Am. Column & Lumber Co. v. United States, 257 U.S. 377 (1921)

The exchange of information and views on questions of the kind propounded is plainly within the right of p. 379assodation, as defined in Hopkins v. United States, 171 U. S. 578, and Anderson v. United States, 171 U. S. 604. The parts of these repôrts to which the Government particularly objected were the estimates of future production and the expressions of opinion as to market conditions in the near future. As to the latter, an examination of the responses will show that they carry not the slightest suggestion of fixing prices or regulating production by agreement. With regard to the estimates of future production, if the suggestion is that they were made for the purpose of limiting production, the evidence shows that the estimates of what future production would be exceeded actual production, that production in fact increased, and that the defendants were striving to produce to their full capacity, if for no other reason, to take advantage of the strong demand at high prices.

The meetings were open to everybody; they were poorly attended, fewer than one-third of the members being present most of the time; the questionnaires and market condition reports were the basis of the discussions, which included such subjects as costs of manufacture, log supply, demand, standardization of grades, inspection, weather and labor conditions, collections, car supply, exports, advertising, etc. Inspection of the minutes will p. 380make it plain that nothing was said at these meetings even approaching an agreement not to compete as to prices or to curtail production. Such references to prices or production as occurred were expressions of opinion by individuals such as are bound to occur unless men engaged in the same industry are forbidden to meet at all.

That the members had no such purpose as is charged is shown: (1) By the specific and circumstantial denials under oath of about fifty of the most active of them, United States v. Reading Co., 226 U. S. 324, 346. (2) By the fact that at the very time when the members of the “ Plan ” are supposed to have been parties to agreements not to compete and to curtail production as a means of enhancing prices, leaders among them were attempting to hold prices down. (3) By the fact that not a single witness was produced from amongst the purchasers of hardwood lumber to testify that tne defendants’ prices were held higher than the conditions of supply and demand justified or that competition had been suppressed or production curtailed by agreements, notwithstanding that the Government had alleged in its complaint that purchasers were holding off in the belief that the prices demanded were too high. The absence of complaint by customers or competitors is a relevant circumstance in a case like this. United States v. United States Steel Corporation, 251 U. S. 417, 447; United States v. American-Asiatic S. S. Co., 220 Fed. 230, 235. (4) By the affirmative testimony of representatives of important groups of customers that natural causes brought about the enhancement in prices and that they had seen no indications of suppression of competition amongst the defendants, but that on the contrary the great exertions of the latter to produce as much as possible and the marked variations in the prices quoted by them indicated the existence of competition. Testimony of this character was accorded great weight in the Steel Case, 223 Fed. 55, 88. (5) By p. 381the fact that the prices of outside manufacturers, who. controlled two-thirds of the production, moved in the same courses as the prices of the defendants. (6) By the sales reports themselves, which, so far from reflecting any agreement as to prices, disclose constant and substantial variations in the prices received by members at a given time for lumber of the same kind, grade, and thickness, customers testifying to the same variations. (7) By the production reports themselves, which show some members producing to the limit of their capacity; others much less than their capacity, principally because of bad weather conditions; and others at various stages in between. United States v. Reading Co., 183 Fed. 427; 226 U. S. 324. (8) By the evidence, nowhere contradicted, that during the period of the alleged agreement to curtail production sales of machinery to hardwood lumber mills were on an unprecedented scale. (9) By the fact—stated by many witnesses, buyers and sellers alike, and denied by none, and since confirmed by an official report of the Department of Agriculture—that there were natural causes operating to produce high prices. (10) By the inherent improbability that, with the demand insistent and increasing and prices rising, the producers of less than a third of a commodity would agree to curtail their production, leaving the increased business and profits for their competitors.

The statements selected from the “ market letters ” by the Government are but a few taken here and there out of a great mass of comment on business conditions. The letters from which the sentences were taken were not secret communications, as would be expected if the purpose in writing them were to bring about an agreement to fix prices or curtail production, but were attached to the fly-leaf of the sales reports, which were filed with the Department of Justice, the Federal Trade Commission, and the Bureau of Forestry, and were also sent to several p. 382statistical publications. This is not the way conspirators act.

