221 U.S.1 (1911), Supreme Court of the United States

Facts
Over a period of decades, the Standard Oil Company of New Jersey had bought up virtually all of the oil refining companies in the United States. Initially, the growth of Standard Oil was driven by superior refining technology and consistency in the kerosene products (i.e., product standardization) that were the main use of oil in the early decades of the company's existence. The management of Standard Oil then reinvested their profits in the acquisition of most of the refining capacity in the Cleveland area, then a center of oil refining, until Standard Oil controlled the refining capacity of that key production market.

Management then used that market dominance to obtain favorable transportation rates from the railroads, putting pressure on the smaller and less organized refining capacity throughout the northeastern United States, compelling Standard Oil's competition to sell out or face bankruptcy, until Standard controlled most of the refining capacity of the U.S.

By the 1880s, Standard Oil was using its stranglehold on refining capacity to begin integrating backward into oil exploration and crude oil distribution and forward into retail distribution of its refined products to stores and, eventually, service stations throughout the United States. Standard Oil allegedly used its size and clout to undercut competitors in a number of ways that were considered "anti-competitive," including underpricing and threats to suppliers and distributors who did business with Standard's competitors.

The government sought to prosecute Standard Oil under the Sherman Antitrust Act. The main issue before the Court was whether it was within the power of the Congress to prevent one company from acquiring numerous others through means that might have been considered legal in common law, but still posed a significant constraint on competition by mere virtue of their size and market power, as implied by the Anti-trust Act.

Opinion of the Court
The Court concluded that this was within the power of Congress under the Commerce Clause. The Court recognized that, "taken literally," the term "restraint of trade" could refer to any number of normal or usual contracts that do not harm the public. The Court embarked on a lengthy exegesis of English authorities relevant to the meaning of the term "restraint of trade." Based on this review, the Court concluded that the term "restraint of trade" had come to refer to a contract that resulted in "monopoly or its consequences." The Court identified three such consequences: higher prices, reduced output, and reduced quality.

The Court concluded that a contract offended the Sherman Act only if the contract restrained trade "unduly" -- that is, if the contract resulted in one of the three consequences of monopoly that the Court identified. A broader meaning, the Court suggested, would ban normal and usual contracts, and would thus infringe liberty of contract. The Court endorsed the rule of reason enunciated by William Howard Taft in Addyston Pipe and Steel Company v. United States, 85 F. 271 (6th Cir. 1898), written when the latter had been Chief Judge of the United States Court of Appeals for the Sixth Circuit. The Court concluded, however, that the behavior of the Standard Oil Company went beyond the limitations of this rule.

Justice John Marshall Harlan wrote a separate opinion concurring in the result, but dissenting in the Court's adoption of the rule of reason. Among other things, he argued that the "rule of reason" was a departure from prior predecents holding that the Sherman Act banned any contract that restrained trade "directly." See, e.g., United States v. Joint Traffic Ass'n, 171 U.S. 505 (1898). While some scholars have agreed with Justice Harlan's characterization of prior case law, others have agreed with William Howard Taft, who concluded that despite its different verbal formulation, Standard Oil's "rule of reason" was entirely consistent with prior case law.