Standard Oil as Lochner's Trojan Horse
32 Pages Posted: 30 Mar 2013
Date Written: 2012
This essay explains how one of the most maligned decisions in Constitutional Law, Lochner v. New York, 198 U.S. 45 (1905) lives on in one of the Sherman Act’s most celebrated decisions: Standard Oil v. United States, 221 U.S. 1 (1911). Standard Oil, it is shown, was simply an application of Lochnerian principles to antitrust policy. In particular, Standard Oil’s “Rule of Reason,” universally-embraced by modern jurists and scholars, functioned as a device for narrowing the Sherman Act to avoid abridging contracts and other conduct protected by the Fifth Amendment’s Due Process Clause. By banning only that conduct producing higher prices, reduced output or inferior quality, the Court left unscathed so-called “normal” or “ordinary” conduct necessary to “fructify” trade and create wealth, conduct beyond the scope of the “police power” as understood by Lochner and its progeny. In so doing, the Court simply reiterated the principles articulated by previous decisions, which had banned as “direct” those restraints that resulted in prices above the competitive level, leaving firms and individuals free to adopt “indirect” restraints sheltered by liberty of contract. Thus, Lochner lives on in Sherman Act case law, with no sign of mortality.
The essay also explores how a Lochnerized Rule of Reason would address two current antitrust controversies: first, the appropriate definition of “consumer welfare,” and second, whether courts should condemn “normal” conduct when a balancing test reveals that the harms produced by such conduct outweigh its benefits. Implementation of Lochnerian principles would, it is shown, require courts to equate the “consumer welfare” relevant for antitrust doctrine with “total welfare” instead of the welfare of purchasers in the relevant market. After all, the “police power” invoked by Lochner and its progeny entailed the power to ban externalities and other market failures, while decisions such as Coppage v. Kansas, 236 U.S. 1 (1915) rejected, as outside the police power, interference with liberty and property that simply redistributed wealth from one party to another. Lochnerian principles would also require antitrust courts to reject the sort of balancing that supposedly characterizes modern Rule of Reason analysis.
Keywords: Sherman Act, Rule of Reason, Standard Oil v. United States, Lochner v. New York, Liberty of Contract, Due Process Clause, Consumer Welfare, Total Welfare, Purchaser Welfare
JEL Classification: B12, D61, K21, L40
Suggested Citation: Suggested Citation