Northern Pacific Railway Co. v. United States

delivered the opinion of the Court.

In 1864 and 1870 Congress granted the predecessor of the Northern Pacific Railway Company approximately forty million acres of land in several Northwestern States and Territories to facilitate its construction of a railroad line from Lake Superior to Puget Sound.1 In general terms, this grant consisted of every alternate section of land in a belt 20 miles wide on each side of the track through States and 40 miles wide through Territories. The granted lands were of various kinds; some contained great stands of timber, some iron ore or other valuable mineral deposits, some oil or natural gas, while still other sections were useful for agriculture, grazing or industrial purposes. By 1949 the Railroad had sold about 37,000,000 acres of its holdings, but had reserved mineral rights in 6,500,000 of those acres. Most of the unsold land was leased for one purpose or another. In a large number of its sales contracts and most of its lease agreements the Railroad had inserted “preferential routing” clauses which compelled the grantee or lessee to ship over its lines all commodities produced or manufactured on the land, provided that its rates (and in some instances its service) were equal to those of competing carriers.2 Since many of the goods produced on the lands subject to these “preferential routing” provisions are shipped from one State to another the actual and potential amount of interstate commerce affected is substantial. Alternative means of transportation exist for a large portion of these shipments including the facilities of two other major railroad systems.

In 1949 the Government filed suit under § 4 of the Sherman Act seeking a declaration that the defendant’s “preferential routing” agreements were unlawful as unreasonable restraints of trade under § 1 of that Act.3 After various pretrial proceedings the Government moved for summary judgment contending that on the undisputed facts it was entitled, as a matter of law, to the relief demanded. The district judge made numerous findings, as set forth in substance in the preceding paragraph, based on the voluminous pleadings, stipulations, depositions and answers to interrogatories filed in the case, and then granted the Government’s motion (with an exception not relevant here). 142 F. Supp. 679. He issued an order enjoining the defendant from enforcing the existing “preferential routing” clauses or from entering into any future agreements containing them. The defendant took a direct appeal to this Court under § 2 of the Expediting Act of 1903, 32 Stat. 823, as amended, 15 U. S. C. § 29, and we noted probable jurisdiction. 352 U. S. 980.

The Sherman Act was designed to be a comprehensive charter of economic liberty aimed at preserving free and unfettered competition as the rule of trade. It rests on the premise that the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices, the highest quality and the greatest material progress, while at the same time providing an environment conducive to the preservation of bur democratic political and social institutions. But even were that premise open to question, the policy unequivocally laid down by the Act is competition. And to this end it prohibits “Every contract, combination ... or conspiracy, in restraint of trade or commerce among the several States.” Although this prohibition is literally all-encompassing, the courts have construed it as precluding only those contracts or combinations which "unreasonably” restrain competition. Standard Oil Co. of New Jersey v. United States, 221 U. S. 1; Chicago Board of Trade v. United States, 246 U. S. 231.

However, there are certain agreements or practices which because of their pernicious effect on competition and lack of any redeeming virtue are conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use. This principle of per se unreasonableness not only makes the type of restraints which are proscribed by the Sherman Act more certain to the benefit of everyone concerned, but it also avoids the necessity for an incredibly complicated and prolonged economic investigation into the entire history of the industry involved, as well as related industries, in an effort to determine at large whether a particular restraint has been unreasonable — an inquiry so often wholly fruitless when undertaken. Among the practices which the courts have heretofore deemed to be unlawful in and of themselves are price fixing, United States v. Socony-Vacuum Oil Co., 310 U. S. 150, 210; division of markets, United States v. Addyston Pipe & Steel Co., 85 F. 271, aff’d, 175 U. S. 211; group boycotts, Fashion Originators’ Guild v. Federal Trade Comm’n, 312 U. S. 457; and tying arrangements, international Salt Co. v. United States, 332 U. S. 392.

