United States v. Delaware, Lackawanna & W. R. Co.
238 U.S. 516 (1915)

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U.S. Supreme Court

United States v. Delaware, Lackawanna & W. R. Co., 238 U.S. 516 (1915)

United States v. Delaware, Lackawanna

& Western Railroad Company

No. 517

Argued December 9, 10, 1914

Decided June 21, 1915

238 U.S. 516

Syllabus

A railroad corporation engaged at the time of the passage of the Hepburn Act in the business of mining, buying, transporting and selling coal, in order to divest itself of title after the coal had been mined and before transportation began, caused a coal company to be incorporated having stockholders and officers in common with itself; thereupon, the two corporations, having a common management, entered into a contract prepared by the railroad company under which the railroad company did not go out of the mining and selling business, but when the coal was brought to the surface, it lost title by a sale to the coal company f.o.b. the mines and instantly as carrier regained possession and retained it until delivery to the coal company, which subsequently paid the contract price; the price paid was a fixed percentage of the price at a stated terminal on the day of delivery at the mines, and the railroad agreed to sell all of the coal it produced or purchased from others to the coal company, and the latter company agreed to buy only from the railroad company and subject to the contract; the stockholders of the railroad company were allowed to take pro rata the stock of the coal company, and practically all availed of the option, and the coal company declared a dividend on each share of stock sufficient to pay for

Page 238 U. S. 517

the amount of stock allotted to the holder thereof. In a suit brought by the government alleging that the two corporations were practically one and that the contract was invalid, held that:

The Commodity Clause of the Hepburn Act was intended to prevent railroads from occupying the dual and inconsistent position of public carrier and private shipper, and, in order to separate the business of transportation from that of selling, the statute made it unlawful for the carriers to transport in interstate commerce any coal in which the carrier had any interest, direct or indirect.

It is not improper for a carrier engaged in mining coal to institute the organization of a coal company to buy or produce the coal so as to comply with the terms of the Commodity Clause and to give its stockholders an opportunity to subscribe to the stock, but it must dissociate itself from the management of the coal company as soon as the same starts business.

Mere stock ownership by a railroad company or by its stockholders in a producing company is not the test of illegality under the Commodity Clause, but unity of management and bona fides of the contract between the carrier and the producer.

The Commodity Clause and the Anti-Trust Act are not concerned with the interest of the parties, but with the interest of the public, and if a contract between a carrier and a producer is as a matter of law in restraint of trade, or if the producing company is practically the agent of the carrier, the transportation of the article produced by the carrier is unlawful.

The contract in this case enables the railroad company to practically control the output, sales, and price of coal, and to dictate to whom it should be sold, and, as such, is illegal under both the Commodity Clause and the Anti-Trust Act.

In order to comply with the Commodity Clause in regard to the transportation of coal, a carrier engaged also in mining coal must absolutely dissociate itself from the coal before the transportation begins, and if it sells at the mouth of the mine, the buyer must be absolutely free to dispose of it and have absolute control, nor should a carrier sell to a corporation managed by the same officers as itself -- that is contrary to the policy of the Commodity Clause.

While there might be a bona fide and lawful contract between a carrier mining coal and a buying company by which the latter buys all of the coal of the former, the contract, to be not illegal, must leave the buyer free to extend its business elsewhere

Page 238 U. S. 518

as it pleases, and to otherwise act in competition with the carrier.

213 F. 240 reversed.

The appellee was chartered not only as a railroad company, but was authorized to mine and sell coal. The Commodity Clause of the Hepburn Act of 1906 made it unlawful for the carrier to haul its own coal beyond the limits of the State of Pennsylvania, and, desiring to continue the business of mining and transporting coal, the railroad adopted a plan under which it was to make a sale and divest itself of title to the coal at the mouth of the mines, before transportation began. Accordingly, it caused to be incorporated, under the laws of New Jersey, the Delaware, Lackawanna and Western Coal Company, with a capital stock of $6,800,000 -- divided into shares of $50 each. The Railroad Company then invited its own stockholders to subscribe to the capital stock of the Coal Company at the rate of one share of the latter for each four shares of the former. Ninety-nine percent of these stockholders did, as was expected, subscribe for the stock of the Coal Company, their subscriptions being paid for in full out of a cash dividend of $13,600,000 previously declared by the Railroad Company. The new corporation was then organized by electing the Vice-President of the Railroad Company as President of the Coal Company and other officers and directors of the Coal Company were also officers and directors of the Railroad Company.

