45 million, four times the nominal amount of the stock in the
member companies that the trust purchased.196 In purchasing the North
River Sugar Refining Company, the trust exchanged certificates in the
Sugar Refineries Company (an unincorporated association that served as the
vehicle for the Sugar Trust) with a par value of $700,000 for North River
stock for which the North River shareholders had negotiated a sales price of
$325,000.197 Similarly, when the shareholders transferred their stock in the
Nebraska Distilling Company (NDC), which had a negotiated valued of
$100,000, to the Distillers’ & Cattle Feeders’ Trust, they received trust
certificates in return with a face value of $285,700.198 Under the corporate
law of the day, watered stock was a serious problem. Par value, in effect,
was a representation by the corporation and its management to its
shareholders, creditors, and potential investors in the secondary market of
the minimum value of the corporation. While the original sellers to the
trust may have been aware of the watered nature of the trust certificates
they received in exchange (as the North River shareholders surely were),
trust certificates were transferrable and purchasers in the secondary market
could unknowingly pay highly inflated values for the certificates. In any
event, whatever protections a state’s corporation law tried to create for
creditors and investors in the secondary market did not apply to trusts
proper, which were not corporations. As a result, watered trust certificates
were an open invitation to fraud for which there was little recourse. Many
also believed that watered stock resulted in higher prices for the products of
the trusts, the idea being that investors expected a return on their capital,
which was represented by the par value of their trust certificates, and to
make up for the phantom capital in the watered certificates the trust would
have to charge higher prices.199
State attorneys general, and then state legislatures, were the first to
respond to the emergence of trusts proper.200 The loss of employment from
shuttered plants, outrage from local competitors threatened with the
195. See WILLIAM W. COOK, A TREATISE ON STOCK AND STOCKHOLDERS AND GENERAL
CORPORATION LAW §§ 21–22, at 28–30 (2d ed. 1889); ARTHUR L. HELLIWELL, A TREATISE
ON STOCK AND STOCKHOLDERS §§ 145‒56, at 243‒79 (1904).
196. NEW YORK 1888 REPORT, supra note 176, at 5–6.
197. See N. River Sugar, 24 N.E. at 838.
198. Neb. Distilling Co., 46 N.W. at 157.
199. See EDWARD SHERWOOD MEADE, TRUST FINANCE 295 (1903).
200. Stimson, in an article in the first volume of the Harvard Law Review, collected a
number of arguments that states might use against the trust device and urged the states to
prosecute vigorously these enterprises. Frederick J. Stimson, “Trusts,” 1 HARV. L. REV. 132
(1887); see also William F. Dana, “Monopoly” Under the National Antitrust Act, 7 HARV. L.
REV. 338, 348–49 (1894) (collecting citations of state prosecutions).
destruction of their businesses, and at least the perception of higher prices

charged to customers (and at times lower prices paid to suppliers) made the
successful trusts an attractive target, at least in those states where the
targeted trust had not been successful in coopting the political machinery.
Since the typical trust structure organized corporate operating companies at
the state level, states initially turned to state corporation law as the means to
attack the trusts. As discussed earlier, corporations are creatures of the
state, and the state is free to prescribe the conditions under which they will
be created and will continue to exist. In principle, if not in everyday
practice, states held corporate management to a high fiduciary duty of care
to operate the corporation consistent with the corporate charter and in the
interests of the shareholders. As a corollary, state corporation law required
corporate management to operate the corporation themselves without
outside interference. Among other things, this meant that corporations
could not enter into partnerships or other similar arrangements with third
parties that would require them to subordinate the corporation’s interests to
another entity201 or cease operating the business for which they were
chartered at another entity’s direction.202 Corporations that abused their
franchise to the public detriment, failed to pursue their stated purposes, and
failed to operate solely in the interests of their shareholders could have their
franchises revoked by the state in a judicial quo warranto proceeding
brought on behalf of the state by the state’s attorney general.203
Several states responded to public demands for actions against the trusts
by initiating quo warranto proceedings to revoke the charters of domestic
corporations participating as trust members. These constituent corporations
could be attacked on one or more of three distinct theories. First, as a
201. See, e.g., Whittenton Mills v. Upton, 76 Mass. (10 Gray) 582 (1858) (declaring void
a longstanding putative partnership between a corporation and an individual as outside the
powers of the corporation); N. River Sugar, 24 N.E. at 841 (affirming the revocation of a
corporate charter where the corporation violated its charter and failed to perform its
corporate duties by joining and subordinating its interest to the Sugar Trust and closing its
facilities pursuant to the trust’s instruction); Mallory v. Hananer Oil Works, 8 S.W. 396, 399
(Tenn. 1888) (holding that it was unlawful for Hananer, a Tennessee corporation, to become
a member of a partnership with three other Memphis-based corporations, independently of
whether the partnership constituted an illegal combination to fix prices and control
production of cottonseed oil in Memphis). See generally HELLIWELL, supra note 195, § 375,
at 703‒05.
202. See, e.g., Neb. Distilling Co., 46 N.W. at 161.
203. See Ward v. Farwell, 97 Ill. 593, 607 (1881) (“So, every private corporation, in
accepting its charter, impliedly undertakes and agrees, upon condition of forfeiture, that it
will exercise the rights and privileges conferred upon it in furtherance of the objects and
purposes of its creation, and not otherwise, and that it will so manage and conduct its affairs
that it shall not become dangerous or hazardous to the safety or well being of the State or
community in and with which it transacts its business.”). A writ of quo warranto is an order
to the corporation to show by what authority it has exercised some power or performed some
action. For a discussion of the history of the quo warranto writ and its contemporary usage
in the late nineteenth century, see, for example, JAMES L. HIGH, A TREATISE ON
EXTRAORDINARY LEGAL REMEDIES, EMBRACING MANDAMUS, QUO WARRANTO AND
PROHIBITION §§ 647–77a (2d ed. 1884); 5 SEYMOUR D. THOMPSON, COMMENTARIES ON THE
LAW OF PRIVATE CORPORATIONS ch. 157 (1895).
member of a trust thought to be operating contrary to the public interest—if

not unlawfully—as a combination in restraint of trade or a monopoly, a
corporate member could be deemed to have abused its corporate charter to
the public detriment.204 Even the most liberal corporation enabling acts
limited a corporation’s activities to lawful purposes, and a corporation that
participated in such an unlawful combination in restraint of trade would
have exceeded its powers and jeopardized its charter. Second, many trusts
closed down facilities they acquired, and if the plants of a corporate
member were shuttered, the corporation could be found to have abandoned
its chartered purposes.205 Third, in trust arrangements, the management of
participating corporations took its directions from the trust administrators.
Notwithstanding any efficiencies that may have resulted from the trust
arrangement, or for that matter any benefits that may have accrued to the
current shareholders of the participating corporations (the controlling
trustees), the participation of a corporation in a trust had the effect of
subordinating the interests of the corporation to the interests of trust
organization as a whole contrary to state corporation law, which required
corporations to be controlled by a board of directors acting independently of
outside influence.206
The first quo warranto action challenging participation in a trust was
brought by Louisiana against a member of the American Cotton Oil Seed
Trust.207 Following closely behind were attacks by New York in 1889 and
California in 1890 against the Sugar Trust,208 by Ohio in 1890 against the
Standard Oil Trust,209 and by Nebraska in 1890 against the Whiskey
Trust.210
New York’s challenge to the North River Sugar Refining Company
illustrates the use of state corporation law to revoke the charter of a state
204. See, e.g., N. River Sugar, 24 N.E. at 839–41.

205. See, e.g., Neb. Distilling Co., 46 N.W. at 156 (observing that of the seventy-five to
eighty distilleries under the control of the Whiskey Trust only fourteen were kept in
operation and finding that the defendant violated its charter by closing its distillery pursuant
to trust direction).
206. The use of quo warranto proceedings challenging corporate participation in the trusts
was presaged by cases such as Whittenton Mills v. Upton, 76 Mass. (10 Gray) 582 (1858). In
that case, the court in a detailed analysis declared void a longstanding putative partnership
between a Massachusetts manufacturing corporation and an individual as outside the powers
of the corporation, since under partnership law the individual could commit its corporate
partner but under the corporation’s charter only the officers could bind the corporation. See
id.
207. State v. Am. Cotton Oil Trust, 1 RY. & CORP. L.J. 509 (La. Civ. Dist. Ct. 1887)
(finding a cause of action to exist and allowing it to proceed to trial).
208. People v. N. River Sugar Refining Co., 3 N.Y.S. 401 (Cir. Ct. 1889), aff’d, 7 N.Y.S.
406 (N.Y. Gen. Term 1889), aff’d, 24 N.E. 834 (N.Y. 1890) (ordering the forfeiture of a
franchise and the dissolution of the corporation); People ex rel. Att’y Gen. v. Am. Sugar
Refining Co., 7 RY. & CORP. L.J. 83 (Cal. App. Dep’t Super. Ct. 1890) (ordering forfeiture
of the franchise).
209. State ex rel. Att’y Gen. v. Standard Oil Co., 30 N.E. 279 (1892) (ordering the
severance of the relationship to Standard Oil Trust).
210. Neb. Distilling Co., 46 N.W. at 155 (annulling franchise); see also Distilling &
Cattle Feeding Co. v. People, 41 N.E. 188 (Ill. 1895).
corporation participating in a trust. North River, a corporation organized

