Alcoa Is Convicted of Violating the Sherman Antitrust Act Summary

  • Last updated on November 10, 2022

Although the Aluminum Company of America (Alcoa) had not committed predatory acts or engaged in anticompetitive practices, it was convicted of violating the Sherman Act on the basis of its large market share, thereby establishing that large market share alone justified antitrust prosecution.

Summary of Event

The antitrust conviction in 1945 of the Aluminum Company of America (Alcoa) was a landmark in the development of American antitrust law. Section 2 of the Sherman Antitrust Act Sherman Antitrust Act (1890) of 1890 declared it illegal “to monopolize, or attempt to monopolize” any part of the trade or commerce of the United States. Up to 1945, only overt acts had been founded to violate the act. The landmark convictions in 1911 of Standard Oil and American Tobacco, for example, had been based largely on evidence of predatory and exclusionary actions that appeared to be undesirable in themselves and also indicative of an attempt to gain monopoly power. In acquitting U.S. Steel of antitrust charges in 1920, the Supreme Court had declared that “the law does not make mere size an offense.” The Alcoa case of 1945, however, indicated mere size, as measured by share of the product market, could be an offense. Aluminum Company of America Antitrust enforcement United States v. Aluminum Co. of America (1945) [kw]Alcoa Is Convicted of Violating the Sherman Antitrust Act (Mar. 12, 1945) [kw]Sherman Antitrust Act, Alcoa Is Convicted of Violating the (Mar. 12, 1945) [kw]Antitrust Act, Alcoa Is Convicted of Violating the Sherman (Mar. 12, 1945) [kw]Act, Alcoa Is Convicted of Violating the Sherman Antitrust (Mar. 12, 1945) Aluminum Company of America Antitrust enforcement United States v. Aluminum Co. of America (1945) [g]North America;Mar. 12, 1945: Alcoa Is Convicted of Violating the Sherman Antitrust Act[01420] [g]United States;Mar. 12, 1945: Alcoa Is Convicted of Violating the Sherman Antitrust Act[01420] [c]Laws, acts, and legal history;Mar. 12, 1945: Alcoa Is Convicted of Violating the Sherman Antitrust Act[01420] [c]Trade and commerce;Mar. 12, 1945: Alcoa Is Convicted of Violating the Sherman Antitrust Act[01420] [c]Business and labor;Mar. 12, 1945: Alcoa Is Convicted of Violating the Sherman Antitrust Act[01420] Hand, Learned Hand, Augustus N. Swan, Thomas Caffey, Francis G. Knox, John C.

The Aluminum Company of America was formed in 1907 out of the Pittsburgh Reduction Company, which had pioneered in the development of aluminum smelting and fabrication. It was the only aluminum manufacturing firm of any consequence in the United States. This monopoly situation resulted from several factors. First, Alcoa controlled strategic patents. Second, aluminum products were neither well known nor appreciated, and the firm had to struggle to develop a variety of end products and to widen the market for them. This often meant selling at low prices to encourage consumers to try such items as aluminum cookware. Third, the economies of scale in aluminum production were such that, in the limited aluminum market of the early twentieth century, the nascent industry could not support many firms of optimum efficient size. Alcoa became a vertically integrated company, significantly involved in mining bauxite (the ore), refining it, and fabricating it into a variety of end products, some aimed at industrial users and others at households. As aluminum gained popularity, Alcoa expanded its facilities to keep pace with demand, lowering its prices as its research helped reduce production costs.

A number of antitrust actions were brought against Alcoa in its early years. The company accepted a consent decree to settle a prosecution by the Department of Justice in 1912. The company agreed not to combine with others in controlling the price of aluminum, not to harass competitors, and not to cut off raw material supplies from potential competing fabricators of end products. In 1921, the Federal Trade Commission Federal Trade Commission (FTC) tried unsuccessfully to block Alcoa’s absorption of a bankrupt competitor. The FTC also tried in vain to bring charges of unfair competitive practices in 1925.

In 1937, the Department of Justice brought Alcoa to court again, charging illegal monopoly and seeking to break up the company. The government claimed that Alcoa controlled all aluminum refining in the United States and 90 percent of aluminum sheet, tubing, cable, and wire. After a trial lasting 362 trial days, federal judge Francis G. Caffey dismissed all of the government’s complaints in 1941.