In Chicago Board of Trade n . United States, 246 U. S. 231, this court held that, in determining whether or not a particular business practice violates the Sherman Act, “ the evil believed to exist, the reason for adopting the p. 383particular remedy, the purpose or end sought to be obtained, are all relevant facts.” Manufacturers of hardwood lumber were situated as wheat and cotton growers and cattle raisers .would be if there were no general markets or governmental agencies to keep them informed of the conditions of supply and demand and of the movement of prices. To obtain the information made available in some industries through general markets and in others by the Department of Agriculture and to put themselves on a footing of equality in bargaining with the wholesale dealers and other large buyers, in short, to be able to conduct their business in the light of the facts surrounding the industry and not be compelled to act in the dark, was the purpose of the defendants in entering into this arrangement for the interchange of reports as to stocks on hand and past sales and prices. It is probably true that the large manufacturers could take care of themselves if this plan were stricken down. The small manufacturers, however, who constitute the great mass, cannot individually support selling organizations sufficiently extensive to keep in touch with market conditions throughout the country. Only through some such coOperative plan as these reports, therefore, is it possible for them to obtain the information as to market conditions which is so essential to their well-being and that of the industry.

In the few cases in the lower courts, in which such interchange of reports has been challenged, its legality p. 384has always been sustained until the present case. United States n . Reading Co., 183 Fed. 427; 226 U. S. 324; United States v. Piowaty & Sons, 251 Fed. 375; United States v. Aileen Coal Co. (District Court, S. D. N. Y., unreported); State v. Arkansas Lumber Co., 260 Mo. 212.

It is not without importance that the practice here in question has become an established feature of American industrial organization, on the strength and advice of counsel that the practice is legal. There is a vital difference between an agreement or association which has for its direct and immediate object the suppression of competition or the raising of prices and one whose direct and immediate object is legitimate but which indirectly might result in higher prices. Thus it is a common thing for producers of an article to associate for the purpose of enlarging the demand for it by advertising or otherwise making known new uses to which it can be put. No one questions the legality of such an association, since its direct and immediate object, namely, enlargement of demand, is legitimate, although expectation of higher prices in consequence of the greater demand was in the thoughts of the parties. United States v. Joint Traffic Association, 171 U. S. 505, 568; Hopkins v. United States, 171 U. S. 578, 592, 594, 600; Anderson v. United States, 171 U. S. 604, 613; Addyston Pipe & Steel Co. v. United States, 175 U. S. 211, 244. The distinction between the direct and indirect object or effect of an agreement in determining its legality under the Sherman Act was again stated in the Standard Oil Case, 221 U. S. 1, 66. In Swift & Co. v. United States, 196 U. S. 375, after stating that in United States v. Knight Co., 156 U. S. 1, “ the subject-matter of the combination was manufacture and the direct object monopoly of manufacture within a State,” it was added, “ However likely monopoly of commerce among the States in the article manufactured was to follow from the agreement it was not a necessary p. 385consequence nor a primary end.” In Eastern States Retail Lumber Dealers’ Association v. United States, 234 U. S. 600, however, the direct and immediate object in distributing the information was unlawful—a boycott. There is a fundamental difference between merely exchanging information as to past prices and what was done at the “Gary Dinners.” Steel Case, 223 Fed. 55; 251 U. S. 417. There, the parties by their own admissions reached an understanding as to the prices they would charge in the future.

This case for the first time presents directly for the consideration of this court the practices of those p. 386organizations which are known as “ open price associations.” The conditions of the industrial world are such, and the literature upon the subject so abundant, that the court will take judicial knowledge that these associations are so numerous and so extensively organized as to threaten an economic revolution. The basic principle of these associations is coOperation, as shown by the language of writers upon the subject. The object of the Anti-Trust Act was to preserve competition as defined by Adam Smith and all political economists since his time; not “ cut-throat competition,” but fair and honest competition by the elimination of fraudulent and unfair practices. But competition was intended to be real and not fake. The meaning of the words “ competition” and " cooperation ” in political economy are directly opposed to each other. “ Competition ” in commerce and economics is thus defined by Webster: “ The effort of two or more parties, acting independently, to secure the custom of a third party by the offer of the most favorable terms ”; while “ cooperation ” is defined as “ the association of a number of persons for their common benefit; collective action in the pursuit of common well being, especially in some industrial or business process.”