under New York’s general manufacturing corporation act, was one of
sixteen companies that signed the original deed of the Sugar Refineries
Company, which created the Sugar Trust.211 On April 22, 1887, North
River’s stockholders authorized its secretary to negotiate and sign the
necessary papers for participating in the Sugar Trust.212 The North River
secretary signed the trust deed in September, which was dated as of August
16, 1887, and became effective on October 1, 1887.213 Perhaps having
second thoughts about the wisdom of involving the corporation formally in
the creation of the trust, the North River stockholders on November 4,
1887, passed a resolution denying any authorization to the company officers
to enter into any agreement with Sugar Refineries and declaring that North
River was not part of the trust.214 Just three weeks later, however, on
November 25, the shareholders formally resolved to sell their shares in
North River for $325,000 to John Searles, who was incidentally the
treasurer of the Havemeyer Sugar Refining Company (an anchor member of
the Sugar Trust).215 After Searles became the sole shareholder of North
River, he conveyed the stock to the trustees of Sugar Refineries in exchange
for trust certificates with a par value of $700,000, or a little more than
double the price Searles paid for the stock.216 The Sugar Refineries board
appointed a new set of directors for North River, which continued in
operation until its facilities were permanently closed several months later in
January 1888.217
In reviewing the New York Attorney General’s petition to revoke the
North River charter, the New York Court of Appeals first found that North
River had become a constituent part of the Sugar Trust combination.218 In
support of their finding, the court noted that the new directors served at the
sufferance of the trustees, and through the control of the new directors
Sugar Refineries could cause all North River earnings to be distributed
through dividends and could mortgage North River properties in order to
supply funds for the Sugar Refineries to obtain capital to acquire other
sugar refineries.219 By the direction of the trustees acting through the new
directors, North River closed its facilities.220 The court dismissed North
River’s argument that it was a mere bystander and that it continued to
respond to its shareholders and board of directors, whomever they might
happen to be. Not only did North River, through its treasurer, originally
211. The deed is reprinted in People v. N. River Sugar Refining Co., 121 N.Y. 582, 585–
95 (1890).
212. People v. N. River Sugar Refining Co., 24 N.E. 834, 837 (N.Y. 1890).
213. Id.
214. Id. at 837–38.
215. Id. at 838.
216. Id. There is no record of what Searles did with the trust certificates. Id.
217. People v. N. River Sugar Refining Co., 121 N.Y. 582, 599 (N.Y. 1890).
218. N. River Sugar, 24 N.E. at 835.
219. Id.
220. Id. at 839.
sign the trust deed, it acquiesced to participating in the trust, though the
actions of its original management, by registering the stock transfers,
seating a new replacement board of Sugar Refineries designees, and paying
its earning to the new stockholders of record.221
It remained for the court to determine whether this membership was
illegal under New York corporation law and, if so, whether this worked to
the public injury so as to make revocation of its charter an appropriate
remedy. The court considered both questions together.222 As a matter of
state corporation law, North River had abandoned its responsibilities as a
corporate body to make decisions solely in its own interests.223 Its “real”
stockholders had been separated from their voting rights given to them by
the state, its directors served at the sufferance of the Sugar Trust’s board, it
had no discretion to declare dividends and retain earnings, and its property
could be mortgaged for interests other than its own.224 At the direction of
the Trust, North River ceased to do business for the purpose of lessening
market supply.225 Most egregious to the court, however, was North River’s
participation in the creation of a trust that circumvented New York’s
regulations of large the aggregation of capital through the state’s
corporation laws.226 The court concluded that it was unnecessary to
determine whether the Sugar Trust was an unlawful combination in restraint
of trade or monopoly.227 It was enough that North River abandoned its
corporate responsibilities imposed on it by law, much less that it evaded
state supervision of capital aggregations by forming an unsupervised trust
or partnership.228 The court affirmed the judgment of dissolution.229
Nebraska’s suit to revoke the charter of the Nebraska Distilling Company
proceeded on a somewhat different theory.230 In 1887, NDC became part of
the Distillers and Cattle Feeders Trust, better known as the Whiskey
Trust.231 The stockholders of NDC, whose assets the trust assessed at
$100,000, exchanged their stock in return for trust certificates valued at par
at $285,700 (yet another example of stock watering), whereupon NDC
221. Id.
222. Id.
223. Id. at 839–40.
224. Id. at 840.
225. Id.
226. Id.
227. Id. at 841.
228. Similarly, in its action to declare the American Cotton Oil Trust illegal and enjoin it
from doing business in the state, the Louisiana attorney general alleged, among other things,
that the trust operated as if it were a corporation but was not incorporated in the state nor was
it subject to state corporate law regulation. In its opinion, the court noted that the absence of
proper regulation could harm persons who purchased Cotton Oil Trust certificates and those
who deal with it and become its creditors. The court found the allegations sufficient to state
a cause of action that the trust was operating in the state illegally, overruled the demurrer,
and ordered the case to proceed to trial. State v. Am. Cotton Oil Trust, 1 RY. & CORP. L.J.
509, 510–11 (La. Civ. Dist. Ct. 1887).
229. N. River Sugar, 24 N.E. at 839.
230. State v. Neb. Distilling Co., 46 N.W. 155 (Neb. 1890).
231. Id. at 156.
issued new stock to the trustees, who in turn installed a new board of
directors for the company.232 The Whiskey Trust, which was started after
the failure of a series of pools, was formed for the purpose of reducing the
industry production of alcohol, spirits, and liquor.233 The trust’s method of
controlling production was simple: it centralized production in the most
efficient plants and mothballed the rest.234 By 1890, of the roughly 90 to
110 distilleries located north and west of the Ohio River, 75 to 80 had
become members of the trust.235 Of these, the trust kept fourteen in
operation.236
Within a few months after joining the trust, the NDC plant was closed.237
The plant stayed shuttered but apparently operational until January 1890.238
At that time, the NDC’s shareholders (that is, the trustees of the Whiskey
Trust) voted to liquidate NDC’s plant and equipment and surrender NDC’s
corporate charter to the state of Nebraska.239 It is likely that the trustees
were concerned about the possibility of a quo warranto proceeding, which
could result not only in the revocation of NDC’s charter but also in the
appointment of a receiver for its assets and possibly the reopening of
production. The trustees authorized NDC’s president to convey without
restriction the plant’s equipment to Weston Arnold, a trust operative, who
five days later assigned his interest in all but two cookers and a mash pump
to George Woolsey, one of NDC’s original stockholders and later a trust-
appointed officer of NDC.240 Woolsey, who wished to use the plant for the
manufacture of cereals, agreed with Arnold not to use any part of the
equipment for distilling purposes for a period of roughly twenty years and
to include a restrictive covenant to the same effect for the benefit of Arnold
in the event Woolsey ever sold the plant to someone else.241 In making
these assignments, the Whiskey Trust sought to dissolve NDC before a quo
warranto proceeding could revoke its charter and to ensure that NDC’s
plant would not resume production.242 In addition, the reservation of the
two cookers and mash pump by Arnold was designed to destroy the plant’s
usefulness as a distillery regardless of what Woolsey did with the other
equipment.243
The scheme did not work. Within days after the assignment to Woolsey
the state initiated its action.244 Although NDC’s charter stated that it was
organized for the purpose of the manufacture and sale of alcohol, spirits,
232. Id. at 157.

233. Id. at 156.
234. Id.
235. Id.
236. Id.
237. Id. at 157.
238. Id. at 157–59.
239. Id.
240. Id. at 158.
241. Id. at 158–59.
242. Id. at 155.
243. Id. at 158.
244. Id. at 155.
and other liquors, the court did not cite the NDC’s takeover by the trust or
the failure of NDC to stay in business as the grounds for revoking the
charter (probably because the attorney general was really after the
equipment, which was already out of NDC’s hands, before it could be
rendered useless for distilling purposes). Rather, the court noted that the
general corporation statute under which NDC had been organized restricted
the operations of Nebraska corporations to those with a lawful purpose; acts
done in furtherance of an unlawful purpose were unauthorized and in excess
of the corporation's powers, and therefore illegal and void. The court found
that NDC’s purpose in originally joining the Whiskey Trust was to suppress
competition and create a monopoly, and that all contracts and conveyances
in furtherance of this purpose—including the conveyance of the equipment
to Arnold and Woolsey—were null and void.245 Since the equipment was
within the jurisdiction of the court, the court could take control of it and
dispose of it as the ends of justice required. Moreover, NDC’s
unauthorized contracts and conveyances also provided the grounds for the
court annulling NDC’s corporate franchise.246
The quo warranto actions by New York, California, Nebraska, and Ohio
against their respective state corporations for participating in a trust proper,
and the action by Louisiana to enjoin the Cotton Oil Trust from operating in
the state for lack of incorporation, are often regarded as the first antitrust
actions against the trusts. While harm to customers and suppliers and the
tendency to monopoly may have been a consideration in bringing the
actions, and certainly were noted when the states argued that participation
in the trusts were not only ultra vires but also against the public interest,
competition concerns were probably secondary at best. In the New York
and Nebraska actions, the quo warranto actions were brought against
corporations whose facilities were closed down by the controlling trust,247
while Louisiana directly challenged the operation of the Cotton Oil Trust,
which had shut down two mills in the state.248 At least in New York and
perhaps in the other states as well, the closure of a plant and the
concomitant loss of employment appear to be the determinative factor. It is
worth noting that the base of the Sugar Trust was in New York, yet the only
quo warranto proceeding that the state brought was against a constituent
corporation whose facilities were closed almost immediately upon joining
the trust. For many years, New York left the Sugar Trust unmolested,
although the Sugar Trust was one of the most notorious combinations in the
country, controlling 85 percent of the refining capacity on the East Coast,
and probably the most significant combination operating in New York,
since it controlled all of the sugar refineries in the state.249 Nor did New
245. Id. at 159.

246. Id. at 161.
247. See People v. N. River Sugar Refining Co., 121 N.Y. 582, 599 (1890); see also Neb.
Distilling Co., 46 N.W. at 157.
248. See State v. Am. Cotton Oil Trust, 1 RY. & CORP. L.J. 509, 510 (La. Civ. Dist. Ct.
1887).
York challenge the participation of its domestic corporations, notably

including the Standard Oil Company of New York, in other trusts proper.
Certainly the New York authorities were aware of the operation of a
number of trusts proper within its jurisdiction. Not only were these
reported with some frequency in The New York Times, but a committee of
the state senate charged with investigating the trusts compiled an extensive
record and issued reports in 1888 and 1889.250 There were countervailing
considerations. As the New York State Senate committee noted, some of
the major trusts (such as the Standard Oil Trust or the Cotton Oil Trust that
Louisiana attacked) had their headquarters located in New York City and
therefore contributed “to the wealth and prosperity of the great commercial
center of the country.”251
It is also not clear to what extent the quo warranto proceedings, even if
successful, would have impeded the operation of the trusts. When the
appeal was pending on Louisiana’s challenge to the operation of the Cotton
Oil Trust, the trust dissolved the constituent Louisiana corporations and
transferred their assets to a Rhode Island corporation the trust had set up for
that purpose.252 When the appeal was heard, counsel for the Cotton Oil
Trust informed the appellate court that since the corporations no longer
existed the case was moot.253 Likewise, after a writ of quo warranto had
issued in the trial court against the Nebraska Distilling Company and while
the case was pending appeal, the Whiskey Trust arranged for the assets of
the company to be sold to a purchaser who ostensibly would use the
facilities for a cereal mill and under a sale and purchase agreement that
contained a restrictive covenant that prohibited the purchaser and any
successors or assigns from manufacturing spirits at the facility for a number
of years.254
In any event, the actions by New York, California, Nebraska, and
Louisiana—and the prospect of similar actions by other states—caused the
trusts to look for another legal vehicle. Some fundamental changes in
corporation law, especially in New Jersey, caused the major trusts proper
and other large multistate combinations to look again at incorporation.
250. See id. at 4 (investigating the Sugar Trust, the Milk Trust, the Rubber Trust, the
Cotton Seed Oil Trust, the Envelope Trust, the Elevator Trust, the Oil Cloth Trust, the
Standard Oil Trust, the Butchers’ Trust, the Glass Trust, and the Furniture Trust); NEW YORK
1889 REPORT, supra note 61, at 3 (investigating the Copper Trust, the Sugar Trust, the Jute
Bagging Trust, the Milk Trust, the Elevator Trust, and the Wholesale Grocers’ Trust). As
the reports noted, many of these “trusts” were almost surely in the form of simple
agreements and not trusts proper.
252. See ARTHUR H. DEAN, WILLIAM NELSON CROMWELL, 1854–1948, AN AMERICAN
PIONEER IN CORPORATION, COMPARATIVE AND INTERNATIONAL LAW 99 (1957).
253. Id.
254. See State v. Neb. Distilling Co., 46 N.W. 155, 157–58 (Neb. 1890).
E. Holding Corporations and the Liberalization of Incorporation Laws