The government appealed the case to the Supreme Court, Supreme Court, U.S.;conflicts of interest but so many of the Court’s justices had been involved as lawyers in earlier stages of the case that a quorum of the Court could not be secured. Congress authorized the U.S. Court of Appeals for the Second Circuit, Court of Appeals for the Second Circuit, U.S. based in New York, to hear the appeal. A three-judge panel consisting of Learned Hand, Augustus N. Hand, and Thomas Swan found the company guilty of violating the Sherman Antitrust Act in 1945. The crucial finding of fact was that Alcoa controlled 90 percent of the output of aluminum ingot, a finding that disregarded the share of recycled scrap but counted Alcoa’s shipments to its own fabricating operations. If scrap had been counted, Alcoa’s share would have been only 64 percent, and if its internal shipments had been excluded, its share would have been only 33 percent. The measurement was crucial, since the court argued that 90 percent “is enough to constitute a monopoly; it is doubtful whether 60 or 64 percent would be enough, and certainly 33 percent is not.”

Once Alcoa was identified as a monopolist, its actions, though not overtly predatory or anticompetitive, were by definition illegal. The price charged by a monopolist is by definition a monopoly price. As the decision stated, “it must sell at some price, and the only price at which it would sell is a price which it itself fixed.” The intent to monopolize could be presumed: “No monopolist monopolizes unconscious of what he is doing.” The court argued in effect that Alcoa’s vigorous expansion of business was itself a strategy to discourage potential rivals: “It insists that it never excluded competitors, but we can think of no more effective exclusion than progressively to embrace each new opportunity as it opened.” The court identified one specific example of supposed predatory conduct, that of setting prices for ingot and sheet too close to each other to allow other makers of sheet to operate at a profit.

When the government had initiated the antitrust suit in 1937, its intent had been to require Alcoa to be broken up. By the time the case was decided in 1945, however, the aluminum industry had changed substantially. Reynolds Metals Company Reynolds Metals Company , which had long been the chief manufacturer of aluminum foil, entered the refining end of the industry in 1941. During World War II, the government’s Defense Plant Corporation built nine aluminum smelters and a number of fabricating facilities to aid war production. These facilities were operated by Alcoa under lease. Alcoa hoped to acquire some of these, but the federal Surplus Property Act Surplus Property Act (1944) of 1944 dictated that disposal policies should discourage monopoly.

In the 1945 decision, the court ruled that the government’s request to break up Alcoa should be deferred until the wartime facilities were disposed of. This took place over the period of 1946-1948. Most of the facilities were taken by Reynolds or by Kaiser Aluminum and Chemical Company, both of which emerged as relatively large integrated firms. Alcoa provided the newcomers with access to its major patents and technical knowledge.

In 1947, Alcoa petitioned the court to be absolved from the monopoly charge, citing the changes in industry structure. The government countered with a renewed request to break up Alcoa. Federal district judge John C. Knox responded in June, 1950, with a ruling that essentially denied both requests. Breaking up the company would endanger “economic and industrial forces from which the public has reaped substantial benefit.” The judge did act to reduce the connection between Alcoa and its former Canadian subsidiary, Aluminum, Ltd., ordering Alcoa officers, directors, and large stockholders to sell off their holdings of one or the other. He also extended the court’s surveillance of the industry for another five years.

Significance

In the terminology of economists, the Alcoa case provided the basis for using a “market structure” test for the presence of illegal monopoly. On one hand, the court’s decision in United States v. Aluminum Co. of America implied that an efficient and progressive firm could be declared to be an illegal monopoly even if it had committed no clearly predatory or exclusionary acts. On the other hand, the market-share standard of 90 percent was so high that few firms were likely to encounter it. Still, the ruling established that such spectacular success, should it occur, would be cause for governmental intervention in the future.

In the wake of the Alcoa case, the aluminum industry stabilized into a situation in which there were three dominant firms in aluminum refining. All three also played important roles in fabrication, but numerous smaller firms also competed in aluminum fabricating. Some economists criticized the transformation of the industry, perceiving that it had become an oligopoly and that there would be wasteful aspects to this structure not present under the earlier near-monopoly. Most observers found that the industry behaved in a reasonably competitive fashion. Government surveillance continued, however. In 1964, the Justice Department successfully challenged Alcoa’s bid to absorb Rome Cable Company. Both Rome and Alcoa produced aluminum cable, and their combined market share of about 30 percent was large enough to disqualify the merger under the Celler-Kefauver Amendment to the Clayton Antitrust Act.