The results of the operation of this “ open price scheme” are manifestly different when applied to different industries and under different economic conditions. When the product manufactured has but one or a very few grades and the cost of production does not greatly vary, and the capacity of the factories is about equal to the demand, the prices would be on a dead level, and every semblance of competition would disappear, and the trade would be distributed among the producers in almost exact proportion to the capacity of their factories. There would be practically no growth of the smaller factories; and a new factory would hardly dare enter the field. Where the capacities of the factories are much in excess of the demand, under the law of supply and demand prices would materially decrease; and those factories which are operated at the greatest expense would be forced to suspend. But if organized into an “ open price association,” prices would be maintained at such a point that all members, even the one whose “cost of production is greatest, would make some profit. This would be accomplished by either dividing the work between the factories in proportion to their capacities or by dividing p. 389the factories into groups and designating the period of time during which the groups may operate. When the demand for the product manufactured is decreasing and the price is falling, through the influence of an association the reduction of price is greatly impeded, first, by a curtailment of production from a tacit or expressed agreement to that effect and, second, because a member is unwilling to undersell his associates when such fact is known to them. When the demand for the product is increasing and the market is rising, the exchange of information as to mounting prices will produce far more quickly an uneasy market, and greatly increase the excessive prices, as demonstrated by the evidence in this case.

U. S. 522, were more remote from the result than were the adoption and execution of the plan here proven. In point of proximity of cause to effect this case is parallel with the line of cases beginning with United States v. Jellico Mountain Coal & Coke Co., 46 Fed. 432. In United States v. Reading Co., 226 U. S. 324, 348, 351, a conspiracy was condemned which had never been, and was not then, effective, and its future effect was uncertain and speculative. A line of cases beginning with Hopkins v. United States, 171 U. S. 578, is relied upon by defendants, in which it was held that the Anti-Trust Act did not apply because interstate commerce was not directly involved. Later cases have not so strictly applied the rule there laid down. See Swift & Co. v. United States, 196 U.S. 375, 397; Montague & Co. v. Lowry, 193 U. S. 38. These cases have no special bearing here, because there is no question but that the appellants’ lumber was moving in interstate commerce; and if their conduct resulted in any restraint at all, such restraint was upon interstate commerce. There is necessarily a distinction between agreements which by their nature are local in their operation and but incidentally affect interstate commerce, and those agreements which directly pertain to such commerce and are not local in their nature. Where the agreement necessarily relates to interstate commerce the courts have never drawn a nice distinction as to whether or not the effect is immediate or in a measure remote. Appellants also cite as authority Anderson v. United States, 171 U. S. 604, and Chicago Board of Trade v. United States, 246 U. S. 231; but neither of those cases has any material bearing on the questions here presented. In the former case it was held that the purpose of the regulations complained of was not to regulate, obstruct or restrain commerce, but to properly and fairly regulate the transaction of the business in which the parties to p. 391the agreement were engaged; and in the latter case it was held that under the facts proven the object and effect of the rule of the Board complained of was to promote interstate commerce, and not to restrain it.

After stating that the purpose was not to restrict competition or to control prices but to “ furnish information to enable each member to intelligently make prices and to p. 393intelligently govern his production,” the committee continues :

“ Competition, blind, vicious, unreasoning, may stimulate trade to abnormal activity but such condition is no p. 394more sound than that mediaeval spirit some still cling to of taking a club and going out and knocking the other fellow and taking away his bone.

1. A daily report of all sales actually made, with the name and address of the purchaser, the kind, grade and quality of lumber sold and all special agreements of every p. 395kind, verbal or written with respect thereto. “ These reports are to be exact copies of orders taken.”

7. Meetings shall be held once a month at Cincinnati “ or at points to be agreed upon by the members.” “ It is intended that the regular meetings shall afford p. 397oppqrtunity for the discussion of all subjects of interest to the members.”

