U.S. Government Loses Its Suit Against Alcoa Summary

  • Last updated on November 10, 2022

A circuit court dismissed charges against Aluminum Company of America for acquisition of the Cleveland Products Company’s stock, showing that not all monopolies would be prosecuted.

Summary of Event

Founded in 1902, Aluminum Company of America (commonly known as Alcoa) immediately attained monopoly power in the aluminum industry. After signing a consent decree with the government in 1912, the company was charged by the Federal Trade Commission in 1918, under section 7 of the Clayton Antitrust Act of 1914, Clayton Antitrust Act (1914) for acquiring stocks of the Cleveland Products Company. Alcoa v. Federal Trade Commission was dismissed in 1924, leaving Alcoa with monopoly status until it was prosecuted again in 1945. Alcoa v. Federal Trade Commission (1924) Alcoa Antitrust legislation Aluminum industry [kw]U.S. Government Loses Its Suit Against Alcoa (1924) [kw]Suit Against Alcoa, U.S. Government Loses Its (1924) [kw]Alcoa, U.S. Government Loses Its Suit Against (1924) Alcoa v. Federal Trade Commission (1924) Alcoa Antitrust legislation Aluminum industry [g]United States;1924: U.S. Government Loses Its Suit Against Alcoa[05970] [c]Trade and commerce;1924: U.S. Government Loses Its Suit Against Alcoa[05970] [c]Laws, acts, and legal history;1924: U.S. Government Loses Its Suit Against Alcoa[05970] Hunt, Alfred Mellon, Andrew Butler, Pierce Hall, Charles Martin

The formation of Alcoa was a result of a patent for processing aluminum alloys by electrolysis, a process discovered by Charles Martin Hall in 1886. Despite the abundance of bauxite ore, until the discovery of the Hall process, aluminum had been difficult to extract and was used only in expensive costume jewelry. In 1888, a group of Pittsburgh investors including Alfred Hunt, Arthur Vining Davis, and Andrew and Richard B. Mellon formed the Pittsburgh Reduction Company and acquired the right to the Hall patent.

Meanwhile, Alfred Cowles, Alfred and Eugene Cowles Cowles, Eugene of Cowles Electric Smelting Company of Lockport also began using the Hall process to make aluminum alloys. After winning a patent infringement suit against the Cowles brothers in 1893, Pittsburgh Reduction became the sole producer of virgin aluminum by the Hall process until 1906. The Cowles brothers acquired rights to a process similar to Hall’s that was patented in 1892 by Charles Schenck Bradley. Bradley, Charles Schenck

By 1891, Pittsburgh Reduction had been recapitalized as a million-dollar company. In 1907, after Hall’s patent expired, the company changed its name to Aluminum Company of America to reflect the nature and national scope of its business. Between 1907 and 1910, Alcoa became the sole aluminum producer by purchasing the exclusive right to the Bradley patent from the Cowles brothers.

The Hall and Bradley processes dramatically reduced the cost of aluminum production. A few years after its formation, Pittsburgh Reduction was able to undercut most other smelting companies in aluminum price. By the beginning of the twentieth century, aluminum’s price had fallen enough to make commercial aluminum production and use practical for the first time.

Immediately after its formation, Pittsburgh Reduction began the process of vertical integration to ensure the company’s position against potential competition once Hall’s patent expired. First, it integrated backward by acquiring bauxite mines to secure its own ore supply, aluminum refineries in Illinois, fabricating facilities in New Kensington, and a number of waterpower electricity-generating sites in New York State and Canada. By the late 1890’s, Pittsburgh Reduction had purchased about 90 percent of bauxite reserves in the United States. Even after Hunt died during the Spanish-American War, the integration process continued under Richard B. Mellon and later under Arthur Davis, who became the presidents of Alcoa in 1899 and 1910, respectively.

