United States v. E. I. du Pont de Nemours & Co.Annotate this Case
351 U.S. 377 (1956)
U.S. Supreme Court
United States v. E. I. du Pont de Nemours & Co., 351 U.S. 377 (1956)
United States v. E. I. du Pont de Nemours & Co.
Argued October 11, 1955
Decided June 11, 1956
351 U.S. 377
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
In a civil action under § 4 of the Sherman Act, the Government charged that appellee had monopolized interstate commerce in cellophane in violation of § 2 of the Act. During the relevant period, appellee produced almost 75% of the cellophane sold in the United States; but cellophane constituted less than 20% of all flexible packaging materials sold in the United States. The trial court found that the relevant market for determining the extent of appellee's market control was the market for flexible packaging materials, and that competition from other materials in that market prevented appellee from possessing monopoly powers in its sales of cellophane. Accordingly, it dismissed the complaint.
Held: the judgment is affirmed. Pp. 351 U. S. 378-404.
(a) The ultimate consideration in determining whether an alleged monopolist violates § 2 of the Sherman Act is whether the defendant controls prices and competition in the market for such part of trade or commerce as he is charged with monopolizing. P. 351 U. S. 380.
(b) A party has monopoly power contrary to § 2 of the Sherman Act if it has, over "any part of the trade or commerce among the several States," a power of controlling prices or unreasonably restricting competition. Pp. 351 U. S. 389-394.
(c) Determination of the competitive market for commodities depends upon how different from one another are the offered commodities in character or use, how far buyers will go to substitute one commodity for another. P. 351 U. S. 393.
(d) It is not a proper interpretation of the Sherman Act to require that products be fungible to be considered in the relevant market. P. 351 U. S. 394.
(e) Where there are market alternatives that buyers may readily use for their purposes, illegal monopoly does not exist merely because the product said to be monopolized differs from others. P. 351 U. S. 394.
(f) In considering what is the relevant market for determining the control of price and competition, no more definite rule can be
declared than that commodities reasonably interchangeable by consumers for the same purposes make up that "part of the trade or commerce" monopolization of which may be illegal. P. 351 U. S. 395.
(g) Cellophane's interchangeability with numerous other materials suffices to make it a part of the market for flexible packaging materials. Pp. 351 U. S. 395-400.
(h) On the record in this case, it cannot be said that the variations in price between cellophane and other flexible packaging materials prevent them from being competitive or gave appellee monopoly power over prices. Pp. 351 U. S. 400-401.
(i) On the record in this case, it cannot be said that appellee has excluded competitors from the flexible packaging material market. Pp. 351 U. S. 402-404.
118 F.Supp. 41 affirmed.
MR. JUSTICE REED delivered the opinion of the Court.
The United States brought this civil action under § 4 of the Sherman Act against E. I. du Pont de Nemours and Company. The complaint, filed December 13, 1947, in the United States District Court for the District of Columbia, charged du Pont with monopolizing, attempting to monopolize and conspiracy to monopolize interstate commerce in cellophane and cellulosic caps and bands in violation of § 2 of the Sherman Act. Relief by injunction was sought against defendant and its officers, forbidding monopolizing or attempting to monopolize interstate trade in cellophane. The prayer also sought action to dissipate the effect of the monopolization by divestiture or other steps. On defendant's motion under 28 U.S.C. § 1404(a), the case was transferred to the District of
Delaware. After a lengthy trial, judgment was entered for du Pont on all issues. [Footnote 1]
The Government's direct appeal here does not contest the findings that relate to caps and bands, nor does it raise any issue concerning the alleged attempt to monopolize or conspiracy to monopolize interstate commerce in cellophane. The appeal, as specifically stated by the Government, "attacks only the ruling that du Pont has not monopolized trade in cellophane." At issue for determination is only this alleged violation by du Pont of § 2 of the Sherman Act. [Footnote 2]
During the period that is relevant to this action, du Pont produced almost 75% of the cellophane sold in the United States, and cellophane constituted less than 20% of all "flexible packaging material" sales. This was the designation accepted at the trial for the materials listed in Finding 280, Appendix A, this opinion, post, p. 351 U. S. 405.
The Government contends that, by so dominating cellophane production, du Pont monopolized a "part of the trade or commerce" in violation of § 2. Respondent agrees that cellophane is a product which constitutes "a "part" of commerce within the meaning of Section 2." Du Pont brief, pp. 16, 79. But it contends that the prohibition of § 2 against monopolization is not violated, because it does not have the power to control the price of cellophane or to exclude competitors from the market in which cellophane is sold. The court below found that the "relevant market for determining the extent of du Pont's market control is the market for flexible packaging materials," and that competition from those other materials prevented du Pont from possessing monopoly powers in its sales of cellophane. Finding 37.
