American Scandal

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Every scandal begins with a lie. But the truth will come out. And then comes the fallout and the outrage.

Scandals have shaped America since its founding. From business and politics to sports and society, we look on aghast as corruption, deceit and ambition bring down heroes and celebrities, politicians and moguls. And when the dust finally settles, we’re left to wonder: how did this happen? Where did they trip up, and who is to blame? From the creators of American History Tellers, Business Wars and Tides of History comes American Scandal, where we take you deep into the heart of America’s dark side to look at what drives someone to break the rules and what happens when they’re caught. Hosted by Lindsay Graham.

The Breakup of Big Oil | American Monopolies | 6

The Breakup of Big Oil | American Monopolies | 6

Tue, 15 Sep 2020 09:00

The United States is home to a large number of big businesses, from entertainment conglomerates to the giants of tech. Increasingly, members of the public and politicians are raising concerns about these companies—and the power that they wield. Chris Sagers, a law professor at Cleveland State University, joins Lindsay to discuss monopolies in the U.S., both in the past and the present. The two also discuss how the current, heated debates about big business may play out.

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From Wondry, I'm Lindsey Graham and this is American Scandal. Oil magnate John D. Rockefeller died more than 80 years ago, but he still holds the crown as the richest person in modern history. He started building his fortune young. In 1859, shortly before his 20th birthday, Rockefeller set off on his first business venture. He acted as a middleman for the sale of staples like meat and grain in Cleveland, Ohio. And by the end of his first year, his firm did more than $450,000 worth of business, the equivalent of about $14 million today. Rockefeller's pension for bookkeeping and his aversion to risk would serve him well as he transitioned from everyday goods to crude oil. He became a part owner in a new refinery and in just two years, Rockefeller bought out his partners. Over the next decade, he would expand his business and bring all aspects of the oil refining process in house from the well to the barrels. Rockefeller also negotiated large rebates with the railroad companies. Those rebates helped him ship his products for less and squeeze out competition. Rockefeller named his enterprise Standard Oil and by 1879, the conglomerate was responsible for 90% of all oil refining in the United States. It dominated American markets and across the country, everyday consumers lit their lamps with standard careseeing. But for all his business acumen, not everybody would applaud Rockefeller's corporate conquest. As competitors folded, journalist sharpened their attacks on his monopoly and a new antitrust law would empower the courts to break up his empire. In the end, Rockefeller's life is an American success story as much as it is a cautionary tale of unchecked capitalism. It's a theme as relevant now as it was then. My guest today is Chris Sayers. He's a professor of law at Cleveland State University and now a senior fellow for the American Antitrust Institute. We'll talk about the business climate that allowed Rockefeller to prosper and how a century old law is finding a new meaning in the digital age. Here's our conversation. American scandal is sponsored by the new ABC drama Alaska Daily. When an Indigenous woman goes missing in Alaska, it sparks new questions about other missing and murdered Indigenous women. And that's where the thrilling new ABC drama Alaska Daily begins and where it's headed, will have you on the edge of your seat. Two time Academy Award winner Hillary Swank stars as Eileen, a veteran reporter who joins a team of local journalists working to bring the truth to light. From Academy Award winning screenwriter Tom McCarthy, Alaska Daily premieres Thursday, October 6th on ABC and streams next day on Hulu. If you're into true crime, the Generation Y podcast is essential listening. We started this podcast over 10 years ago to dissect some of the craziest and most notable murders, crimes and conspiracy theories together and we'd love for you to join us. Follow the Generation Y podcast on Amazon Music or wherever you listen to podcasts. Chris Seger's Welcome to American Scandal. Thanks so much for having me. Standard oil evokes images of crude oil, you know, the black gushers of the previous centuries. But when we talk about crude oil today, it's all most often in reference to gasoline and diesel. But at the beginning of Rockefeller's career, gasoline and diesel were not what was the hot commodity. Oil producers had a very different application in mind. So let's just start with how was oil used in the mid to late 1800s? Yeah, that's right. The automobile was not in existence yet. And so gasoline was not an important commodity. In fact, much of the byproducts that could be taken from crude oil were of little or no value and they were thrown away at the time. But one product of crude oil was extremely valuable and that was kerosene. The electric light didn't exist yet. People needed to light their houses with kerosene lamps or other oil burning lamps. And the competing fuels at the time were inferior to kerosene. So getting your hands on a lot of crude oil was pretty valuable. So we have a superior product kerosene. And then we have a a new booming market. You know, this is a period of immense population increase both across the country and especially in cities. And so we have a market opportunity. Let's take a look at some of the practices that led to the success of one company, Standard Oil. Rockefeller brought most of their operations in house through a process of what we would identify now as vertical integration. What is vertical integration? And how new of a concept was this in Rockefeller's time? The relationship between two companies is vertical when one of them sells something that the other one buys. So the producer of an input, the producer of some raw material sells that raw material to a manufacturer. And that's a vertical relationship. So Rockefeller's innovation was to bring in house different steps in the extraction and preparation of oil products into one company. So Rockefeller over the course of his long career brought all kinds of things into his company in addition to what he started with, which was refining the material. So by the end of his career, Rockefeller had a mass extraction, the mining drilling of the oil distribution of the crude oil to his refineries, the refining of it, and then distribution of it back out to consumers. So I'm sorry, you asked how new it was. And it was new, surely when Rockefeller started doing it. And it was new because in fact combining things into big companies in any way was new. Prior to the Civil War, America was an economy almost exclusively a very small companies