With the increased production of and the creation of a potential market for aluminum, the Pittsburgh company began to make efforts to expand its demand. First, it began to integrate forward, acquiring consumers of its product. In 1901, it formed its own cookware subsidiary, Aluminum Cooking Utensil Company, Aluminum Cooking Utensil Company to promote the use of aluminum cooking utensils. Through its efforts, aluminum came to be used in many household products ranging from cooking utensils and heat conductors to electric wire and cables, gradually replacing other metals, particularly steel.

In the 1910’s, mass production of automobiles by the Ford Motor Company, Ford Motor Company the beginning of the aircraft industry, and the outbreak of World War I World War I (1914-1918)[World War 01];aluminum industry increased the demand for aluminum. By 1915, more than half of all aluminum production was devoted to automobile parts. Automobiles;manufacture Three years later, Alcoa’s annual production reached 150 million pounds, much of the increase a result of military applications of aluminum during World War I.

As a result of increased demand for aluminum and economies of scale achieved through increased production, Alcoa expanded its production at an annual rate of 10 percent throughout the first two decades after its formation. Declining aluminum prices accompanied expanded production. During the 1910’s, Alcoa had operations across most of the United States east of the Mississippi, including mining, reduction, fabricating, and electric power sites. It produced about 90 percent of primary aluminum alloy and mill-fabricated products used in the United States, with the other 10 percent accounted for by imports, mostly from Switzerland, France, and Great Britain.

Through its Canadian subsidiary, the Northern Aluminum Company, Northern Aluminum Company Alcoa joined European cartels between 1901 and 1912 in order to control its domestic markets. The United States contains only a small amount of the world’s bauxite reserves. By the end of the 1920’s, through the purchase of bauxite reserves in South America, waterpower plants on waterfalls in eastern Canada, and various aluminum smelting and fabricating companies, Alcoa controlled thirty-two operations in eleven countries.

Even after Hall’s patent expired, Alcoa proved successful in maintaining its monopoly position in the aluminum industry. Attempts to enter the industry of primary aluminum failed to challenge Alcoa’s dominant position. In 1912, for example, a group of French financiers representing the central sales agency of the French aluminum industry, L’Aluminum Français, organized the Southern Aluminum Company Southern Aluminum Company and began constructing aluminum reduction facilities in North Carolina. The company planned to use French imported bauxite ore, which was cheaper than the American counterpart. The outbreak of World War I in August, 1914, however, terminated the French financing and ended construction of the plant. A year later, Alcoa bought the Southern Aluminum Company. The Uihlein family, known for its Schlitz breweries, acquired some bauxite ore in Guyana but soon decided to quit aluminum production. The Guyana ore eventually was sold to Alcoa.

Passage of the Sherman Antitrust Act in 1890 Sherman Antitrust Act (1890) had begun intense public scrutiny of “trusts,” or holding companies, and monopolies in the U.S. market. Even though the prosperity of Alcoa was the result of a patent, the legality of the company’s monopoly status was no longer warranted after 1907, when Hall’s patent expired. Throughout the 1910’s and 1920’s, Alcoa was able to continue expanding its operation by acquiring aluminum reduction plants, mines, and power-generating facilities not only in the United States but also in Canada, Western Europe, and Scandinavia.

Meanwhile, major victories over big trusts in the early 1910’s encouraged the U.S. Department of Justice to prosecute other big corporations for violation of antitrust law. Alcoa was an obvious candidate for such action. In May, 1912, the Justice Department charged Alcoa with violating section 2 of the Sherman Act by monopolizing and restraining trade in the aluminum industry. The next month, the District Court of Western Pennsylvania ruled Alcoa guilty and ordered a consent decree in which Alcoa agreed to drop its participation in the international cartels through its Canadian subsidiary and to end its policy of restricting bauxite companies from supplying competing aluminum manufacturers. Alcoa denied the charges that it had controlled the price of aluminum and discriminated in price or service of primary aluminum against competing fabricators and in favor of its own subsidiary.

