United States V. E.C. Knight - Manufacture vs. Commerce – Sugar monopoly

• Fuller 1895. Federal government sued under the Sherman Antitrust Act to force a major sugar refiner (which controlled 98% of sugar refining market) to divest itself of other refiners that it had recently acquired.

• Holding: The SCt held that Congress could not, under the Commerce Clause, forbid a monopoly in “manufacture.” The refinery was a manufacturing operation, and was therefore left to state control. A monopoly on manufacturing was not subject to the Sherman Act. The fact that the refined sugar was eventually sold “in commerce” was irrelevant, since the manufacturing operation’s relation to commerce was only “incidental and indirect.” What was required was a direct logical relationship with Commerce.

• Rationale. SCt’s rationale for its holding was the protection of state’s rights to regulate “local” activities. The majority opinion contended that if the federal commerce power extended to “all contracts and combinations in manufacture, agriculture, mining and other productive industries, whose ultimate result may affect external commerce, comparatively little of business operations and affairs would be left for state control.” Thus, while a monopoly may certainly affects interstate commerce, SCt held that the line must be drawn somewhere.

• Role of Congressional intent. Intent seemed to play role in Fuller’s decision, but not clear exactly what role. (derived from McCulloch v. Maryland stipulation)

• Dissent - Harlan. Federal government should have power to regulate any subject that states could not competently regulate. This vision would not eliminate concept of enumerated powers because SC has power to decide whether powers exerted by Congress are constitutional.

Substantial economic effects and stream of commerce

• Other cases not long after Knight, without repudiating that case, followed an approach that was more hospitable to congressional power. In these cases, congressional regulation was found to fall within the commerce power so long as the activities being regulated had a “substantial economic effect” upon interstate commerce. That is, these cases did not focus on whether the logical relationship between the activity and commerce was “direct” or “indirect,” but rather, looked at whether the practical economic effects of the activity upon interstate commerce were quantitatively substantial.

The Shreveport Rate Cases – Substantial economic effects – Railroad rates

• Houston, East & West Texas Railway v. U.S. Hughes 1914. Best known example of the “substantial economic effect” approach.

• Facts. Interstate Commerce Commission, after setting rates for transport of goods between Shreveport, Louisiana and various points in Texas, sought to prevent railroads from setting rates for hauls totally within Texas which were less per mile than the Texas-to-Shreveport rates. The Commission’s theory was that Shreveport competed with certain Texas cities for shipments from other parts of Texas, and that the lower Texas intrastate rates were unfairly discriminating against the Texas-to-Shreveport interstate traffic. The railroads countered that it was beyond Congress’ power to control intrastate rates of an interstate carrier.

• Commission upheld. SCt rejected the railroads’ challenge, and upheld the ICC’s right to regulate intrastate charges, at least of interstate carriers. The opinion held that the commerce power necessarily included the right to regulate “all matters having such a close and substantial relation to interstate traffic that control is essential or appropriate to the security of that traffic.” The fact that the activity being regulated was intrastate did not place it beyond congressional control, since the ultimate object was protection of interstate commerce.

• Koppelman. It makes difference that this is a RR case.