7. Mousetrap Maker's Hazard?

7. MousetrapMaker'sHazard The year 1888 saw two things happen of importance in American history. Few people probably noted them at the time. In those days of gaslights, handlebar mus taches, sideburns, hoopskirts, and antimacassars,the chief national news was what President Cleveland and Con gress would do about the tariff and silver. But in that year, the Standard Oil Trust was formed, to control petroleum refining in the United States. And a half-dozen men, after raising $20,000, started commer cial production of aluminum in a corrugated-iron shed with a dirt floor in Pittsburgh. Aluminum was then selling at $8.00 a pound. The midget Alcoa (Aluminum Company of America) produced its first specimens in the fall. Output averaged less than ten pounds a day at the start. The hard-working founders locked up the product each night for safety in the office safe. The men that put together the legal device of the Standard Oil Trust and the men that refined the first aluminum started forces that have grown and enlarged down the decades, until they finally met head-on a few years ago.

The gist of the Oil Trust plan seemed a good one at the time. It was much like the modem cartel, or the modem ideas of the FTC lawyers, to soften the effects of hard competition. But it helped to raise the political storm which produced the Sherman· Antitrust Act of so MOUSETRAP MAKER'S HAZARD 51 1890. The gist of the Alcoa idea was almost the op posite. It was innovation. The idea was to develop something new and, as-it developed, to keep it always new, cheap, desirable, and ahead of competitive products. Both of these ideas were typically American; and still are. The one was conservative of values and the. other, in the final analysis, destructive of commercial values. By the late 1930'sthe founders of the Aluminum Com pany of America had cut the price of aluminum to 20 cents a pound and, raised its production to over 300,000, 000 pounds a year. They had developed markets for it successively in novelties, in the "quieting" of molten steel, in bicycles, saucepans, high-voltage wires, and airplanes. In so doing they pushed and intruded them selves into the markets of the men who sold special steels, copper and other nonferrous metals, and had, also, in the everyday language of business,"created new markets," by repeatedly lowering price and developing new uses.

They worked at is so hard that for fifty years their Alcoa was the only maker of aluminum in the United States. Other people, including the automobile com panies, who have both engineering know-how and long pocket-books, considered going into the business and decided they could get their aluminum cheaper or at less risk from Alcoa. In 1938, two years before the na tional defense program started, Alcoa embarked on a .l$200,000,000war-expansion program. In 1937 the Antitrust Division of the Department of Justice sued the Aluminum Company of America for violation of Section 2 of the Sherman Antitrust Act, or in other words, for being a monopoly, in the aluminum business. Alcoa had already run afoul of the Sherman Act in 1912, and signed a "consent decree" to stop 52 MOUSETRAP MAKER'S HAZA1UJ certain practices. And thereafter it had retained a bat tery of lawyers to keep it on the straight-and-narrow path of the antitrust law. They read all the Supreme Court opinions, and advised the company accordingly.

Up to the late 1930's, or until the reconstitution of the present "new" Supreme Court, the top court of the land, in interpreting the Sherman Antitrust Act, had stuck to "abuses" and "predatory tactics." As Chief Justice Stone said,.the Sherman Act "was enacted in the era of 'trusts' and of 'combinations' of businessesand of capital organized and directed to control of the market by sup pression of competition in the marketing of goods and services,the monopolistic tendency of which had become a matter of public concern. "The end sought," he went on, "was the prevention of free competition in business . . . which tended to restrict production, raise prices or otherwise control the market to the detriment of purchasers or consumers of goods and services, allof which had come to be regarded as a special form of public injury." 1 The Alcoa lawyers presumably relied on the federal courts' continuing to take the same view of the Sherman Act. They were due for a jolt.

The trial started on June 1, 1938,and ended August 14, 1940. It is said to have been the longest trial, up till then, in the history of the world. Testimony and argu ment took 364 court days. (This was near the eve of Pearl Harbor, Alcoa had its hands full with defense busi ness, Alcoa top executives had to cool their heels in court, and it was fortunate at least that the company had started its expansion program two years earlier.) The court record reached more than 40,000 pages, plus nearly 10,000 pages of exhibits. The transcript weighed 325 pounds, and the final record was printed in 480 volumes, MOUSETRAP MAKER'S HAZARD 53 containing an estimated 15,000,000 words, or more than 30 times as many as Gone with the Wind. An amusing account of the trial and circumstances was given in the New Yorker.2 It said: From the narrow-minded legal point of view, the trial was a set-back for [Thurman] Arnold [head of the Antitrust Division] . There were about a hundred and forty points involved, and he lost by the score of 140-0. All the charges of German domination, international conspiracies, unfair treatInent of competitors, and excessive prices were swept aside.