Largely because of abolition of the international agreement, aluminum imports to the United States increased sharply following the decree in 1912. Even though the decree signified a victory for the government and temporarily reduced public hostility against monopoly, it had little effect on Alcoa’s industry position. Alcoa remained the dominant firm in the aluminum industry.

In 1914, new major antitrust legislation was passed in the form of the Clayton Antitrust Act and the Federal Trade Commission Act. Federal Trade Commission The new laws resulted in a new government agency, the Federal Trade Commission, which was responsible for enforcing the modified antitrust law. Because the 1912 consent decree had not resulted in dissolution of Alcoa, the government continued to press charges. Between 1912 and 1940, Alcoa was subject to five major antitrust charges and three Federal Trade Commission complaints.

In 1915, the Cleveland Products Company’s aluminum rolling mill in Ohio went bankrupt, largely because of the federal government’s price control over aluminum sheet during World War I. Alcoa agreed to invest in the plant in return for a controlling stock interest. In 1922, the Federal Trade Commission challenged this transaction for violating section 7 of the Clayton Act, which prohibits both acquisitions of competing firms and interlocking directorates that may potentially lessen competition.

In February, 1923, in the Third Circuit Court of Appeals, the prosecution was sustained by a vote of two to one. Alcoa sold Cleveland Products’ stock interest to avoid further charges. Later, Cleveland Products found itself in debt again. Alcoa purchased the company’s ingot supply in a government auction, and the Federal Trade Commission filed against the transaction. In 1924, the same judges in the Third Circuit Court, headed by Pierce Butler, unanimously ruled in favor of Alcoa. The court decision demonstrated the judiciary’s tendency to be tolerant of monopolies if they were “well behaved.” The government temporarily halted its actions against Alcoa.

Significance

Alcoa’s history provides many interesting legal as well as economic lessons. The decision in the 1924 case, together with that in the U.S. Steel case in 1920, reflected the government’s attitude toward existing monopolies. It reaffirmed the courts’ principle of “rule of reason,” Rule of reason principle established in the Standard Oil antitrust suit in 1911. It also reflected pressure from the administration favoring Alcoa, in which Secretary of the Treasury Andrew Mellon was a major stockholder. The court’s interpretation that not all monopolies are offenses against the antitrust laws extended the era of the rule of reason as the basis of enforcing the antitrust laws. The rule of reason stated that large firms were legal as long as their size was not accompanied by “unreasonable” conduct.

After its victory over the government, Alcoa continued to expand. From 1925 to 1928, it acquired waterpower sites and expanded its reduction capacity in Canada. Alcoa’s victory also initiated a new merger movement in many American industries over the next two decades. The president of Alcoa, Arthur Davis, began to refocus the company’s attention on domestic operations. In 1928, he divested Alcoa of all overseas operations except for bauxite mines in South America. The assets were sold to Davis’s brother, Edward, who operated Aluminum Limited in Montreal, Canada. The Canadian company, which was renamed Alcan Aluminum Limited in 1966, grew to become the dominant aluminum company in Canada.

After its early defeat, the Department of Justice did not give up on Alcoa. Before the second major antitrust suit, which began in 1937, the government made nearly 140 individual charges against Alcoa, including conspiracy with foreign aluminum manufacturers and monopolization of bauxite reserves, waterpower sites, alumina and ingot aluminum, and aluminum castings. In addition, the Federal Trade Commission continued to file charges against Alcoa for violating the 1912 consent decree by delaying shipment of ore supply to competitors and by discriminating in prices. In 1930, all these complaints were dismissed. Alcoa also successfully defended itself against charges by the Baush Company in 1935 and the Sheet Aluminum Corporation in 1934 that it had monopolized the industry through price discrimination.

The second major antitrust suit against Alcoa lasted for eight years, ending with a U.S. Supreme Court decision in 1945 that held Alcoa had monopolized virgin ingot aluminum. That court decision reversed the interpretation in the 1924 case and stressed that the sheer existence of a monopoly can be an offense against antitrust law.