As general incorporation statutes became more common and the number
of general corporations grew, some states began competing with one
another in the reform of their general corporation laws to attract new
incorporations, including those sponsored by out-of-state capital, in order to
increase employment in the states as well as increase the state’s revenues
from registration and franchise fees and other corporate taxes.255 New
Jersey was already a leader in the race among states to liberalize
incorporation laws.256 A major turning point occurred in 1888, when the
state amended its general incorporation law to permit corporations to hold
stock and bonds in other corporations chartered under the laws of other
states.257 Equally important, in 1892 New Jersey explicitly authorized its
corporations to operate and hold property outside of the state, requiring
only that they have an office in New Jersey.258 In 1893, another amendment
cleared up an ambiguity in the earlier law and expressly declared that it was
lawful for any New Jersey general corporation to purchase, hold, and sell
the stock or bonds of any other corporation.259 When New Jersey revised
and restated its general corporation law in 1896, it had eliminated nearly all
of the remaining common law restrictions on corporate structure and
activity, including time limits on the duration of corporate charters,
constraints on the number and scope of permissible lines of business, and
limitations on capitalization of the issuance of nonvoting shares and shares
without par value.260 The more relaxed laws also conferred substantial
255. The bulk of New Jersey revenues had come historically from railroad taxes. In
1884, New Jersey extended its tax reach to other corporations. See generally CHRISTOPHER
GRANDY, NEW JERSEY AND THE FISCAL ORIGINS OF MODERN AMERICAN CORPORATION LAW
(1993); Charles W. McCurdy, The Knight Sugar Decision of 1895 and the Modernization of
American Corporation Law, 1869–1903, 53 BUS. HIST. REV. 304, 317 (1979).
256. For an account of the various machinations of the New Jersey legislature during this
time, see Harold Stoke, Economic Influences upon the Corporation Laws of New Jersey,
38 J. POL. ECON. 551 (1930). For further background, see also GRANDY, supra note 255, at
39–45; Christopher Grandy, New Jersey Corporate Chartermongering, 1875–1929, 49 J.
ECON. HIST. 677 (1989); Edward Q. Keasbey, New Jersey and the Great Corporations,
13 HARV. L. REV. 198 (1899); Lincoln Steffans, New Jersey: A Traitor State, 24
MCCLURE’S MAG. 649, 650 (1905). New Jersey had substantially liberalized its general
incorporation act once before in 1875, although there was no significant increase in the
number of incorporations in the state until the second liberalization in 1889. See CADMAN,
supra note 140, at 155–60; GEORGE H. EVANS, JR., BUSINESS INCORPORATIONS IN THE UNITED
STATES, 1800–1943, app. A, at 125–32 (1948) (New Jersey general incorporation statistics);
Keasbey, supra, at 205–07; Melvin I. Urofsky, Proposed Federal Incorporation in the
Progressive Era, 26 AM. J. LEGAL HIST. 160, 163–64 (1982). See generally JAMES B. DILL,
THE STATUTORY AND CASE LAW APPLICABLE TO PRIVATE COMPANIES UNDER THE GENERAL
CORPORATION ACT OF NEW JERSEY AND CORPORATE PRECEDENTS (3d ed. 1901).
257. Act of Apr. 4, 1888, ch. 269, 1888 N.J. Laws 385–86 (authorizing New Jersey and
other corporations operating in the state, and so authorized by their law of incorporation, to
own and hold stock and bonds of corporations chartered in other states).
258. Act of Mar. 10, 1892, ch. 56, § 1, 1892 N.J. Laws 90.
259. Act of Mar. 14, 1893, ch. 171, § 1, 1983 N.J. Laws 301; see Act of Mar. 8, 1893,
ch. 67, § 1, 1893 N.J. Laws 121 (consolidation or merger).
260. See Act of Apr. 21, 1896, ch. 185, 1896 N.J. Laws 277.
discretion on corporate directors in deciding what information must be

conveyed to shareholders and in utilizing proxy votes to make basic
corporate decisions.261 Other states soon followed with their own
liberalizations, including New York in 1892,262 Connecticut263 and
Pennsylvania in 1895,264 and Delaware in 1899.265
Authorization by the incorporating state for its corporations to buy stock
in other corporations, operate out of state, and hold property in other
jurisdictions, coupled with the elimination of restrictions on corporate
duration, lines of business, and capital structures, of course, solved only
half the problem in providing a corporate vehicle for combinations and
other large business enterprises. At least in principle, state legislatures
could have attempted to limit, if not preclude, foreign corporations from
doing business within their respective jurisdictions. States also could have
continued to use quo warranto proceedings to prohibit their domestic
corporations from becoming part of a foreign holding corporation just as
some of them did when their corporations became part of a trust proper.
But most states moved in just the opposite direction, perhaps because of
some intervening Supreme Court decisions.
261. See Joel Seligman, A Brief History of Delaware’s General Corporation Law of 1899,
1 DEL. J. CORP. L. 249, 266 (1976).
262. Act of May 18, 1892, ch. 688, 1892 N.Y. Laws 1834.
263. Act of May 17, 1895, ch. 138, 1895 Conn. Pub. Acts 514–15.
264. Act of June 26, 1895, ch. 261, 1895 Pa. Laws 369–70.
265. Act of Mar. 10, 1899, ch. 273, 21 Del. Laws 445 (1899). Delaware essentially
copied the New Jersey Revised Statute of 1896, although Delaware’s fees were lower. See
LARCOM, supra note 147, at 14–15, 17–25; Little Delaware Makes a Bid for the
Organization of Trusts, 33 AM. L. REV. 408, 419 (1899). In 1913, the New Jersey state
legislature, with the guidance and encouragement of Governor Woodrow Wilson, reformed
the general corporation law through the so-called “Seven Sisters” acts. See Acts of Feb. 19,
1913, chs. 13–19, 1913 N.J. Laws 25–33. Apparently stung by Theodore Roosevelt’s
attacks in the 1912 presidential election on Wilson’s failure to do anything about New Jersey
as a haven for trusts, Wilson sought and obtained state legislation that eliminated most of the
attractive features of the New Jersey general corporation statute. See ARTHUR S. LINK,
WILSON: THE NEW FREEDOM 32–34 (1956). Two years later, Delaware adopted a new
General Corporation Law and became the state of choice for new incorporation. See
LARCOM, supra note 147, at 9–10, 155. In 1917, the New Jersey legislature reversed course,
largely to stem the loss of revenue in franchise fees, and substantially weakened or repealed
the Seven Sisters Acts. See Act of Mar. 28, 1917, ch. 195, 1917 N.J. Laws 566. By then,
however, it was already too late, since Delaware already replaced New Jersey as the state of
choice for large corporations.
Figure 3. New Jersey Corporation Taxes

(as a percentage of total New Jersey tax receipts)
In 1876, the Supreme Court began to pull back from its earlier
suggestions that states could discriminate arbitrarily against foreign
corporations, or at least discriminate against the sale of goods by foreign
corporations in the course of interstate commerce. In Welton v. Missouri,266
the Court used the Commerce Clause to invalidate a discriminatory
licensing fee imposed on traveling wholesale salesmen, known as
“drummers,” representing out-of-state manufacturers but not on those
representing in-state manufacturers.267 Welton, an agent of the Singer
Sewing Machine Company who was indicted and convicted for failing to
obtain the requisite license to sell goods produced out of state, claimed that
the license fee constituted a tax on the sale of goods in interstate commerce
and therefore an unconstitutional restraint.268 The Court, despite a history
of sustaining state taxes on the in-state sales activities of foreign
corporations, agreed.269 A decade later, in Robbins v. Shelby County Taxing
District,270 the Court held that even nondiscriminatory drummer license
fees are invalid if they impede interstate commerce.271 While Welton and
Robbins paved the way for the expansion of firms such as Singer and
McCormick that used demonstration agents who required no local facilities
to market their products, Cooley and Paul continued to permit states
complete freedom to regulate foreign corporations producing out-of-state
goods or services that required local manufacturing, warehouses, sales, or
266. 91 U.S. 275 (1875).