The Government asserts that cellophane and other wrapping materials are neither substantially fungible nor like priced. For these reasons, it argues that the market for other wrappings is distinct from the market for cellophane, and that the competition afforded cellophane by other wrappings is not strong enough to be considered in determining whether du Pont has monopoly powers. Market delimitation is necessary under du Pont's theory to determine whether an alleged monopolist violates § 2. The ultimate consideration in such a determination is whether the defendants control the price and competition in the market for such part of trade or commerce as they are charged with monopolizing. Every manufacturer is the sole producer of the particular commodity it makes, but its control in the above sense of the relevant market depends upon the availability of alternative commodities for buyers -- i.e., whether there is a cross-elasticity of demand between cellophane and the other wrappings. This interchangeability is largely gauged by the purchase of competing products for similar uses considering the price, characteristics and adaptability of the
competing commodities. The court below found that the flexible wrappings afforded such alternatives. This Court must determine whether the trial court erred in its estimate of the competition afforded cellophane by other materials.
The burden of proof, of course, was upon the Government to establish monopoly. See United States v. Aluminum Co. of America, 148 F.2d 416, 423, 427. This the trial court held the Government failed to do, upon findings of fact and law stated at length by that court. For the United States to succeed in this Court now, it must show that erroneous legal tests were applied to essential findings of fact or that the findings themselves were "clearly erroneous" within our rulings on Rule 52(a) of the Rules of Civil Procedure. See United States v. United States Gypsum Co.,333 U. S. 364, 333 U. S. 393-395. We do not try the facts of cases de novo.Timken Roller Bearing Co. v. United States,341 U. S. 593, 341 U. S. 597. [Footnote 3]
Two additional questions were raised in the record and decided by the court below. That court found that, even if du Pont did possess monopoly power over sales of cellophane, it was not subject to Sherman Act prosecution, because (1) the acquisition of that power was protected by patents, and (2) that power was acquired solely through du Pont's business expertness. It was thrust upon du Pont. 118 F.Supp. at 213-218.
Since the Government specifically excludes attempts and conspiracies to monopolize from consideration, a conclusion that du Pont has no monopoly power would obviate examination of these last two issues.
I. Factual Background. -- For consideration of the issue as to monopolization, a general summary of the development of cellophane is useful.
In the early 1900's, Jacques Brandenberger, a Swiss chemist, attempted to make tablecloths impervious to dirt by spraying them with liquid viscose (a cellulose solution available in quantity from wood pulp, Finding 361) and by coagulating this coating. His idea failed, but he noted that the coating peeled off in a transparent film. This first "cellophane" was thick, hard, and not perfectly transparent, but Brandenberger apparently foresaw commercial possibilities in his discovery. By 1908, he developed the first machine for the manufacture of transparent sheets of regenerated cellulose. The 1908 product was not satisfactory, but, by 1912, Brandenberger was making a saleable thin flexible film used in gas masks. He obtained patents to cover the machinery and the essential ideas of his process.
It seems to be agreed, however, that the disclosures of these early patents were not sufficient to make possible the manufacture of commercial cellophane. The inadequacy of the patents is partially attributed to the fact that the essential machine (the Hopper) was improved after it was patented. But more significant was the failure of these patents to disclose the actual technique of the process. This technique included the operational data acquired by experimentation. [Footnote 4]
In 1917, Brandenberger assigned his patents to La Cellophane Societe Anonyme and joined that organization.
Thereafter, developments in the production of cellophane somewhat paralleled those taking place in artificial textiles. Chemical science furnished the knowledge for perfecting the new products. The success of the artificial products has been enormous. Du Pont was an American leader in the field of synthetics, and learned of cellophane's successes through an associate, Comptoir des Textiles Artificiel.
In 1923, du Pont organized with La Cellophane an American company for the manufacture of plain cellophane. The undisputed findings are that:
"On December 26, 1923, an agreement was executed between duPont Cellophane Company and La Cellophane by which La Cellophane licensed duPont Cellophane Company exclusively under its United States cellophane patents, and granted duPont Cellophane Company the exclusive right to make and sell in North and Central America under La Cellophane's secret processes for cellophane manufacture. DuPont Cellophane Company granted to La Cellophane exclusive rights for the rest of the world under any cellophane patents or processes duPont Cellophane Company might develop."
Subsequently, du Pont and La Cellophane licensed several foreign companies, allowing them to manufacture and vend cellophane in limited areas. Finding 601. Technical exchange agreements with these companies were entered into at the same time. However, in 1940, du Pont notified these foreign companies that sales might be made in any country, [Footnote 5] and, by 1948, all the technical exchange agreements were canceled.