Alcoa provides a classic example of monopoly in the United States. The company was able to maintain its monopoly power in the aluminum industry beyond that warranted by the government patent through the skilled management of full (forward and backward) integration in the aluminum business as well as by maintaining continued expansion of the demand for aluminum. Amid the government hostility against monopoly in the early 1900’s, the court ruling in favor of Alcoa reversed more than two decades of rulings against big corporations, notably Standard Oil and American Tobacco. The new judicial attitude toward big corporations led to the rise of many large companies and to mergers in the next few decades. As for the aluminum industry, Alcoa maintained its monopoly status until the second major antitrust suit ended in 1945. The period following that defeat saw the rise of two competitors, Reynolds Metals and Kaiser Aluminum & Chemical Corporation. Alcoa v. Federal Trade Commission (1924) Alcoa Antitrust legislation Aluminum industry

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Armentano, Dominick T. Antitrust and Monopoly: Anatomy of a Policy Failure. 2d ed. Oakland, Calif.: Independent Institute, 1990. Covers major antitrust lawsuits since the Sherman Act. Discusses their relationship to economic theory and the development of antitrust legislation. Chapter 4 addresses the Alcoa case. Includes an appendix of relevant sections of antitrust laws. Written for an undergraduate audience.
  • citation-type="booksimple"

    xlink:type="simple">Carr, Charles C. Alcoa: An American Enterprise. New York: Rinehart, 1952. Covers the birth of the modern aluminum industry and the history of Alcoa until the end of World War II. Also discusses Alcoa’s labor relations and antitrust cases.
  • citation-type="booksimple"

    xlink:type="simple">Hovenkamp, Herbert. Federal Antitrust Policy: The Law of Competition and Its Practice. 2d ed. Eagan, Minn.: West, 1999. Covers nearly all aspects of U.S. antitrust policy in a manner understandable to people with no background in economics. Chapter 2 discusses “history and ideology in antitrust policy.”
  • citation-type="booksimple"

    xlink:type="simple">Parry, Charles W. Alcoa: A Retrospection. New York: Newcomen Society of the United States, 1985. A pamphlet containing Parry’s speech on the history of Alcoa, beginning with the life of Charles Martin Hall.
  • citation-type="booksimple"

    xlink:type="simple">Peck, Merton J. Competition in the Aluminum Industry, 1945-1958. Cambridge, Mass.: Harvard University Press, 1961. An industry study of supply and demand conditions and of pricing behavior in the industry. Includes a chapter on economic theory and public policy.
  • citation-type="booksimple"

    xlink:type="simple">Peritz, Rudolph J. R. Competition Policy in America: History, Rhetoric, Law. Rev. ed. New York: Oxford University Press, 2001. Explores the influences on U.S. public policy of the concept of free competition. Discusses congressional debates, court opinions, and the work of economic, legal, and political scholars in this area.
  • citation-type="booksimple"

    xlink:type="simple">Smith, George David. From Monopoly to Competition: The Transformation of Alcoa, 1888-1986. Cambridge, England: Cambridge University Press, 1988. Provides interesting discussion of the changing dynamic structure of the aluminum industry over the course of the twentieth century.
  • citation-type="booksimple"

    xlink:type="simple">Wallace, Donald H. Market Control in the Aluminum Industry. Cambridge, Mass.: Harvard University Press, 1937. A thorough study of the early development of the aluminum industry in the United States as well as in Europe before World War II. Includes an appendix that presents a record of the 1924 legal case.
  • citation-type="booksimple"

    xlink:type="simple">Weiss, Leonard. Economics and American Industry. New York: John Wiley & Sons, 1961. Chapter 5 provides good coverage of the evolution of the structure of the aluminum industry. Offers a useful illustration of the industry’s pricing behavior with economic models. Valuable for undergraduate economics students.
  • 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 2 of volume 2 contains succinct discussions of the antitrust cases in the aluminum industry in the first half of the twentieth century and a good end-of-chapter survey of events. Other chapters provide case studies of other major industries. Appendix contains critiques of the studies by economists and government officials.

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