For our purposes a tying arrangement may be defined as an agreement by a party to sell one product but only on the condition that the buyer also purchases a different (or tied) product, or at least agrees that he will not purchase that product from any other supplier.4 Where such conditions are successfully exacted competition on the merits with respect to the tied product is inevitably curbed. Indeed “tying agreements serve hardly any purpose beyond the suppression of competition.” Standard Oil Co. of California v. United States, 337 U. S. 293, 305-306.5 They deny competitors free access to the market for the tied product, not because the party imposing the tying requirements has a better product or a lower price but because of his power or leverage in another market. At the same time buyers are forced _to foregb, their free choice between competing products. For these reasons “tying agreements fare harshly under the laws forbidding restraints of trade.” Times-Picayune Publishing Co. v. United States, 345 U. S. 594, 606. They are unreasonable in and of themselves whenever a party has sufficient economic power with respect to the tying product to appreciably restrain free competition in the market for the tied product and a “not insubstantial” amount of interstate commerce is affected. International Salt Co. v. United States, 332 U. S. 392. Cf. United States v. Paramount Pictures, 334 U. S. 131, 156-159; United States v. Griffith, 334 U. S. 100. Of course where the seller has no control or dominance over the tying product so that it does not represent an effectual weapon to pressure buyers into taking the tied item any restraint of trade attributable to such tying arrangements would obviously be insignificant at most. As a simple example, if one of a dozen food stores in a community were to refuse to sell flour unless the buyer also took sugar it would hardly tend to restrain competition in sugar if its competitors were ready and able to sell flour by itself.

In this case we believe the district judge was clearly correct in entering summary judgment declaring the defendant’s “preferential routing” clauses unlawful restraints of trade. We wholly agree that the undisputed facts established beyond any genuine question that the defendant possessed substantial economic power by virtue of its extensive landholdings which it used as leverage to induce large numbers of purchasers and lessees to give it preference, to the exclusion of its competitors, in carrying goods or produce from the land transferred to them. Nor can there be any real doubt that a “not insubstantial” amount of interstate commerce was and is affected by these restrictive provisions.

As pointed out before, the defendant was initially granted large acreages by Congress in the several Northwestern States through which its lines now run. This land was strategically located in checkerboard fashion amid private holdings and within economic distance of transportation facilities. Not only the testimony of various witnesses but common sense makes it evident that this particular land was often prized by those who purchased or leased it and was frequently essential to their business activities. In disposing of its holdings the defendant entered into contracts of sale or lease covering at least several million acres of land which included “preferential routing” clauses.6 The very existence of this host of tying arrangements is itself compelling evidence of the defendant’s great power, at least where, as here, no other explanation has been offered for the existence of these restraints. The “preferential routing” clauses conferred no benefit on the purchasers or lessees. While they got the land they wanted by yielding their freedom to deal with competing carriers, the defendant makes no claim that it came any cheaper than if the restrictive clauses had been omitted. In fact any such price reduction in return for rail shipments would have quite plainly constituted an unlawful rebate to the shipper.7 So far as the Railroad was concerned its purpose obviously was to fence out competitors, to stifle competition. While this may have been exceedingly beneficial to its business, it is the very type of thing the Sherman Act condemns. In short, we are convinced that the essential prerequisites for treating the defendant’s tying arrangements as unreasonable “per se” were conclusively established below and that the defendant has offered to prove nothing there or here which would alter this conclusion.

In our view International Salt Co.v. United States, 332 U. S. 392, which has been unqualifiedly approved by subsequent decisions, is ample authority for affirming the judgment below. In that case the defendant refused to lease its salt-dispensing machines unless the lessee also agreed to purchase all the salt it used in the machines from the defendant. It was established that the defendant had made about 900 leases under such conditions and that in the year in question it had sold about $500,000 worth of salt for use in the leased machines. On that basis we affirmed unanimously a summary judgment finding the defendant guilty of violating § 1 of the Sherman Act. The Court ruled that it was “unreasonable, per se, to foreclose competitors from any substantial market” by tying arrangements. As we later analyzed the decision, “it was not established that equivalent machines were unobtainable, it was not indicated what proportion of the business of supplying such machines was controlled by defendant, and it was deemed irrelevant that there was no evidence as to the actual effect of the tying clauses upon competition.” Standard Oil Co. of California v. United States, 337 U. S. 293, 305.