This elaborate plan for the interchange of reports does not simply supply to each member the amount of stock held, the sales made and the prices received, by every other member of the group, thereby furnishing the data for judging the market, on the basis of supply and demand and current prices. It goes much farther. It not only furnishes such information, with respect to stock, sales and prices, but also reports, giving the views of p. 399each member as to “ market conditions for the next few months ”; what the production of each will be for the next “ two months ”; frequent analyses of the reports by an expert, with, we shall see, significant suggestions as to both future prices and production; and opportunities for future meetings for the interchange of views, which the record shows were very important. It is plain that the only element lacking in this scheme to make it a familiar type of the competition suppressing organization is a definite agreement as to production and prices. But this is supplied: by the disposition of men “ to follow their most intelligent competitors,” especially when powerful; by the inherent disposition to make all the money possible, joined with the steady cultivation of the value of “ harmony ” of action; and by the system of reports, which makes the discovery of price reductions inevitable and immediate. The sanctions of the plan obviously are, financial interest, intimate personal contact, and business honor, all operating under the restraint of exposure of what would be deemed bad faith and of trade punishment by powerful rivals.

Obviously the organization of the defendants constitutes a combination and confessedly they are engaged in a large way in the transportation and sale of lumber in interstate commerce so that there remains for decision p. 400only the question whether the system of doing business adopted resulted in that direct and undue restraint of interstate commerce which is condemned by this Anti-Trust statute.

“ The argument that the course pursued is necessary to the protection of the retail trade and promotive of the p. 401public welfare in providing retail facilities is answered by the fact that Congress, with the right to control the field of interstate commerce, has so legislated as to prevent resort to practices which unduly restrain competition or unduly obstruct the free flow of such commerce, and private choice of means must yield to the national authority thus exerted.”

It is plain that as the “ Plan ” was the “ clearing house ” of the members, “ for information on prices, trade statistics, and practices,” so Gadd was the p. 402“'clearing house ” of the “ Plan,” and that what he said and did, acquiesced in by the members, as it was, must be accepted as the authoritative expression of the combination.

Next, the record shows clearly that the members of the combination were not satisfied to secure, each for himself, the price which might be obtainable even as the result of cooperative restriction of production, but that throughout the year they assiduously cultivated, through the letters of Gadd, speaking for them all, and through the p. 405discussions at the meetings, the general conviction that higher and higher prices were obtainable and a disposition on the part of all to demand them. The intention to create such a common purpose is too clear to be doubted, evidenced as it is by the following excerpts from much of like character in the testimony:

“ It has been rumored that a certain class of buyers, believing that the price of lumber was too high and that the p. 407temporary inactivity in the export market offered the opportune moment, have agreed to confine purchases to actual immediate requirements during the next sixty days. This is not going to worry the manufacturers very much; in fact, it will give them a much needed breathing spell and an opportunity to accumulate a supply of dry stocks which, in our opinion, is the same as gold dollars in the bank. ******* “ Those who have been looking for lower prices overlook the very important factors: that production continues below normal . . . that unsold stocks at mills are 70 per cent, below normal; . . . that the export demand has just started, . . .”

Within four months of the consolidation, on April 23, 1919, the Manager of Statistics wrote to members asking p. 408each to write him “ his experience with the Plan ” and any incidents showing benefits derived from it.

“ The Open Competition Plan has been absolutely accurate but instead of apparently stabilizing the market, p. 409it has caused a run-a-way market.”—This on May 29th, within six months of the forming of the combination.

Such close cooperation, between many persons, firms, and corporations controlling a large volume of interstate commerce, as is provided for in this “ Plan,” is plainly in theory, as it proved to be in fact, inconsistent with that free and unrestricted trade which the statute contemplates shall be maintained; and that the persons conducting the association fully realized this is apparent from their protesting so often as they did, in many of their confidential communications appearing in this record, that their purposes were not unlawful, that they sought only to supplant cut-throat competition with what in their own judgment would be “ fair and reasonable competition,” and to obtain, not make, fair prices, and by their p. 410repeated insistence that the Sherman Law “ designed to prevent the restraint of trade is itself one of the greatest restrainers of trade, and should be repealed.”

The “ Plan ” is, essentially, simply an expansion of the gentlemen’s agreement of former days, skilfully devised p. 411to evade the law. To call it open competition because the meetings were nominally open to the public, or because some voluminous reports were transmitted to the Department of Justice, or because no specific agreement to restrict trade or fix prices is proved, cannot conceal the fact that the fundamental purpose of the “ Plan ” was to procure “ harmonious ” individual action among a large number of naturally competing dealers with respect to the volume of production and prices, without having any specific agreement with respect to them, and to rely for maintenance of concerted action in both respects, not upon fines and forfeitures as in earlier days, but upon what experience has shown to be the more potent and dependable restraints, of business honor and social penalties,—cautiously reinforced by many and elaborate reports, which would promptly expose to his associates any disposition in any member to deviate from the tacit understanding that all were to act together under the subtle direction of a single interpreter of their common purposes, as evidenced in the minute reports of what they had done and in their expressed purposes as to what they intended to do.