The legal doctrines of the 1945 Alcoa case could be applied to other industrial situations. Although the Alcoa decision, chiefly drafted by Judge Learned Hand, was not a Supreme Court case, the Court affirmed its essential doctrines when it found the major cigarette companies guilty of antitrust violations in 1946. Numerous antitrust actions against large firms followed. In 1949, the government accused American Telephone and Telegraph (AT&T) of monopolizing the market for telephone equipment because of its ownership of Western Electric, the principal equipment supplier. The company agreed to some policy modifications, and the government’s request to split off Western Electric was withdrawn.

Considerations similar to those of the Alcoa case were involved in the government’s successful antitrust prosecution of United Shoe Machinery Corporation, upheld by the Supreme Court in 1954. Large-firm antitrust prosecutions with elements similar to those of the Alcoa case were undertaken against Eastman Kodak, International Business Machines (IBM), Radio Corporation of America (RCA), Western Electric, United Fruit, and General Motors. All of these were settled when the defendants agreed to consent decrees that did not involve major structural changes in their industry.

The most important cases following in the footsteps of United States v. Aluminum Co. of America were ones brought against IBM in 1969 and AT&T in 1974. These came to very different outcomes. After a long and complex trial, the case against IBM for illegal monopolization of the computer industry was dropped by the government in 1982. At about the same time, AT&T agreed to a settlement that dramatically reorganized the entire telephone industry. The various regional operating Bell Telephone companies were made into fully indepedent corporations, and entry into the long-distance telephone service industry became much easier. Aluminum Company of America Antitrust enforcement United States v. Aluminum Co. of America (1945)

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Adams, Walter. “The Aluminum Case: Legal Victory—Economic Defeat.” American Economic Review 41 (December, 1951): 915-922. Applauds the market-share emphasis. Criticizes the court for failing to break up Alcoa.
  • citation-type="booksimple"

    xlink:type="simple">Areeda, Phillip, Louis Kaplow, and Aaron Edlin. Antitrust Analysis: Problems, Text, Cases. 6th ed. New York: Aspen, 2004. Textbook containing case studies of the major antitrust cases in American history. Bibliographic references and index.
  • citation-type="booksimple"

    xlink:type="simple">Armentano, Dominick T. Antitrust and Monopoly: Anatomy of a Policy Failure. New York: John Wiley, 1982. Contains a detailed examination of the Alcoa case that is part of the author’s attack on antitrust policies, which he believes have punished efficient and progressive firms for their success.
  • citation-type="booksimple"

    xlink:type="simple">Blair, Roger D., and David L. Kaserman. Antitrust Economics. Homewood, Ill.: Richard D. Irwin, 1985. This college text for economics majors goes into considerable detail in comparing economic and legal criteria for monopoly. The Alcoa case is discussed briefly in context.
  • citation-type="booksimple"

    xlink:type="simple">Hylton, Keith N. Antitrust Law: Economic Theory and Common Law Evolution. New York: Cambridge University Press, 2003. Comprehensive text on economic principles behind antitrust and the development of American antitrust law over more than one hundred years of litigation. Includes a chapter on the Alcoa case. Bibliographic references and index.
  • citation-type="booksimple"

    xlink:type="simple">Peck, Merton J. Competition in the Aluminum Industry, 1945-1958. Cambridge, Mass.: Harvard University Press, 1961. The most detailed scholarly study of the industry during the period following the antitrust case.
  • citation-type="booksimple"

    xlink:type="simple">Purdy, Harry L., Martin L. Lindahl, and William A. Carter. Corporate Concentration and Public Policy. 2d ed. New York: Prentice-Hall, 1942. This older college text is well written. Chapter 11 deals with the evolution of the aluminum industry, while chapter 18 discusses the antitrust case in the context of Sherman Act cases in general.
  • citation-type="booksimple"

    xlink:type="simple">Smith, George David. From Monopoly to Competition: The Transformation of Alcoa, 1888-1986. New York: Cambridge University Press, 1988. A very scholarly yet readable company history. Quotes Alcoa executives who thought that competition benefited from the antitrust action.
  • citation-type="booksimple"

    xlink:type="simple">Whitney, Simon N. Antitrust Policies: American Experience in Twenty Industries. 2 vols. New York: Twentieth Century Fund, 1958. Chapter 13 deals with the history of the aluminum industry and its antitrust experience. The best short summary of the antitrust case, its background, and its consequences.

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