The defendant attempts to evade the force of International Salt on the ground that the tying product there was patented while here it is not. But we do not believe this distinction has, or should have, any significance. In arriving at its decision in International Salt the Court placed no reliance on the fact that.a patent was involved nor did it give the slightest intimation that the outcome would have been any different if that had not been the case. If anything, the Court held the challenged tying arrangements unlawful despite the fact that the tying item was patented, not because of it. “By contracting to close this market for salt against competition, International has engaged in a restraint of trade for which its patents afford no immunity from the antitrust laws.” 332 U. S., at 396. Nor have subsequent cases confined the rule of per se unreasonableness laid down in International Salt to situations involving patents. Cf. United States v. Griffith, 334 U. S. 100; United States v. Paramount Pictures, 334 U. S. 131, 156; Times-Picayune Publishing Co. v. United States, 345 U. S. 594.88

The defendant argues that the holding in International Salt was limited by the decision in Times-Picayune Publishing Co. v. United States, 345 U. S. 594. There the Court held that a unit system of advertising in two local newspapers did not violate § 1 of the Sherman Act. On the facts before it the majority found there was no tying problem at all since only one product was involved and that, in any event, the defendant did not possess sufficient economic power in the advertising market to bring its unit rule within the principle of per se unreasonableness. But the Court was extremely careful to confine its decision to the narrow record before it. Id., at 627-628. And far from repudiating any of the principles set forth in International Salt it vigorously reasserted them by broadly condemning tying arrangements as wholly inconsistent with the fundamental principles of the antitrust laws. In the Court’s forceful terms, “Tying arrangements . . . flout the Sherman Act’s policy that competition rule the marts of trade. .... By conditioning his sale of one commodity on the purchase of another, a seller coerces the abdication of buyers’ independent judgment as to the ‘tied’ product’s merits and insulates it from the competitive stresses of the open market. But any intrinsic superiority of the ‘tied’ product would convince freely choosing buyers to select it over others, anyway.” Id., at 605.

While there is some language in the Times-Picayune opinion which speaks of “monopoly power” or “dominance” over the tying product as a necessary precondition for application of the rule of per se unreasonableness to tying arrangements, we do not construe this general language as requiring anything more than sufficient economic power to impose an appreciable restraint on free competition in the tied product (assuming all the time, of course, that a “not insubstantial” amount of interstate commerce is affected). To give it any other construction would be wholly out of accord with the opinion’s cogent analysis of the nature and baneful effects of tying arrangements and their incompatibility with the policies underlying the Sherman Act. Times-Picayune, of course, must be viewed in context with International Salt and our other decisions concerning tying agreements. There is no warrant for treating it as a departure from those cases. Nor did it purport to be any such thing; rather it simply made an effort to restate the governing considerations in this area as set forth in the prior cases. And in so doing it makes clear, as do those cases, that the vice of tying arrangements lies in the use of economic power in one market to restrict competition on the merits in another, regardless of the source from which the power is derived and whether the power takes the form of a monopoly or not.

The defendant contends that its “preferential routing” clauses are subject to so many exceptions and have been administered so leniently that they do not significantly restrain competition. It points out that these clauses permit the vendee or lessee to ship by competing carrier if its rates are lower (or in some instances if its service is better) than the defendant’s.9 Of course if these restrictive provisions are merely harmless sieves with no tendency to restrain competition, as the defendant’s argument seems to imply, it is hard to understand why it has expended so much effort in obtaining them in vast numbers and upholding their validity, or how they are of any benefit to anyone, even the defendant. But however that may be, the essential fact remains that these agreements are binding obligations held over the heads of vendees which deny defendant’s competitors access to the fenced-off market on the same terms as the defendant. In International Salt the defendants similarly argued that their tying arrangements were inoffensive restraints because they allowed lessees to buy salt from other suppliers when they offered a lower price than International. The Court’s answer there is equally apt here.

“[This exception] does, of course, afford a measure of protection to the lessee, but it does not avoid the stifling effect of the agreement on competition. The appellant had at all times a priority on the business at equal prices. A competitor would have to undercut appellant’s price to have any hope of capturing the market, while appellant could hold that market by merely meeting competition. We do not think this concession relieves the contract of being a restraint of trade, albeit a less harsh one than would result in the absence of such a provision.” 332 U. S., at 397.

All of this is only aggravated, of course, here in the regulated transportation industry where there is frequently no real rate competition at all and such effective competition as actually thrives takes other forms.

Affirmed.