Sylvania, and American affiliate of a Belgian producer of cellophane not covered by the license agreements above referred to, began the manufacture of cellophane in the United States in 1930. Litigation between the French and Belgian companies resulted in a settlement whereby La Cellophane came to have a stock interest in Sylvania, contrary to the La Cellophane-du Pont agreement. This resulted in adjustments as compensation for the intrusion into United States of La Cellophane that extended du Pont's limited territory. The details do not here seem important. Since 1934, Sylvania has produced about 25% of United States cellophane.
An important factor in the growth of cellophane production and sales was the perfection of moisture-proof cellophane, a superior product of du Pont research and patented by that company through a 1927 application. Plain cellophane has little resistance to the passage of moisture vapor. Moisture-proof cellophane has a composition added which keeps moisture in and out of the packed commodity. This patented type of cellophane has had a demand with much more rapid growth than the plain.
In 1931, Sylvania began the manufacture of moisture-proof cellophane under its own patents. After negotiations over patent rights, du Pont, in 1933, licensed Sylvania to manufacture and sell moisture-proof cellophane produced
under the du Pont patents at a royalty of 2% of sales. These licenses, with the plain cellophane licenses from the Belgian company, made Sylvania a full cellophane competitor, limited on moisture-proof sales by the terms of the licenses to 20% of the combined sales of the two companies of that type by the payment of a prohibitive royalty on the excess. Finding 552. There was never an excess production. The limiting clause was dropped on January 1, 1945, and Sylvania was acquired in 1946 by the American Viscose Corporation with assets of over two hundred million dollars.
Between 1928 and 1950, du Pont's sales of plain cellophane increased from $3,131,608 to $9,330,776. Moisture-proof sales increased from $603,222 to $89,850,416, although prices were continuously reduced. Finding 337. It could not be said that this immense increase in use was solely or even largely attributable to the superior quality of cellophane, or to the technique or business acumen of du Pont, though doubtless those factors were important. The growth was a part of the expansion of the commodity packaging habits of business, a by-product of general efficient competitive merchandising to meet modern demands. The profits, which were large, apparently arose from this trend in marketing, the development of the industrial use of chemical research and production of synthetics, rather than from elimination of other producers from the relevant market. That market is discussed later at p. 351 U. S. 394. Tables appearing at the end of this opinion (Appendix A, Findings 279-292, inclusive, post, pp. 405-410) show the uses of cellophane in comparison with other wrappings. [Footnote 6] See the discussion infra, p. 351 U. S. 399et seq.
II. The Sherman Act and the Courts. -- The Sherman Act has received long and careful application by this Court to achieve for the Nation the freedom of enterprise
from monopoly or restraint envisaged by the Congress that passed the Act in 1890. Because the Act is couched in broad terms, it is adaptable to the changing types of commercial production and distribution that have evolved since its passage. Chief Justice Hughes wrote for the Court that,
"As a charter of freedom, the act has a generality and adaptability comparable to that found to be desirable in constitutional provisions."
Appalachian Coals, Inc. v. United States,288 U. S. 344, 288 U. S. 359-360. Compare, on remedy, Judge Wyzanski in United States v. United Shoe Machinery Corp., 110 F.Supp. 295, 348. It was said in Standard Oil Co. v. United States,221 U. S. 1, 221 U. S. 50, that fear of the power of rapid accumulations of individual and corporate wealth from the trade and industry of a developing national economy caused its passage. Units of traders and producers snowballed by combining into so-called "trusts." Competition was threatened. Control of prices was feared. Individual initiative was dampened. While the economic picture has changed, large aggregations or private capital, with power attributes, continue. Mergers go forward. Industries such as steel, automobiles, tires, chemicals, have only a few production organizations. A considerable size is often essential for efficient operation in research, manufacture and distribution.
Judicial construction of anti-trust legislation has generally been left unchanged by Congress. This is true of the Rule of Reason. [Footnote 7] While it is fair to say that the Rule
is imprecise, its application in Sherman Act litigation, as directed against enhancement of price or throttling of competition, has given a workable content to antitrust legislation. Seenote 18infra. It was judicially declared a proper interpretation of the Sherman Act in 1911, with a strong, clear-cut dissent challenging its soundness on the ground that the specific words of the Act covered every contract that tended to restrain or monopolize. [Footnote 8] This Court has not receded from its position on the Rule. [Footnote 9] There is not, we think, any inconsistency between it and the development of the judicial theory that agreements as to maintenance of prices or division of territory are in themselves a violation of the Sherman Act. [Footnote 10] It is logical that some agreements and practices are invalid per se, while others are illegal only as applied to particular situations. [Footnote 11]
Difficulties of interpretation have arisen in the application of the Sherman Act in view of the technical changes in production of commodities and the new distribution practices. [Footnote 12] They have called forth reappraisal of the effect of the Act by business and government. [Footnote 13]
That reappraisal has so far left the problems with which we are here concerned to the courts, rather than to administrative agencies. Cf. Federal Trade Commission Act, 38 Stat. 721. It is true that Congress has made exceptions to the generality of monopoly prohibitions, exceptions that spring from the necessities or conveniences of certain industries or business organizations, or from the characteristics of the members of certain groups of citizens. [Footnote 14] But those exceptions express legislative
determination of the national economy's need of reasonable limitations on cutthroat competition or prohibition of monopoly. "[W]here exceptions are made, Congress should make them." United States v. Line Material Co.,333 U. S. 287, 333 U. S. 310. They modify the reach of the Sherman Act, but do not change its prohibition of other monopolies. We therefore turn to § 2 ( note 2supra) to determine whether du Pont has violated that section by its dominance in the manufacture of cellophane in the before-stated circumstances.