267. Id. at 277.
268. Id. at 276. For more background on the case, see Charles W. McCurdy, American
Law and the Marketing Structure of the Large Corporation, 1875–1890, 38 J. ECON. HIST.
631, 639–41 (1978).
269. Id. at 282.
270. 120 U.S. 489 (1887).
271. Id. at 497‒98, 502.
service facilities.272 These were considered intrastate business operations

that could be discriminatorily taxed, regulated, or even prohibited.273 In
1886, in Santa Clara County v. Southern Pacific Railroad,274 the Court held
that a corporation was a “person” within the meaning of the Fourteenth
Amendment, thus beginning the breakdown of the constitutional distinction
between the mobility of foreign goods and the mobility of foreign
corporations.275
In the wake of the liberalization of general incorporation laws, and the
Supreme Court’s decisions making it more difficult for states to prohibit or
discriminate against foreign corporations, many large business enterprises,
especially those organized as trusts proper (and subject to possible future
quo warranto attacks), quickly reconfigured themselves as corporations. In
the few years before the passage of the Sherman Act, these included the
National Cordage Company (1887), the American Tobacco Company
(1890), the Diamond Match Company (1890), the Distilling and Cattle
Feeding Company (1890) (reorganized in 1895 into the American Spirits
Manufacturing Company), and the National Starch Manufacturing
Company (1890).276 Perhaps because of a fear that some states would view
a domestic corporation’s participation as a subsidiary to a holding company
the same way as they viewed participation in a trust proper, almost all
reorganizing trusts originally consolidated their constituent companies
through merger or purchase into a single corporation and eschewed the
holding company form. Typically, the trust would organize a new
corporation, which would then purchase the plant and equipment of its
members at an agreed-upon value (often very inflated) in exchange for the
corporation’s stock of equal par value. In addition, the seller would agree
not to reenter the business, usually for a considerable length of time, and
would often execute a considerable bond to secure the obligation.
272. Paul v. Virginia, 75 U.S. (8 Wall.) 168, 183–85 (1868); Cooley v. Bd. of Wardens,
53 U.S. (12 How.) 299, 321 (1851).
273. See, e.g., Horn Silver Mining Co. v. New York, 143 U.S. 305, 313–15 (1892)
(noting the absolute right to exclude foreign corporations from intrastate business activities);
Pembina Consol. Silver Mining & Milling Co. v. Pennsylvania, 125 U.S. 181, 189–90
(1888) (upholding a discriminatory tax on in-state offices of foreign corporations); Cooper
Mfg. Co. v. Ferguson, 113 U.S. 727 (1885).
274. 118 U.S. 394 (1886).
275. See Morton J. Horowitz, Santa Clara Revisited: The Development of Corporate
Theory, 88 W. VA. L. REV. 173, 173 (1985).
276. See ELIOT JONES, THE TRUST PROBLEM IN THE UNITED STATES 40 (1921). Within a
few years after the passage of the Sherman Act, other significant enterprises, including the
American Sugar Refining Company (1891), the National Lead Company (1891), the General
Electric Company (1892), the United States Rubber Company (1892), the National Wall
Paper Company (1892), the United States Leather Company (1893), and the American
Malting Company (1897), reorganized into corporations. Id.; GLENN D. BABCOCK, HISTORY
OF THE UNITED STATES RUBBER COMPANY (1966); ARTHUR STONE DEWING, CORPORATE
PROMOTIONS AND REORGANIZATIONS 19–20 (1914) (formation of the United States Leather
Company); CLIFFORD DYER HOLLEY, THE LEAD AND ZINC PIGMENTS 24–25 (1909)
(formation of the National Lead Company); MOODY, supra note 182, at 248 (formation of
the General Electric Company).
The reorganization of the Match Trust into a single corporation provides

a good example.277 The promoters of the Match Trust organized the
Diamond Match Company under the laws of Connecticut on December 3,
1880.278 The capital stock of the company consisted of $2,225,000, divided
into $1,400,000 of common stock and $850,000 of preferred stock.279
Members transferred their real estate, plants, machinery, patents, and good-
will to the Diamond Match Company at agreed-upon valuations in
exchange for common stock of equal par value.280 Each proprietor also
would transfer its matches and match materials to Diamond in exchange for
preferred stock or, if the par value of the preferred stock was insufficient,
preferred stock and cash.281 Selling companies also agreed not to reenter
the business of manufacturing friction matches for a period of years and
executed bonds that provided for payment of liquidated damages to
Diamond in the event of a breach.282 Controlling shareholders of corporate
sellers were also required to enter into similar noncompetition agreements
in their individual capacities and execute bonds.283 Finally, presumably to
provide Diamond with some operating capital, sellers were required to
purchase for cash at par value one-half as much preferred stock as they
received in common stock for its property.284 The Richardson Match
Company, a Detroit concern, for example, sold its plant and equipment to
Diamond for $190,000 in common stock and subscribed for preferred stock
in the amount of $95,000.285 The company entered into a twenty-year
noncompetition covenant and executed a $50,000 bond, while David
Richardson, the majority shareholder and general manager, also signed a
twenty-year noncompetition agreement and executed a $25,000 bond.286 In
this manner, Diamond was able to purchase the plant and equipment of
thirty-one manufacturers, comprising essentially all of the friction match
manufacturing facilities in the United States, of which all but thirteen were
quickly closed.287
Of the ten largest corporate consolidations chartered between 1887 and
1897, only the American Cotton Oil Company (1889) organized itself
originally as a holding company.288 The Standard Oil Trust, perhaps gun-
shy from its defeat in the Ohio courts and wary of the legality of
transforming a trust proper into a holding company, operated under the
277. See Richardson v. Buhl, 43 N.W. 1102 (Mich. 1889).

278. Id. at 1111.
279. Id. at 1103.
280. Id.
281. Id.
282. Id.
283. Id.
284. Id.
285. Id. at 1104.
286. Id. at 1103.
287. Id. at 1111. For a discussion of the reorganization of the National Lead Trust into
the National Lead Company, see Nat’l Lead Co. v. S.E. Grote Paint Store Co., 80 Mo. App.
247 (Ct. App. 1899).
288. JONES, supra note 276, at 40.
control of its nine principal shareholders acting in their individual capacities

until 1899, when it finally overcame its reluctance and reorganized as a
New Jersey holding company.289 By 1899, all of the trusts that had been
attacked by state quo warranto prosecutions had reorganized themselves as
corporations,290 while some 280 other combinations with capitalizations
exceeding $10 million had incorporated in New Jersey by 1894.291
IV. THE LEGISLATIVE RESPONSE

As the 1880s progressed, there was growing political pressure to do
something about the dramatic social dislocations, the perceived suppression
of individual opportunity, and the shifts in income distribution that
accompanied the rapid industrialization of the decade. The call for action
against the trusts was part of this movement. Trusts, in the mind of the
public and most contemporary commentators, were combinations of
competitors, regardless of their technical legal form, that sought to increase
prices and regulate production levels, although there was also concern,
especially in the agricultural states, that trusts also suppressed the prices
they paid for raw materials and other inputs.292 A report by a New York
State Senate committee charged with investigating the operation of the
trusts within the state observed:
[T]he main purpose, management and effect of all upon the public is the
same, to wit: The aggregation of capital, the power of controlling the
manufacture and output of various necessary commodities; the acquisition
or destruction of competitive properties, all leading to the final and
conclusive purposes of annihilating competition and enabling the
industries represented in the combination to fix the price at which they
would purchase the raw material from the producer, and at which they
would sell the refined product to the consumer.293
U.S. Senator David Turpie expressed a similar view to Congress:
[A] trust, in the most recent acceptation of the term, is a union or
combination, rarely of individuals, usually of corporations, dealing in or
producing a certain commodity, of the total amount of which belonging to
them a common stock is made with the intention of holding and selling
289. See MOODY, supra note 182, at 125.

290. 19 U.S. INDUS. COMM’N, supra note 54, at 598–99.
291. See GEORGE H. EVANS, JR., BUSINESS INCORPORATION IN THE UNITED STATES, 1800–
1943, at 126–31 (1948).
292. See, e.g., Chi., Wilmington & Vermillion Coal Co. v. People, 114 Ill. App. 75, 112
(App. Ct. 1904) (“A pool or trust is a combination having the intention and power, or
tendency, to monopolize business, or to control production, or to interfere with trade, or to
fix and regulate prices, and the like. The primary object of a pool or trust is to secure a
monopoly, since from that point of advantage it can destroy its competitors, and can control
production, sales and prices.”); CHARLES FISK BEACH, A TREATISE ON THE LAW OF
MONOPOLIES AND INDUSTRIAL TRUSTS 4 (1898) (“[The term ‘trust’] is used to designate any
corporation, association or other combination, the object of which is to create a monopoly,
either complete or partial, with a view to increasing prices by suppressing competition and
obtaining control of the market.”).
the same at an enhanced price, by suppressing or limiting the supply and

by other devices, so that the price of such trust commodity shall depend
merely upon the agreement made about it by those in the combination,
without reference to the cost of its production, the quantity of the article
held for consumption, or the demand therefor among buyers.294
Many citizens, encouraged by an increasing number of newspaper articles
and other reports in the popular literature, focused their discontent on the
large combinations that directly or indirectly touched almost everyone,
whether as a customer, employee, supplier, or competitor.295 At the same
time, there was a general recognition that the country had evolved beyond
the agrarian economy of the pre–Civil War days; that technological,
transportation, and managerial developments had enormously increased the
nation’s productivity by creating large economies of scale and scope; that
large, highly capitalized businesses were a necessary consequence; and that
there would be no returning to an era when only small businesses existed.
As a result, the difference between combinations of independent firms and
large unitary business enterprises that had grown organically became
critical.
A. State Antitrust Legislation

The states reacted first to the calls for antitrust legislation. By and large,
states are more homogeneous than the country as a whole, and it was
natural that the citizens of some states would be disproportionately
adversely affected by perceived trust activities. Moreover, this same
relative homogeneity made it easier for the affected citizens in these states
to obtain protective legislation from their state legislatures. Finally, in the
1880s, states were the regulators of first instance of microeconomic
activities. Consistent with the prevailing notions of federalism, the
responsibility for regulating economic activities and preserving competition
originally fell to the individual states. Prior to the passage of the Sherman
Act in 1890, thirteen states had enacted their own antitrust law: Iowa
(1888), Kansas (1889), Maine (1889), North Carolina (1889), Nebraska
(1889), Texas (1889), Tennessee (1889), Missouri (1889), Michigan (1889),
Mississippi (1890), North Dakota (1890), South Dakota (1890), and
Kentucky (1890).
294. 21 CONG. REC. 137 (1889) (remarks of Sen. David Turpie).