As soon as the organization was completed, the Railroad Company prepared and submitted to the Coal Company a contract by which the Railroad Company, reserving what it needed for its railway locomotives,

"agreed to sell and the Coal Company agreed to buy, f.o.b. the mines, all coal which, during the term of the contract, the Railroad Company should produce from its own mines or purchase from anyone else."

The price for prepared sizes -- the more important commercial coal -- was fixed at 65 percent

Page 238 U. S. 519

of the price in New York on the day of delivery at the mines. The railroad company also leased to the coal company all its trestles, docks, and shipping facilities.

The contract, thus prepared by the railroad company, was then signed by both corporations, and, on August 2, 1909, the coal company took possession of the leased property; those who had been agents of the railroad in its sales department became agents of the coal company in its sales department, and the two corporations, with managing officers in common, also had offices in common in the City of New York.

Thereafter, the railroad company continued its mining business, annually producing about 7,000,000 tons and purchasing about 1,500,000 tons from operators whose mines were located on its railway. After retaining what was needed for use on its railway engines, it sold the balance, aggregating about 7,000,000 tons, to the coal company at the contract prices f.o.b. the mines. The coal thus sold by the railroad company was then transported by the railroad company to destination, where it was delivered to the coal company, which paid the regular tariff freight rate and the contract prices on the 20th of each month. This course of dealing continued until February, 1913, when the government filed a petition against both corporation alleging that the two were practically one, and attacking the validity of the contract.

The petition alleged that the coal business was extremely profitable, and in order to continue it, in all its branches, the railroad company (which was controlled by a group of 25 persons, owning a majority of its stock) had determined

"to cause the organization of a new corporation to be under their own control, whose stockholders would be substantially the same as those of the railroad company, and through it to conduct the business theretofore carried on by the railroad sales department, thus securing, in effect, the continued unity of

Page 238 U. S. 520

mining, transporting, and selling, in substance, as theretofore, and depriving the public of the benefits which the commodity clause was intended to produce."

The petition alleged that, when the contract was made, in August, 1909, the stockholders of the two corporations were practically identical; that a large majority of the stock in both is still owned by the same persons, and that, by virtue of the terms and provisions of the contract, the railroad had such an interest in the coal as to make it unlawful for it to transport such commodity in interstate commerce.

It was further charged that the transportation of the coal sold to the coal company was not only a violation of the commodity clause, but that the contract tended to create a monopoly and unlawfully to hinder and restrain trade in coal, in violation of the provisions of the Anti-Trust Act. In this connection it was also charged that the railroad company not only mined coal, but purchased the product of other mines located along its railway, and had acquired the output of other collieries on its line, giving to it the disposition of more than 90 percent of the market, with power to arbitrarily fix prices. The petition averred:

"By reason of the arrangements described, the support of the railroad company, and the peculiar advantages and facilities acquired, the coal company at once secured and has ever since maintained an unlawful monopoly of the sale of coal produced along defendant's railroad, and has completely dominated the markets at all points thereon not reached by any other railroad. Its position, power, and support render effective competition with it practically impossible, and the monopoly which it now holds will continue indefinitely unless restrained."

Both defendants answered. There was practically no dispute as to the facts, though both corporations contended that the facts alleged and proved did not support

Page 238 U. S. 521

the legal conclusions sought to be drawn therefrom by the government. Each insisted that the two corporations were separate in law and in fact, contended that the railroad company had no interest in the coal, and insisted that the coal company acted independently of the railroad company, and was not subject to its control.