III. The Sherman Act, § 2 -- Monopolization. -- The only statutory language of § 2 pertinent on this review is: "Every person who shall monopolize . . . shall be deemed guilty. . . ." This Court has pointed out that monopoly at common law was a grant by the sovereign to any person for the sole making or handling of anything so that others were restrained or hindered in their lawful trade. Standard Oil Co. v. United States,221 U. S. 1, 221 U. S. 51. However, as in England, it came to be recognized here that acts bringing the evils of authorized monopoly -- unduly diminishing competition and enhancing prices -- were undesirable, id. at 221 U. S. 56-58, and were declared illegal by § 2. Id. at 221 U. S. 60-62. Our cases determine that a party has monopoly power if it has, over "any part of the trade or commerce among the several states," a power of controlling prices or unreasonably restricting competition. Id. at 221 U. S. 85.
Senator Hoar, in discussing § 2, pointed out that monopoly involved something more than extraordinary commercial success, "that it involved something like the use of means which made it impossible for other persons to engage in fair competition." [Footnote 15] This exception to the
Sherman Act prohibitions of monopoly power is perhaps the monopoly "thrust upon" one of United States v. Aluminum Co. of America, 148 F.2d 416, 429, left as an undecided possibility by American Tobacco Co. v. United States,328 U. S. 781. Compare United States v. United Shoe Machinery Corp., 110 F.Supp. 295, 342. [Footnote 16]
If cellophane is the "market" that du Pont is found to dominate, it may be assumed it does have monopoly power over that "market." [Footnote 17] Monopoly power is the power to control prices or exclude competition. [Footnote 18] It seems apparent
that du Pont's power to set the price of cellophane has been limited only by the competition afforded by other flexible packaging materials. Moreover, it may be practically impossible for anyone to commence manufacturing cellophane without full access to du Pont's technique. However, du Pont has no power to prevent competition from other wrapping materials. The trial court consequently had to determine whether competition from the other wrappings prevented du Pont from possessing monopoly power in violation of § 2. Price and competition are so intimately entwined that any discussion of theory must treat them as one. It is inconceivable that price could be controlled without power over competition, or vice versa. This approach to the determination of monopoly power is strengthened by this Court's conclusion in prior cases that, when an alleged monopolist has power over price and competition, an intention to monopolize in a proper case may be assumed. [Footnote 19]
If a large number of buyers and sellers deal freely in a standardized product such as salt or wheat, we have complete or pure competition. Patents, on the other hand, furnish the most familiar type of classic monopoly. As the producers of a standardized product bring about significant differentiations of quality, design, or packaging in the product that permit differences of use, competition becomes, to a greater or less degree, incomplete, and the producer's power over price and competition greater over his article and its use, according to the differentiation he is able to create and maintain. A retail seller may have, in one sense, a monopoly on certain trade because of location, as an isolated country store or filling station, or because no
one else makes a product of just the quality or attractiveness of his product, as, for example, in cigarettes. Thus, one can theorize that we have monopolistic competition in every nonstandardized commodity, with each manufacturer having power over the price and production of his own product. [Footnote 20] However, this power that, let us say, automobile or soft-drink manufactures have over their trademarked products is not the power that makes an illegal monopoly. Illegal power must be appraised in terms of the competitive market for the product. [Footnote 21]
Determination of the competitive market for commodities depends on how different from one another are the offered commodities in character or use, how far buyers will go to substitute one commodity for another. For example, one can think of building materials as in commodity competition, but one could hardly say that brick competed with steel or wood or cement or stone in the meaning of Sherman Act litigation; the products are too different. This is the inter-industry competition emphasized by some economists. See Lilienthal, Big Business, c. 5. On the other hand, there are certain differences in the formulae for soft drinks, but one can hardly say that each one is an illegal monopoly. Whatever the market may be, we hold that control of price or competition establishes the existence of monopoly power under § 2. Section 2 requires the application of a reasonable approach in determining the existence of monopoly power just as surely as did § 1. This, of course, does not mean that there can be a reasonable monopoly. See notes 7 and