In a practical sense, however, Arnold was victorious. He forced Alcoa to spend more than $2,000,000 to defend itself. Few corporations can afford to spend $2,000,000 or any substantial fraction of· that sum to defend an antitrust suit, whether groundless or not. The $2,000,000 has been only a part of the penalty which Alcoa paid for resisting Arnold. The officials of Alcoa should have been spending all their time during the last three years increasing the output of aluminum, but they have been compelled to devote half their· time to disproving Arnold's charges. Alcoa has suffered other indirect penalties. Using the disproved charges as if they were proved charges, Arnold led a furious newspaper campaign against the Aluminum Company. Other government officials backed up Arnold. Jesse Jones loaned about $100,000,000 to Alcoa's com petitors. Harold Ickes held up an application of Alcoa for water power fo.t:' making aluminum. Senators and colum nists joined the hue and cry. The public has been taught that aluminum is the lowest and most degraded substance in the table of elements.

Antitrust appealed its defeat in the trial court. "Since the Supreme Court was unable to obtain a quorum to sit on the appeal, (320 U. S. 708) the case was certified to the Circuit Court of Appeals (C.C.A. 2) on June 12, 1944, (322 U. S. 716) which reversed the de cision of the lower court and held that the Aluminum 54 MOUSETRAP MAKER'S HAZARD Company was an illegal monopoly at the time of trial ..." 3 Alcoa lost in the Circuit Court on a single count of the one hundred forty, that it had "monopolised" the market for virgin aluminum ingots. A recent statement by a group of top antitrust law yers stated, For a long time, it was supposed that unless size were obtained or retained by an inherently illegal means or by an actual abuse of overpowering strength in the competitive field, growth in size was not a violation of the [antitrust] law. It was supposed that a concern might engage in actively enlarging its market and the scope of its business, and go ahead by its efficiency, foresight, technical improvement, accumulation of its resources, and ability to attract additional resources, as far as these efforts could take it-and we had language from the Supreme Court that would seem to justify that concept.

Now the Aluminum case looks the other way-even though a concern has exercised only that type of business energy and sound judgment which, act by act, is beyond reproach, in seizing upon opportunities for the development of the size and scope of its business. . . . 4 The Circuit Court of Appeals-Judge Learned Hand writing the decision--stunned the entire legal fraternity, from Pennsylvania Avenue to Forty-Second Street, with its decision.5 Since this important opinion is in legalese, the reader who is not also a lawyer should read it slowly. For these words sent a thrill through the hearts of government .lawyers, and a chill through the hearts of businesslawyers. (And the nontechnical or nonlegal reader should know beforehand that the phrase "to exclude competitors"-or any tense or gerundive of it-means, by previous Sher man Act interpretations, to violate the law).

MOUSETRAP MAKER'S HAZARD 55 Said the Court: "[Alcoa] insists that it never excluded competitors; but we can think of no more effective ex clusion than progressively to embrace each new oppor tunity as tt opened, and to face every newcomer with new capacity already geared into a great organization, having the advantage of experience, trade connections, and the elite of personnel." And the Judge went on to say, "Only in case we in terpret 'exclusion' as limited to manoeuvres not honestly industrial, but actuated solely by a desire to prevent competition, can such a course, indefatigably pursued, be deemed not 'exclusionary.' "6 In effect the Court said that Alcoa excluded com petitors by being so efficient. This was a new view of the meaning of the Sherman Antitrust Act. Up to this opinion (which is now the law) if you excluded com petitors, in the eyes of the law, you did so by roughing them up, buying them out, intimidating them, or in some such way as by "manoeuvres not honestly industrial"

for getting them out of your way. Alcoa beat its com petitors and potential competitors by keeping ahead of them. This was a new kind of crime. (This was per haps also the legal basis on which the Department of Justice now says that "efficiency is no defense.") The Court's opinion, incidentally, went at some length into the competition between virgin aluminum and scrap or used aluminum. They compete and, chemically, are the same. The Court found Alcoa's monopoly in virgin aluminum, and talked the rest of the company's com petition away. In this connection, Alcoa's president recently stated that "aluminum competes with cop per, zinc, steel, wood, plastics, and dozens of other ma terials." 7 On the general subject, the New York lournalof Com56 MOUSETRAP MAKER'S HAZARD merce said, editorially, (June 1,1950) that "The Sherman Act was not designed to punish dynamic progress, and to reduce competitors to a common level of medi ocrity ...