At the hearing, there was evidence that, at the date of the making of the contract, all except 2,249 shares in the coal company were held by those who held stock in the railroad company. By reason of sales of both stocks, it appeared that, in October, 1913, 88,116 shares of the railroad stock were held by those who were not then interested in the coal company, and 6,907 shares of stock in the coal company were held by those who were not owners of the railroad stock.

There was also evidence that many of the officers of the coal company were not officers of the railroad company; that the management of the two corporations was separate and distinct; that the coal company kept its own books, deposited its funds in its name in banks of its own choosing, and that the profits went solely to its own stockholders. The coal company paid the same rates of freight and demurrage as other shippers, and received no discriminating favors from the railroad company. In 1910, the amount paid to the railroad for the purchase price of coal under the contract was about $20,000,000, and for the freight thereon about $14,000,000. Since the contract was made, the coal company has bought coal from other persons, the quantity being 3,847 tons in 1909; 2,267 tons in 1910; 6,600 tons in 1911; 92,004 tons in 1912; 310,645 tons in the first ten months in 1913.

There are about 70,000,000 tons of anthracite coal produced annually, of which 20,000,000 tons are sold at tidewater. Of the 7,000,000 tons sold by the Delaware, Lackawanna & Western Railroad Company, about

Page 238 U. S. 522

2,000,000 tons are transported to tidewater points, and of this, 500,000 tons are prepared sizes. The coal company, at large expense, bought land, built trestles and storage facility at various points in addition to those leased to it by the railroad company.

The district court held that the business of the two corporations had not been so commingled as to make their affairs indistinguishable; that they are two distinct and separate legal beings actually engaged in separate and distinct operation, and that the railroad does not own the coal, either in whole or in part, during its carriage, but has in good faith dissociated itself therefrom before the beginning of the act of transportation.

In answer to the claim that

"the railroad will be the gainer from a high price at tide, since this will necessarily increase the price at the mines, and therefore that this interest in the price is such an interest in the coal itself as is condemned by the statute,"

the court said:

"Undoubtedly it is correct to say that the railroad has an interest in the price, but . . . that 'interest' merely means that the railroad will gain by a higher price at tide, and does not mean that the railroad has power to control the coal or the price for which it sells."

The alleged power to increase the price by increasing the freight was held to be ineffective because freight rates were controlled by the Commerce Commission.

"The railroad company does not fix prices; it does not decide how much coal is to go to New York harbor, and it does not determine the sum for which the coal is to be sold at that point."

The 65 percent basis had its origin many years ago, and affords a convenient basis for calculating the price to be paid for future deliveries. The railroad retains nothing more after the title passes to the coal company at the mines than an interest in the price, and this is not the same thing as an interest in the coal. The commodity clause deals with an "interest,

Page 238 U. S. 523

direct or indirect," in the commodities themselves, and this must mean some kind or degree of ownership in the thing transported or some power to deal with it or to control it. The railroad company neither owns nor controls the coal after it has been loaded on the cars at the breakers. Thereafter the coal company is the owner and the master, and fixes prices, routes, and destination at its own will.

The court further said that the bill of complaint makes a formal charge against both defendants under the antitrust act, but the oral argument left us under the impression that this charge was not much insisted on. For that reason the antitrust branch of the complaint was regarded as comparatively unimportant, and for that reason we shall not undertake what we think would be the needless task of discussing the evidence bearing upon the charge of restraining or monopolizing commerce. If we are mistaken in this supposition, the error can easily be corrected.

The petition was thereupon dismissed without prejudice to the government's right to begin a second proceeding whenever it may be so advised. 213 F. 240. The government then brought the case here by appeal.

In the government's brief, it is stated that, while it did not now ask for a ruling as to the right of the railroad company to purchase and sell coal produced in mines along its railroad, it did ask that, if the decree was affirmed, it should be without prejudice to the right of the United States to institute such proceedings.

Page 238 U. S. 525

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