295. One admittedly incomplete survey identified fifteen treatises or reports of official
investigations and over thirty-five articles addressing the trust issue written between 1887
and 1890. Charles J. Bullock, Trust Literature: A Survey and a Criticism, 15 Q.J. ECON.
167, 168 (1901).
Table 3: State and Federal Antitrust Legislation to the Sherman Act
Iowa Act of April 16, 1888, ch. 84, 1888 Iowa Acts 124
Maine Act of March 7, 1889, ch. 266, 1889 Me. Laws 235
Kansas Act of March 9, 1889, ch. 257, 1889 Kan. Sess. Laws 389
North Carolina Act of March 11, 1889, ch. 374, 1889 N.C. Sess. Laws 372
Nebraska Act of March 29, 1889, ch. 69, 1889 Neb. Laws 516
Texas Act of March 30, 1889, ch. 117, 1889 Tex. Gen. Laws 141
Tennessee Act of April 6, 1889, ch. 250, 1889 Tenn. Acts 475
Missouri Act of May 18, 1889, 1889 Mo. Laws 96
Michigan Act of July 1, 1889, no. 225, 1889 Mich. Pub. Acts 331
Mississippi Act of February 22, 1890, ch. 36, 1890 Miss. Laws 55
North Dakota Act of March 3, 1890, ch. 174, 1890 N.D. Laws 503
South Dakota Act of March 7, 1890, ch. 154, 1890 S.D. Sess. Laws 323
Kentucky Act of May 20, 1890, ch. 1621, 1890 Ky. Acts 143
Federal Act of July 2, 1890, ch. 674, 26 Stat. 209 (1890)
As discussed, state courts in the United States applied the common law to
find void and unenforceable the agreements underlying combinations of
competitors organized for the purpose of raising prices and limiting
production. Although some of the fine points vary, each of the thirteen
state antitrust statutes contains a broad prohibition against combinations
designed to raise price or reduce production. Although some courts raised
the possibility that combinations could regulate prices and output to the
extent necessary to control excessive competition, I could find no reported
court decisions that enforced a combination implementing agreements on
this ground. North Carolina, however, appears to have recognized this
defense by prohibiting only price increases “beyond the price that would be
fixed by the natural demand for or the supply of” the products in
question.296 Six state statutes—Kansas, North Carolina, Tennessee,
Mississippi, Texas, and South Dakota—explicitly prohibited collective
activity to reduce prices (presumably of inputs),297 although many statutes
had catch-all provisions prohibiting the restriction of “full and free
competition” or something to a similar effect that might be used to reach
collective monopsony pricing.298 The North Carolina and Tennessee
296. Act of Mar. 11, 1889, ch. 374, § 2, 1889 N.C. Sess. Laws 372, 373.
297. Act of Mar. 9, 1889, ch. 257, § 1, 1889 Kan. Sess. Laws 389; Act of February 22,
1890, ch. 36, § 1, 1890 Miss. Laws 55; Act of Mar. 11, 1889, ch. 374, § 2; Act of Mar. 7,
1890, ch. 154, § 1, 1890 S.D. Sess. Laws 323 (farm and agricultural products); Act of Apr. 6,
1889, ch. 250, § 1, 1889 Tenn. Acts 475; Act of Mar. 30, 1889, ch. 117, § 1, 1889 Tex. Gen.
Laws 141.
298. Act of Mar. 9, 1889, ch. 257, § 1 (“full and free competition”); Act of July 1, 1889,
no. 225, § 1, 1889 Mich. Pub. Acts 331 (“free competition”); Act of Feb. 22, 1890, ch. 36,
§ 1, 1890 Miss. Laws 55 (“free and unrestricted competition”); Act of Mar. 7, 1890, ch. 154,
statutes also contained early predatory pricing provisions, with North

Carolina prohibiting pricing “for less than actual cost for the purpose of
breaking down competitors”299 and Tennessee prohibiting dumping
products on the market to create an “undue depression in the price of such
article, and by such means to destroy or limit legitimate competition.”300
In addition to codifying the basic common law prohibitions against
combinations in restraint of trade, five states—Kansas, Maine, Missouri,
North Dakota, and Kentucky—prohibited corporations and other persons
from forming or participating in a trust (broadly defined, usually as a
combination to fix prices or reduce production), issuing trust certificates, or
placing the management or control of their companies in the hands of
trustees.301 Maine and Missouri also required their respective secretaries of
state to send a letter of inquiry to each corporation organized under the laws
of the state to ascertain whether the corporation is a member of a trust or
other prohibited combination and required a senior officer to respond under
oath or else the corporate charter would be revoked.302 In 1892, however,
the Missouri Supreme Court declared the provision unconstitutional under
the Missouri Constitution, since the Missouri antitrust statute subjected
officers and directors of a violating corporation to criminal sanctions.303
Maine did not subject officers and directors of a violating corporation to
criminal penalties.
As noted earlier, the common law made contracts and combinations in
restraint of trade void and unenforceable as a matter of contract law, but
they were not criminal offenses that the state could challenge or torts for
which an injured party could seek redress. All thirteen of the state statutes
made violations criminal offenses. The penalties varied widely, both across
and within states. Nine states provided for incarceration. On the low end,
Kansas and Nebraska provided for a maximum term of six months,304 while
Missouri, North Dakota, and Kentucky had maximum terms of one year.305
South Dakota provided for a maximum term of 3 years.306 North Carolina,
§ 1 (“free, fair and full competition”); Act of Mar. 30, 1889, ch. 117, § 1 (“free and
unrestricted competition”).
299. Act of Mar. 11, 1889, ch. 374, § 5.
300. Act of Apr. 6, 1889, ch. 250, § 1.
301. Act of Mar. 9, 1889, ch. 257, § 2; Act of May 20, 1890, ch. 1621, § 2, 1890 Ky. Acts
143; Act of Mar. 7, 1889, ch. 266, § 1, 1889 Me. Laws 235; Act of May 18, 1889, § 2, 1889
Mo. Laws 96; Act of Mar. 3, 1890, ch. 174, § 2, 1890 N.D. Laws 503, 504; see also Act of
Feb. 22, 1890, ch. 36, § 1 (defining combinations as trusts but not explicitly the issuance of
trust certificates or the subordination to trust management); Act of Mar. 11, 1889, ch. 374,
§ 3 (same); Act of Mar. 30, 1889, ch. 117, § 1 (same).
302. Act of Mar. 7, 1889, ch. 266, § 4; Act of May 18, 1889, § 6.
303. See State ex rel. Att’y Gen. v. Simmons Hardware Co., 18 S.W. 1125, 1127 (Mo.
1892). The experience under the statute is recounted in Steven L. Piott, Missouri and
Monopoly? The 1890s As an Experiment in Law Enforcement, 74 MO. HIST. REV. 21 (1979).
304. Act of Mar. 9, 1889, ch. 257, § 3; Act of Mar. 29, 1889, ch. 69, § 6, 1889 Neb. Laws
516, 519.
305. Act of May 20, 1890, ch. 1621, § 3; Act of May 18, 1889, § 3; Act of Mar. 3, 1890,
ch. 174, § 3.
306. Act of Mar. 7, 1890, ch. 154, § 1, 1890 S.D. Sess. Laws 323.
Texas, and Mississippi each provided for a maximum term of ten years.307
Iowa, Maine, and Tennessee did not provide for imprisonment.
On criminal fines, Michigan and Tennessee appear on the low end.
Depending on the section violated, Michigan provided for a criminal fine
range of $50 to $300 or $500 and imprisonment of not more than six
months to one year.308 Tennessee provided for a criminal fine of not less
than $250 for the first offense and not less than $500 for subsequent
offenses, together in both cases with a $50 tax to be paid to the state
attorney general as costs.309 Kansas, Nebraska, and South Dakota provided
for a maximum criminal fine of $1,000.310 Iowa, Texas, Missouri
(individual only), Mississippi, North Dakota (individual only), and
Kentucky provided a maximum fine of $5,000,311 while Maine
(organizational only) and North Carolina had maximum fines of $10,000.312
In addition, Missouri and North Dakota provided for organizational fines of
between 1 percent and 20 percent of the corporation’s capital stock or the
amount invested otherwise.313 Interestingly, in addition to a criminal fine,
Mississippi also provided for a forfeiture of $50 for each day of a violation
to be paid into the state treasury to the credit of the common school fund.314
Nebraska, Texas, Tennessee, Michigan, Mississippi, North Dakota, and
Kentucky all provided for the revocation of the charter through a quo
warranto proceeding of any domestic corporation that violated their
antitrust laws,315 although the other states undoubtedly had this option
under their respective corporation laws.
Most states simply ordered their respective attorney general and
subordinate state attorneys to enforce the law. Some states, however,
clearly were concerned about incentives to enforce the law. Missouri
incentivized its attorney general and prosecuting attorneys by entitling them
to one-fifth of any fine collected if prosecuting alone or one-fourth if
prosecuting together.316 Similarly, Tennessee provided that the attorney
general would receive 50 percent of any fine as well as a taxed fee of
307. Act of Feb. 22, 1890, ch. 36, § 2, 1890 Miss. Laws 55, 56; Act of Mar. 11, 1889, ch.
374, § 3; Act of Mar. 30, 1889, ch. 117, § 6, 1889 Tex. Gen. Laws 141, 142.
308. Act of July 1, 1889, no. 225, §§ 1, 3, 1889 Mich. Pub. Acts 331, 332.
309. Act of Apr. 6, 1889, ch. 250, § 2, 1889 Tenn. Acts 475.
310. Act of Mar. 9, 1889, ch. 257, § 3, 1889 Kan. Sess. Laws 389, 390; Act of Mar. 29,
1889, ch. 69, § 6, 1889 Neb. Laws 516, 519; Act of Mar. 7, 1890, ch. 154, § 1.
311. Act of Apr. 16, 1888, ch. 84, § 2, 1888 Iowa Acts 124; Act of May 20, 1890, ch.
1621, § 3, 1890 Ky. Acts 143, 144; Act of Feb. 22, 1890, ch. 36, § 2; Act of May 18, 1889,
§ 3; Act of Mar. 3, 1890, ch. 174, § 3, 1890 N.D. Laws 503, 504; Act of Mar. 30, 1889,
ch. 117, § 6.
312. Act of Mar. 7, 1889, ch. 266, § 3, 1889 Me. Laws 235, 236; Act of Mar. 11, 1889,
ch. 374, § 3.
313. Act of May 18, 1889, § 3; Act of Mar. 3, 1890, ch. 174, § 3.
314. Act of Feb. 22, 1890, ch. 36, § 7, 1890 Miss. Laws 55, 57.
315. Act of May 20, 1890, ch. 1621, § 5; Act of July 1, 1889, no. 225, § 5, 1889 Mich.
Pub. Acts 331, 333; Act of Feb. 22, 1890, ch. 36, § 10; Act of Mar. 29, 1889, ch. 69, § 5; Act
of Mar. 3, 1890, ch. 174, §§ 6–7; Act of Apr. 6, 1889, ch. 250, § 4, 1889 Tenn. Acts 475,
476; Act of Mar. 30, 1889, ch. 117, § 3.
316. Act of May 18, 1889, § 8.
$50.317 Kansas provided that county attorneys that fail to prosecute and
officials with knowledge of a violation who fail to come forward and notify
the county attorney were subject to fines between $100 and $500 and
forfeiture of office.318
Surprisingly, only Nebraska and Kansas provided for a private right of
action by persons injured as a result of a violation of the state’s antitrust
law. Nebraska provided for the recovery of the “full amount of damages
sustained” plus a reasonable attorney’s fee.319 Kansas provided for a
private right of action to recover the full purchase price paid by the plaintiff
to any illegal combination.320 Missouri and Kentucky provided that a
purchaser from an illegal combination was not liable for the purchase price
and could interpose the illegality of the combination as a defense in a
failure to pay contract action but it does not explicitly provide for a private
right of action to recover a purchase price that had already been paid.321
South Dakota permitted “any person” to file a complaint for any violation
of its antitrust law and instructed its courts to proceed with the case “the
same as though the State’s Attorney had made the complaint.”322 The
language of the statute is ambiguous as to whether it applied to criminal
complaints as well as petitions for injunctive relief.
B. Federal Antitrust Legislation