"To all appearances a new paraphrase is being sub stituted for Emerson's old maxim: Build a better mouse trap, sell enough of them, and Justice Department at torneys will beat a path to your door." The Justice Department attorneys have already begun beating a path to the door of other corporate better mouse-trap makers. In 1925 the General Electric Company bought from the German Krupp company a flimsy patent on an inferior synthetic cutting material (tungsten carbide). Krupp had had the American patent. The product was cemented on the tip of machine-tool cutting arms to cut steel. It was the next hardest thing to a diamond. But it was difficult to make, difficult to cement on to the tool, and difficult to sell. General Electric set up a wholly-owned subsidiary company, called Carboloy, Inc., to improve and sell it. Carboloy ran into a string of production problems and then into the depression; for eleven years it failed to make money. :General Electric kept putting in more money, but the price "vas cut again .and again. By the late 'thirties the thing was a technical and commercial success. It proved invaluable in World War II and production was multiplied by 44 between 1938 and 1942 to meet the demand. The Department of Justice, however, sued 'GE, Carboloy, Inc., and Carboloy's of ficers under the Sherman Act and won a conviction.

The government lawyers asked for jail sentences, but the court would not go that far and let the defendants off with fine~ of $5,000 apiece.

MOUSETRAP MAl{ER'S HAZARD 57 Du Pont ran into similar trouble with cellophane. After spending millions on research and development of this wholly new thing, they put it on the market in 1926 at $2.65 a pound. Its success was such that the com pany subsequently cut the price 20 times in the next 20 years, down to 45 cents a pound. Demand grew to nearly $100,000,000 a year at the lower price and after the war Du Pont prepared to increase capacity still fur ther to supply the growing market. But the Department of Justice moved in and sued Du Pont under the Sherman Act for monopolizing cello phane. The Dn Pont directors thereupon cancelled their expansion plans, feeling it would be poor practice, as well as unfair to their stockholders, to expand further an operation already charged with being illegal. In consequence, cellophane remained scarce. Since Du. Pont continued to sell .it at a price based on costs rather than on what a hungry market would pay for it, cellophane"went into a "gray market" at prices higher than Du Pont was charging.Du Pont had tried what might be called a resale price maintenance policy in reverse. In contrast to the resale price maintenance policy, which the FTC lawyers imposed on the Standard Oil Company of Indiana in the Detroit gasoline case, du Pont tried to keep the resale price of cellophane down, not up.

In 1950, the company ran full-page advertisements in the trade magazines of the principal industries using cellophane. One of these made the following astonish ing statements: The Du Pont Company regrets that it is unable at this time to meet the growing requirements of its customers for Cellophane . . . Several years ago, Du Pont foresaw a sub stantial increase in the use of Cellophane and planned to build 58 MOUSETRAP MAKER'S HAZARD additional plant capacity, to become available about the middle of 1949 . . . Preliminary plans, estimates and investigation of plant sites were well under way when the Department of Justice brought suit in December 1947, charging that our position in the Cellophane business constitutes a monopoly. . . . Pending the outcome of this litigation, it was con sidered unwise to proceed with the proposed construction. Du Pont, therefore, actively sought to interest others in the manufacture of Cellophane, in order that additional film would be available to the trade as soon as possible. It required more than a year and a half to find a company willing and able to invest the large amount of capital approximately $20,OOO,OOO-necessaryto enter the field on an economically efficient basis.

Now, construction is under way on a new Cellophane plant, designed and being built by Du Pont for Olin Indus tr~es, Inc., at Pisgah Forest, North Carolina, to have an initial capacity of about 33 million pounds annually. All Du Pont Cellophane patents and know-how are being made available to them. It is hoped that this plant will be in production by the middle of next year . . .