The principle that the maritime law extends to public vessels has been recognized by Congress. Act of August 19, 1890, c. 802, 26 Stat. 320; Rev. Stats., § 4233; The p. 426Esparta, 160 Fed. 269; The A. A. Raven, 231 Fed. 380. Cf. Admiralty v. 5. 8. Eleanor, VI Lloyd’s List Law Rep. 456.

Nor is there any principle of public policy which prevents the creation of a maritime lien against a public vessel owned by the United States. When the privately owned vessel is at fault, the United States collects its damages from the ship or her owners, and it is only fair p. 429that a private owner should have a like right when the government ship is to blame. Congress has recognized this principle of equality by making the statutory rules for preventing collisions at sea binding upon public ships as well as private, 26 Stat. 320 ; 28 Stat. 645 ; 2 Fed. Stat. Ann., 2d ed., 376, 402, 449. If a merchant ship and a war ship are equally at fault, the damages are divided. The Sapphire, supra.

The Liberty was a pilot boat let to the United States on the bare-boat basis at a nominal rate of hire. She had been manned by a crew from the United States Navy and commissioned as a naval dispatch boat, and was employed to serve military needs in war service. The collision took place on December 24,1917, while she was so employed, in Boston Harbor. Afterwards the vessel was redelivered to the owners and still later, on February 5, 1921, the suit now in question was brought against her. On February 14, under the Act of March 9,1920, c. 95, § 4, 41 Stat. 525, p. 431the United States filed a suggestion of its interest, and also set up the above facts. The District Court held that they constituted no defence and this petition was brought by the Attorney General along with that last mentioned.

It may be assumed that each of these vessels might have been libeled for maritime torts committed after the redelivery that we have mentioned. But the Act of September 7, 1916, c. 451, § 9, does not create a liability on the part of the United States, retrospectively, where one did not exist before. Neither, in our opinion, is such a liability created by the Act of March 9, 1920, c. 95, § 4, authorizing the United States to assume the defence in suits like these. It is not required to abandon any defence that otherwise would be good. It appears to us plain that before the passage of these acts neither the United States nor the vessels in the hands of the United States were liable to be sued for these alleged maritime torts. The Liberty and the Carolinian were employed for public and government purposes, and were owned pro hac vice by the United States. It is suggested that the Western Maid was a merchant vessel at the time of the p. 432collision, but the fact that the food was to be paid for and the other details adverted to in argument cannot disguise the obvious truth, that she was engaged in a public service that was one of the constituents of our activity in the war and its sequel and that had no more to do with ordinary merchandizing than if she had carried a regiment of troops. The only question really open to debate is whether a liability attached to the ships which although dormant while the United States was in possession became enforcible as soon as the vessels came into hands that could be sued.

In deciding this question we must realize that however ancient may be the traditions of maritime law, however diverse the sources from which it has been drawn, it derives its whole and only power in this country from its having been accepted and adopted by the United States. There is no mystic over-law to which even the United States must bow. When a case is said to be governed by foreign law or by general maritime law that is only a short way of saying that for this purpose the sovereign power takes up a rule suggested from without and makes it part of its own rules. The Lottawanna, 21 Wall. 558, 571, 572. Dalrymple v. Dalrymple, 2 Hagg. Cons. 54, 58, 59. Dicey, Conflict of Laws, 2d ed., 6, 7. Also we must realize that the authority that makes the law is itself superior to it, and that if it consents to apply to itself the rules that it applies to others the consent is free and may be withheld. The sovereign does not create justice in an ethical sense, to be sure, and there may be cases in which it would not dare to deny that justice for fear of war or revolution. Sovereignty is a question of power, and no human power is unlimited. Carino v. Insular Government of the Philippine Islands, 212 U. S. 449, 458. But from the necessary point of view of the sovereign and its organs whatever is enforced by it as law is enforced as the p. 433expression of its will. Kawananakoa v. Polyblank, 205 U. S. 349, 353.