As enacted, the Sherman Act was signed by President Harrison on July 2,
1890.323 A statute was necessary if the federal government was to address
the problem of combinations, since federal courts have no criminal
jurisdiction over common law crimes.324
The Sherman Act took a somewhat different tack than the state antitrust
statutes. Rather than specifically targeting trusts and other combinations,
the Sherman Act adopted the language of the common law. Section 1
prohibits “[e]very contract, combination in the form of trust or otherwise, or
conspiracy, in restraint of trade or commerce among the several States, or
with foreign nations,”325 while section 2 makes it unlawful to “monopolize,
317. Act of Apr. 6, 1889, ch. 250, § 2.

318. Act of Mar. 9, 1889, ch. 257, §§ 7–8, 1889 Kan. Sess. Laws 389, 390–91.
319. Act of Mar. 29, 1889, ch. 69, § 3.
320. Act of Mar. 9, 1889, ch. 257, § 4.
321. Act of May 20, 1890, ch. 1621, § 4, 1890 Ky. Acts 143, 144; Act of May 18, 1889,
§ 4.
322. Act of Mar. 7, 1890, ch. 154, § 4, 1890 S.D. Sess. Laws 323, 325.
323. Act of July 2, 1890 (Sherman Act), ch. 647, 26 Stat. 209 (1890). The act was
officially designated the Sherman Act by the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, Pub. L. No. 94-435, § 305(a), 90 Stat. 1397.
324. See, e.g., United States v. Hudson & Goodwin, 11 U.S. (7 Cranch) 32, 34 (1812); see
also United States v. Britton, 108 U.S. 199, 206 (1883); United States v. Coolidge, 14 U.S.
(1 Wheat.) 415, 416 (1816); In re Greene, 52 F. 104, 111 (C.C.S.D. Ohio 1892). For a
modern affirmation of this rule, see United States v. Kozminski, 487 U.S. 931, 939 (1988).
325. Sherman Act § 1.
or attempt to monopolize, or combine or conspire with any other person or

persons, to monopolize any part of the trade or commerce.”326
The appeal of the common law to the framers of the Sherman Act resided
in both the particular restrictions that the common law imposed at the time
but also the fact that the law could be adjusted by the courts using the
common law process continuously through time to cope with new,
emerging business practices. Senator Sherman, commenting on an earlier
version of the bill, explicitly noted that the language was intended to
provide the federal courts a body of law from which it could draw in
making decisions:
This bill, as I would have it, has for its single object to invoke the aid of
the courts of the United States to . . . supplement the enforcement of the
established rules of the common and statute law by the courts of the
several States in dealing with combinations that affect injuriously the
industrial liberty of the citizens of these States.327
To this end, Senator Shearman also argued that the bill “does not announce
a new principle of law, but applies old and well-recognized principles of the
common law to the complicated jurisdiction of our State and Federal
Government.”328 On numerous occasions, backers of the Sherman Act
assured the floor of the Senate that they were merely seeking to enable
federal courts to apply the common law to anticompetitive business
activities329 and early federal cases are full of citations to English and state
common law.330 But equally important, the Sherman Act’s use of common
law terminology empowered the federal courts to use a common law
approach to continue to develop and refine antitrust law as the courts gained
familiarity with various business practices and their consequences, as
business practices continued to evolve and economics learning developed.
As did the state antitrust statutes, the Sherman Act made violations
criminal offenses. The original act made violations misdemeanors
punishable by a fine not to exceed $5,000,331 about the middle of the range
provided by the state statutes. The Sherman Act also provided for
326. Id. § 2. Section 3 essentially applies the prohibitions of section 1 to commerce

within or with any territory or the District of Columbia. Id. § 3. Interestingly, there is no
counterpart to section 2 for territories or the District of Columbia.
327. 21 CONG. REC. 2457 (1890) (statement of Sen. Sherman).
328. Id. at 2456.
329. See, e.g., id. at 2456, 2457, 2561, 2563 (statement of Sen. Sherman); id. at 3146,
3152 (statement of Sen. Hoar).
330. See, e.g., United States v. Addyston Pipe & Steel Co., 85 F. 271, 278–91 (6th Cir.
1989), aff’d, 175 U.S. 211 (1899) (comprehensively surveying common law cases as a
means of construing the Sherman Act); In re Greene, 52 F. 104, 111 (C.C.S.D. Ohio 1892)
(noting that the Sherman Act “does not undertake to define what constitutes a contract,
combination, or conspiracy in restraint of trade, and recourse must therefore be had to the
common law for the proper definition of these general terms”); In re Corning, 51 F. 205, 210
(N.D. Ohio 1892) (“These terms, as used in the act of congress under consideration, are well
defined at common law, and must be considered with reference to such established
meaning.”).
331. Sherman Act §§ 1–2.
imprisonment not exceeding one year, on the lower end of the state
imprisonment statutes.332 The criminal provisions of the Sherman Act were
enforceable by the U.S. Attorney General and the U.S. district attorneys.333
The Sherman Act also provided the federal circuit courts with
jurisdiction in equity to prevent and restrain violations of the Act and
authorized the Attorney General and the district attorneys to bring
proceedings to enjoin on-going and imminent violations.334 Moreover, the
Sherman Act provided the United States with a remedy of forfeiture, so that
property owned under any illegal contract or by any illegal combination that
was in the course of being transported in interstate or foreign commerce
could be condemned and forfeited to the United States.335
Finally, and unlike the state antitrust statutes, the Sherman Act provides
persons injured by an antitrust violation in their business or property with a
private right of action to recover treble damages (three times actual
damages) plus reasonable attorney’s fees.336 The legislative history of the
treble damage remedy is sparse, although it appears that the remedy was to
be available not only to customers who purchased goods or services from a
combination member at fixed prices but also to competitors who may have
been driven out of business by a combination’s efforts to control the
market.337 On multiple damages, the legislative path was convoluted.
Sherman originally introduced a bill providing that customer could sue for
double the amount of actual damages resulting from increased prices
charged pursuant to an illegal combination.338 When the bill was reported
by the Senate Finance Committee, which Sherman chaired, the bill had
been amended to provide, as did the Nebraska and Kansas antitrust statutes,
that purchasers could recover the full consideration paid for any goods or
merchandise purchased from a combination member at an increased
332. Id.
333. Id. § 4.
334. Id. The United States circuit courts were established by the Judiciary Act of 1789.
ch. 20, § 4, 1 Stat. 73. The U.S. circuit courts had original jurisdiction over civil actions
based on diversity jurisdiction and over most federal crimes and appellate jurisdiction over
U.S. district courts. Id. §§ 11, 22. The Judiciary Act of 1891 transferred appellate
jurisdiction to the newly created U.S. circuit courts of appeals, which are now known as the
U.S. courts of appeals. ch. 517, §§ 2, 4, 26 Stat. 826. In 1912, the Judicial Code of 1911
abolished the circuit courts and transferred their remaining original jurisdiction to the U.S.
district courts. Pub. L. No. 61-475, §§ 289–292, 36 Stat. 1087, 1167.
335. Sherman Act § 6. The United States has only rarely sought forfeiture and then
mostly in consent decrees rather than litigated relief. See, e.g., United States v. Steinhardt
Mgmt. Co., No. 94 Civ 9044, 1995 WL 322772 (S.D.N.Y. May 5, 1995) (consent decree);
United States v. Certain Property Owned by Salomon Bros., No. 92 Civ. 3700, 1992 WL
295221 (S.D.N.Y. Sept. 14, 1992) (consent decree providing for a $27.5 million asset
forfeiture to settle in part a charge that Salomon Bros. cornered the market for certain two-
year Treasury notes); see also United States v. Addyston Pipe & Steel Co., 85 F. 271, 301
(6th Cir. 1898) (denying as a matter of law a petition in equity for forfeiture and holding that
forfeiture actions must be tried at law before a jury), aff’d on other grounds, 175 U.S. 211
(1899).
336. Sherman Act § 7.
337. See 21 CONG. REC. 2569 (1890) (statement of Sen. Sherman).
338. S. 3445, 50th Cong. (as introduced, Aug. 14, 1888).
price.339 The full Senate amended the bill, retaining the committee’s
purchaser cause of action to recover the full consideration and adding a new
cause of action for actual damages for firms that were compelled to join or
sell out to a combination or were forced out of business.340 When the 50th
Congress ended without further action on the bill and the 51st Congress
convened, Sherman reintroduced the bill as reported earlier by the Senate
Finance Committee, retaining the purchaser cause of action for the full
purchase price but eliminating the competitor cause of action that the full
Senate had introduced.341 When the Finance Committee reported the bill, it
returned to Sherman’s original idea of double damages, but the language of
the amendment appeared to broaden the private action to include all injured
persons and not just purchasers.342 After being reported to, and debated and
amended by, the Senate,343 double damages and the broadened cause of
action remained in the bill through the floor debate. Unexpectedly, and
undoubtedly to Sherman’s dismay, the bill was referred to the Senate
Judiciary Committee, which rewrote the bill in its entirety in six days. The
Judiciary Committee increased the recovery to treble damages,344 where it
remained through enactment. No doubt the multiple damages were
provided not only to compensate victims, but also as an inducement to bring
what were likely to be expensive and risky law suits,345 as well as a further
deterrent to committing violations in the first instance.346 Even so, both
critics and supporters voiced skepticism that, given the difficulties and
expense of proving a violation, especially against a well-financed
adversary, there would be much private enforcement of the Sherman Act.347
V. SOME CONCLUDING OBSERVATIONS

The state and federal antitrust statutes passed between 1888 and 1890
were enacted to deal with the increasing number of horizontal
combinations—what would be called price-fixing cartels today—that had
emerged throughout the economy in the 1870s and 1880s. In the course of
an enormous economic expansion, broadening geographic markets,
intensifying competition, and falling prices, it had become commonplace
339. S. 3445, 50th Cong. § 2 (as reported by the S. Comm. on Finance, Sept. 11, 1888).
340. S. 3445, 50th Cong. § 3 (as amended by the Senate, Jan. 25, 1889); see 20 CONG.
REC. 1167 (1889) (motion by Sen. Hoar to add competitor cause of action).
341. S. 1, 51st Cong. § 2 (as introduced, Dec. 4, 1889).
342. S. 1, 51st Cong. § 2 (as reported by the S. Comm. on Finance, Jan. 14, 1890); see
21 CONG. REC. 1767–68 (1890) (statement of Sen. George).
343. See S. 1, 51st Cong. § 2 (as amended by the Senate, Mar. 26, 1889) (retaining double
damages).
344. S. 1, 51st Cong. § 7 (as reported by the S. Comm. on the Judiciary, Apr. 2, 1890).
345. See 21 CONG. REC. 2569 (1890) (statement of Sen. Sherman) (expressing concern
that even double damages is “too small” to induce private enforcement).
346. See 21 CONG. REC. 3146–47 (1890) (statement of Sen. Hoar) (characterizing treble
damages as a “penalty”).
347. See 21 CONG. REC. 1768 (1890) (remarks of Sen. George) (“I do not hesitate to say
that few, if any, of such suits will ever be instituted and not one will ever be successful.”); id.
at 2569 (1890) (statement of Sen. Sherman); id. at 2615 (1890) (statement of Sen. Coke).
for competitors to band together in an effort to control production and halt

the decline in the prices that they charged for their products, if not to
increase prices to supracompetitive levels. These efforts were widespread,
ranging from local grain dealers trying to control the market in a city or a
town to nationwide combinations trying to control prices across the nation
for such necessities as oil, sugar, or spirits. Although much less frequent, in
other sectors, combinations arose in an effort to exercise monopsony power
and lower the prices that combination members paid for their production
inputs.
The early antitrust statutes were narrowly focused. Although the
language of the individual statutes varied considerably, the primary import
of each of these laws was to adopt the substantive prohibitions in the
common law against combinations in restraint of trade, extend the
application of the prohibitions beyond simple combinations and pools to
include trusts proper and holding companies, and criminalize violations in
order to enable government enforcement.
Notably, none of the statutes expanded their substantive prohibitions to
make combinations unlawful under the statute that would have been lawful
under the common law. Although some states did use the legislation to
codify the state’s ability to use a quo warranto proceeding to revoke a
domestic corporation’s corporate charter for participating in a trust proper,
each state also surely had that right without further statutory authorization.
Nor did the statutes address conduct other than combinations.
Anticompetitive exclusive and reciprocal dealing, tying arrangements,
group boycotts, resale price maintenance, non-price vertical restraints, and
mergers outside of the context of price-fixing combinations were not within
the ambit of the original antitrust laws at the time they were passed,
although they later became unlawful under the Sherman Act as the law
evolved under the common law approach enabled by the statute.
The extension of the now-statutory prohibitions to trusts proper and
holding companies was unremarkable. The common law held that simple
combinations of independent competitors that were intended and had the
ability to control prices in the marketplace to the injury of customers (or
suppliers) were unlawful—at least in the sense of being void and
unenforceable—and there was no reason to believe that the common law
would not extend its prohibitions in the normal course to reach
combinations organized more tightly in trusts proper, corporations, and
holding companies. Indeed, the legality of combinations of these types
under the common law was challenged in several pre-1890 quo warranto
proceedings.
The criminalization of what before were simply unenforceable horizontal
price-fixing arrangements is much more noteworthy. Prior to the passage
of the original antitrust laws, combinations in restraint of trade were neither
criminal nor tortious, and so could operate without fear of challenge by the
state (apart from quo warranto actions). Notwithstanding the prospect that
a combination could harm the community by raising price, reducing output,
and inflicting other “evils of monopoly,” the only recourse under the law
was to hope that the combination fell apart because enough of its members
cheated on the combination’s rules. The new antitrust legislation changed
this. State and federal prosecutors now had the ability to challenge
combinations directly.
Curiously, however, only two states and the federal government passed
statutes that provided injured private parties—a customer, for example, that
purchased products or services from a combination member at a
supracompetitively fixed price or a competitor that was excluded from the
marketplace by a combination’s exclusive dealing restraints—with a private
cause of action against the combination. One would think that more states
would have concluded that private parties were entitled to redress and
vindication for their injuries or even that private parties could deter
violations and advance the public interest by adding another means of
enforcing the law to supplement limited state enforcement resources. It
remains a mystery why more states did not create a private cause of action,
although certainly one possibility is that the states saw some combinations
as furthering the state’s economic interest and so wanted to maintain
exclusivity over which combinations would be challenged under state law.
In any event, early enforcement of the antitrust statutes was sparse at
best. In the electronic case databases, only a handful of cases appear
through the end of 1893 under the various state statutes and the Sherman
Act. Nor does there appear to be any significant number of material
unreported cases, since there is little mention of additional cases in the
treatises or the newspapers of the day. What reported decisions there are,
however, all pertain to the legality of horizontal combinations.
The electronic case databases contain only four cases under the thirteen
state antitrust laws, all brought by the state. The most interesting of these is
State ex rel. Attorney General v. Simmons Hardware Co.348 The Missouri
attorney general brought an action against the Simmons Hardware
Company alleging (1) that Simmons was a member of a trust organized
with other corporations to regulate the price of hardware in violation of the
Missouri antitrust law and (2) that the Simmons managing officers failed to
respond to the letter of inquiry sent by the secretary of state under the state
antitrust law to confirm that the company was not a member of an illegal
trust.349 On appeal, the Missouri Supreme Court declared the letter of
inquiry provisions of the Missouri antitrust statute unconstitutional as
compelling self-incrimination, since as the law was structured an
affirmative response would subject the responding officers (as well as the
corporation) to criminal penalties, a negative response would subject them
to prosecution for perjury, and a failure to respond would result in the
immediate revocation of the corporation’s charter.350 The remaining cases
348. 18 S.W. 1125 (Mo. 1892).

349. Id. at 1125.
350. Id. at 1127. After the lower court found the law unconstitutional but before the
Missouri Supreme Court had acted, the Missouri legislature amended the statute to eliminate
involved two decisions in Kansas holding that the selling of insurance was
“trade” and so covered by the Kansas antitrust statute,351 and a decision in
Texas holding that insurance is not “commence” and therefore not covered
by the Texas antitrust act.352
The records of federal prosecutions are more complete.353 Only seven
cases—four bills in equity and three criminal cases—were brought by the
United States during the two and a half years that President Harrison
remained in office after the passage of the Sherman Act.354 All seven cases
were brought by U.S. district attorneys in the field with only mild
encouragement from William H.H. Miller, Harrison’s Attorney General.
Even so, some of the targets were substantial: the Sugar Trust,355 the
Whiskey Trust,356 the Cash Register Trust,357 a major railroad trust in the
Midwest,358 and a large lumber trust in the Northwest.359 The government
also obtained a temporary injunction against the labor unions and union
the prospect of criminal indictments, reallocate the power to revoke the charters of violating
corporations from the secretary of state to a court of competent jurisdiction, and require
affirmative proof in court of a state antitrust violation. Act of Apr. 2, 1891, 1891 Mo. Laws
186 (Apr. 2, 1891) (repealing chapter 128). The law was revised once again in 1885. Act of
Apr. 11, 1895, 1895 Mo. Laws 237. For the early saga of the Missouri antitrust law, see
Piott, supra note 303, at 21.
351. State v. Phipps, 31 P. 1097 (Kan. 1893) (affirming the convictions of two insurance
agents for violating laws prohibiting unlawful trusts and combinations in restraint of trade);
In re Pinkney, 27 P. 179, 180–81 (Kan. 1891).
352. Queen Ins. Co. v. State, 24 S.W. 397, 404 (Tex. 1893).
353. For a complete list of Department of Justice prosecutions under the Sherman Act
through 1911, see GOV’T PRINTING OFFICE, SHERMAN ANTITRUST LAW WITH AMENDMENTS
(1911).
354. For a review of antitrust enforcement during Harrison’s tenure as president, see
HOMER CUMMINGS & CARL MCFARLAND, FEDERAL JUSTICE: CHAPTERS IN THE HISTORY OF
JUSTICE AND THE FEDERAL EXECUTIVE 317–21 (1937); William Letwin, The First Decade of
the Sherman Act: Early Administration, 68 YALE L.J. 464, 468–76 (1959).
355. No. 38 (C.C.E.D. Pa. filed Mar. 4, 1892), dismissed, 60 F. 306 (C.C.E.D. Pa.), aff’d,
60 F. 934 (3d Cir. 1894), aff’d, United States v. E.C. Knight Co., 156 U.S. 1 (1895).
356. United States v. Greenhut, No. 461 (D. Mass. filed Feb. 23, 1892), indictment
dismissed, 50 F. 469 (D. Mass. 1892). There were three associated cases where the
government sought removal of out-of-state defendants to Boston to answer the indictment.
In each case, the petition for removal was denied. See In re Greene, 52 F. 104 (C.C.S.D.
Ohio 1892); In re Terrell, 51 F. 213 (C.C.S.D.N.Y. 1892); In re Corning, 51 F. 205 (N.D.
Ohio 1892).
357. United States v. Patterson, No. 1215 (C.C.D. Mass. filed July 2 and Oct. 5, 1892),
indictment dismissed in part, 55 F. 605 (C.C.D. Mass. 1893), nolle prosequi, (C.C.D. Mass.
Nov. 10, 1894), reprinted in DECREES AND JUDGMENTS IN FEDERAL ANTI-TRUST CASES, JULY
2, 1890–JANUARY 1, 1918, at 680 (Roger Shale ed., 1918).
358. United States v. Trans-Mo. Freight Ass’n, No. 6799 (C.C.D. Kan. filed Jan. 6, 1892),
dismissed, 53 F. 440 (C.C.D. Kan. 1892), aff’d, 58 F. 58 (8th Cir. 1893), complaint
reinstated and combination enjoined, 166 U.S. 290, combination dissolved and enjoined,
(C.C.D. Kan. June 7, 1897), reprinted in DECREES AND JUDGMENTS IN FEDERAL ANTI-TRUST
CASES, supra note 357, at 6.
359. United States v. Nelson, No. 1408 (C.C.D. Minn. filed Jan. 20, 1892), dismissed,
52 F. 646 (D. Minn. 1892).
leaders involved in the General Strike of 1892 in New Orleans.360 By the

time Harrison left office, however, the government had succeeded on the
merits in only one minor price-fixing case,361 although the Supreme Court
later reversed the dismissal of one civil case and enjoined the respondent’s
continued operation.362
Federal antitrust enforcement continued at this very slow pace through
the next two administrations. The Department of Justice initiated eight
actions in the Cleveland Administration (1893–1897) and only three in the
McKinley Administration (1897–1901). It was not until the Roosevelt
Administration (1901–1909) that there was a meaningful increase in
Sherman Act enforcement actions.
Table 4. Department of Justice Actions by Administration363

Indictments Equity Other Total
Benjamin Harrison 1889–1893 3 4 7
Grover Cleveland 1893–1897 2 4 2 8
William McKinley 1897–1901 3 3
Theodore Roosevelt 1901–1909 25 18 1 44
William Howard Taft 1909–1913 39 27 66
Why was the number of Department of Justice actions so low in the early
years? One factor was certainly the limitation on subject matter jurisdiction
imposed by the contemporary judicial interpretation of the Commerce
Clause, especially after the Supreme Court’s decision in United States v.
E.C. Knight Co.364 But this fails to explain why prosecutors did not attempt
a more artful pleading of restraints on interstate commerce in more cases
given the large number of combinations operating across state lines.
Another factor may have been the perceived limitations on applying the
prohibitions of the Sherman Act in an ex post facto manner, which
concerned the court in In re Greene.365 Here, too, one would think that
aggressive prosecutors would bring more cases to try to find ways to plead
around the problem and establish more favorable precedent, even if in the
end they were unsuccessful.
360. United States v. Workingmen’s Amalgamated Council of New Orleans, No. 12143
(C.C.E.D. La. filed Nov. 10, 1892), injunction entered, 54 F. 994 (C.C.E.D. La. 1893), aff’d,
57 F. 85 (5th Cir. 1893).
361. United States v. Jellico Mountain Coal & Coke Co., No. 2820 (M.D. Tenn. filed Oct.
13, 1890), declared illegal, 46 F. 432 (C.C.M.D. Tenn. 1891), enjoined, (C.C.M.D. Tenn.
June 17, 1891), reprinted in DECREES AND JUDGMENTS IN FEDERAL ANTI-TRUST CASES, supra
note 357, at 1.
362. Trans-Mo. 166 U.S. 290.
363. These statistics were compiled largely from COMMERCE CLEARING HOUSE, INC., THE
FEDERAL ANTITRUST LAWS WITH SUMMARY OF CASES INSTITUTED BY THE UNITED STATES
1890–1951 (1952).
364. 156 U.S. 1 (1895); see In re Greene, 52 F. 104, 112–13 (C.C.S.D. Ohio 1892).
365. See In re Greene, 52 F. at 112.
Figure 4. Department of Justice Actions Initiated by Year366
Limited enforcement resources, no doubt, were a major problem. When

Congress passed the Sherman Act it created no special unit to enforce the
antitrust laws and appropriated no funds specifically for antitrust
enforcement.367 In 1890, for example, there were eighteen lawyers in the
Department of Justice in Washington, D.C., overwhelmed with cases.368
Although there were many more district attorneys, they were paid a fixed
salary of $200 per year plus fees paid by the government based on their
caseload.369 Antitrust cases, which presented difficulties simply because of
their novelty, were unlikely to attract much enthusiasm under this incentive
structure. Moreover, especially when the large combinations were likely to
vigorously defend against any antitrust action, as they did in the actions
against the Whiskey, Sugar, and Cash Register Trusts, neither state nor
federal enforcement officials had much incentive to devote their limited
time and resources to challenging combinations in the absence of any
material public pressure.370 And while some newspapers continued to rail
against the trusts, for the most part the public was relatively acquiescent.371
366. See COMMERCE CLEARING HOUSE, supra note 363; Richard A. Posner, A Statistical
Study of Antitrust Enforcement, 13 J.L. & ECON. 365, 366 (1970).
367. See Letwin, supra note 354, at 466–68 (describing the “poverty” of the Department
of Justice in resources and manpower in the 1890s). See generally 1893 ATT’Y GEN. ANN.
REP.; 1892 ATT’Y GEN. ANN. REP.; 1891 ATT’Y GEN. ANN. REP.
368. Letwin, supra note 354, at 466.
368. Id.
369. Id. at 467. For a criticism of the fee system by former a attorney general, see
CUMMINGS & MCFARLAND, supra note 354, at 493 (“However, by far the greatest evil which
beset the administration of federal justice in the nineteenth century was the fee system for
the compensation for local federal officers.”). The fee system was abolished in 1896. Id. at
494.
370. On the public perceptions of the trusts at the time, see LOUIS GALAMBOS, THE PUBLIC
IMAGE OF BIG BUSINESS IN AMERICA, 1880–1940, at 47–78 (1975).
371. Of course, another possibility was that the Department of Justice and the district
attorneys simply shirked their responsibilities. See Mr. Edmunds on Trusts, N.Y. TIMES,
Nov. 25, 1892, available at http://query.nytimes.com/mem/archive-free/pdf?res=F00C15
This all changed by the beginning of the next decade. Beginning with
the Panic of 1893, the country entered into its most severe economic
depression to that date.372 Marked by violent strikes and unemployment
rates that exceeded 10 percent in at least five years,373 the decade saw an
enormous number of business failures. These same pressures brought a
further round of combinations. In the aftermath of the depression, over
1800 firms were absorbed into horizontal consolidations of at least five
competing firms.374 This merger wave produced such giants as U.S. Steel,
American Tobacco, International Harvester, Du Pont, Corn Products,
Anaconda Copper, and American Smelting and Refining.375 Antitrust
enforcement, which became funded in 1903, responded with a new vigor,
but that is another story.
F93C5F1B738DDDAC0A94D9415B8285F0D3 (quoting Senator Edmunds as saying that

“[t]he law is all right, the courts are all right, and the people are all right. Let the officers
charged with the enforcement of the law do their full duty and Trusts and combinations will
go to pieces as quickly as they sprang into existence”).
372. See generally ROBERT HIGGS, THE TRANSFORMATION OF THE AMERICAN ECONOMY,
1865–1914 (1971); CHARLES HOFFMANN, THE DEPRESSION OF THE NINETIES: AN ECONOMIC
HISTORY (1970); DOUGLAS STEEPLES & DAVID O. WHITTEN, DEMOCRACY IN DESPERATION:
THE DEPRESSION OF 1893 (1998).
373. Christina Romer, Spurious Volatility in Historical Unemployment Data, 94 J. POL.
ECON. 1, 31 (1986).
374. LAMOREAUX, supra note 29, at 2.
375. RALPH L. NELSON, MERGER MOVEMENTS IN AMERICAN INDUSTRY, 1895–1956, at 34
(1959).

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Fordham Law Review

Volume 81 | Issue 5 Article 7

Trusts and the Origins of Antitrust Legislation

growth, production technology, business organization, and finance. During

I. A CHANGING ECONOMY: ECONOMIC CONDITIONS PRIOR TO 1890

ultimately consolidated into a single company, Western Union, in 1866.15

15. Id. 310–30, 406–26.

25. Compare id., with id. ser Db165 (coal).

integration, significant productivity gains and scale economies resulted

Figure 1: United States Real GDP (in billions of 2005 dollars)32

The rapid pace of industrialization is reflected in real gross purchases of

These changes introduced a period of extraordinary economic growth for

Table 1: Economic Indicators for 1870–1890

II. THE “TRUST” MOVEMENT

Figure 2: GDP Price Deflator (2005 = 100)51

costs.53 These factors gave rise to what became popularly known as

Table 2: Changing Conditions in the Sugar Industry

Number Industry Output Average Output

There was considerable sympathy at the time regarding the problem of

61. See REPORT OF THE COMMITTEE ON GENERAL LAWS RELATIVE TO COMBINATIONS

to new competition and enable the firm to earn supracompetitive profits

III. FORMS OF COMBINATION AND PRE-ANTITRUST REGULATION

combinations to adopt a corporate form. Collectively, these four vehicles

66. The Articles of Association of the Manufacturers of Gunpowder, adopted on April

make the combination rules somehow enforceable. A common method

reported case on contracts in restraint of trade. Although the report of the

73. See id.

breach) could demonstrate that the restraint was ancillary to a legitimate

87. (1831) 131 Eng. Rep. 284 (C.P.).

reasonableness test to restraints that were unlimited in duration.91 Courts

101. Id. at 1110.

supply as creating a monopoly and held that agreements in furtherance of

courts recognized that a combination could raise prices above a reasonable

There were also various artifacts in the laws of some jurisdictions

127. See id. at 79–80.

nefarious than price-fixing combinations: when an agreement fixes only

utility and transportation companies, an award of designated state police

commerce.165 The clearest statement of the state’s authority to regulate

165. See id. at 320–21.

outstanding, representing a beneficial ownership in assets valued far more

trust188—would implement the trust’s directions. Noncooperative directors

Finally, an interesting feature of some, if not most trusts proper, is the

193. See DODD, supra note 137, at 74–84.

the stock.195 For example, if one share of stock newly issued by a

destruction of their businesses, and at least the perception of higher prices

member of a trust thought to be operating contrary to the public interest—if

204. See, e.g., N. River Sugar, 24 N.E. at 839–41.

corporation participating in a trust. North River, a corporation organized

232. Id. at 157.

245. Id. at 159.

York challenge the participation of its domestic corporations, notably

E. Holding Corporations and the Liberalization of Incorporation Laws

discretion on corporate directors in deciding what information must be

Figure 3. New Jersey Corporation Taxes

266. 91 U.S. 275 (1875).

service facilities.272 These were considered intrastate business operations

The reorganization of the Match Trust into a single corporation provides

277. See Richardson v. Buhl, 43 N.W. 1102 (Mich. 1889).