and doing lots and lots of different functions within one company was pretty unusual. There's a corollary to vertical integration and that you can guess it's horizontal integration. Rockefeller employed that also to increase standards market share. What is horizontal integration and how did he use it? Yeah, sure. The relationship of horizontal between two firms obviously is just the relationship between two competitors. So Rockefeller did that a lot. And in fact, the fundamental basis on which he was fond of violated the antitrust laws was combining lots of competitors, lots of firms that sell the same things to the same buyers under one roof. And the beginning of Rockefeller's career was a major effort to combine refining companies, refining capacity under one roof. That's when he became controversial. It's also when he became important and influential. He combined most of the refining capacity in Northeast Ohio and Western Pennsylvania, which turned out to be most the refining capacity in the United States under one roof. You mentioned this is when he became controversial in his horizontal integration, buying up competitors. What was controversial about this? It was certainly new as you mentioned, but what was the controversy? The controversy was that he was very aggressive and he generated opposition, intense criticism, especially in the communities in which he was doing his work. He ruined a lot of businesses or that was the perception anyway. He acquired a lot of businesses through very strong arm tactics and many of these owners of those businesses relinquished them only under duress. Many of the businesses just went under rather than being acquired. That earned him deep enmity. It was controversial initially in the territory where he was doing this, which again is my neck of the woods essentially Cleveland, Ohio and Western Pennsylvania. But as his efforts and his company expanded, it became nationally controversial. Alongside the vertical and horizontal integration, is the last aspect of standard oil success and perhaps what enabled him to put pressure on his competitors. That rebates that standard oil received from railroad companies to ship his products across the country at a discount. How did this arrangement come about and add to Rockefeller's fortune? That is a matter of some historical controversy. To this day, it's the subject of dispute amongst historians and economists. Critics of standard oil and believers in antitrust enforcement would say that Rockefeller more or less extorted those rebates for himself, got himself a preferential treatment from his own distributors through pressure, through exclusionary tactics. Rockefeller himself and defenders again down to the present day defenders claim that he achieved those beneficial deals only by being the more efficient competitor. That is, the railroads wanted to carry oil because he could distribute it in such huge volume that it was beneficial to them to have it and there was nothing any competitive about it. However, that may be getting a big rebate, getting a cheap deal on your own distribution is a significant advantage to you with respect to your own competitors. If you're the crude oil distributor or the refiner who can send your product to customers at a significantly lower price, then you've got a big advantage. Generally speaking, the theory has been that Rockefeller did this primarily because he was on an acquisition binge. He wanted to undersell his competitors either to put them out of business or to force them to sell their businesses to him at lower prices. We use the word rebate when we discuss this arrangement with the railroads. Is that the correct term? Why is it a rebate and not a discount? Well, if you'd ask me, that's pretty semantic. I mean, the ultimate goal was just to be able to sell his product more cheaply to his customers and therefore undercut his competitors. So in the end, using these tactics, ruthless as they were, standard oil success and scope were unprecedented. The industry consolidation, the inter industry collaboration and collusion, the use of legal machinations to concentrate control, these were all new in the world of business. So before the antitrust laws of the late 19th and early 20th centuries, what kind of rules were in place to help courts understand what was okay and what was unfair in competition between businesses? Prior to 1890, when the United States adopted its first federal antitrust statute and essentially the first national antitrust law in the world, there had in fact been a long tradition within what we call the common law in England and America. That is, the law that had been made for many centuries by the courts themselves to address situations in which legislatures had adopted rules. Within that common law, the courts for a long time, both in the United States and in England from which we inherited our law when we became independent. The law had said there were certain things that people couldn't do because they would limit competition. So for example, it was illegal in many circumstances to make a contract that would prevent you from competing with someone. If you said, for example, I hear by cell you my business and I agree that I won't engage in that business anymore, that contract would be unenforceable. So that was known as a contract and restraint of trade. When Congress adopted its federal statute in 1890, it is pretty clear that Congress intended to essentially incorporate that existing common law into the antitrust laws. And in fact, the important first section of that law, the Sherman Act of 1890 actually uses the common law term restraint of trade. The first thing that's illegal under the Sherman Act is contracts, combinations, their conspiracies and restrained of trade. So there had been a long standing law that dealt with this conduct and there was some sense amongst all Anglo American lawyers about what that law meant and it was plainly Congress's purpose to incorporate it into the federal law. All that said, there was still, it really wasn't that clear under existing law, which things even were contracts and restraint of trade and when they could be illegal. And in fact, a lot of that uncertainty remained with federal law for a long time. And indeed, when Rockefeller was finally successfully sued by the federal government and the case made it to the Supreme Court in 1911, that case became a really crucial case for determining what the phrase contract and restraint of trade would mean in the United States and when things would be illegal. Maybe this is an aside, but a contract that restrained trade seems like something that's very common today, a noncompete clause. So that's a nice example of how hard it can be to apply this law. The language of the Sherman Act itself indeed contains something of an ambiguity and uncertainty that was the central problem that would be in front of the court in the standard oil case in 1911. The statute says that every contract, combination and conspiracy and restraint of trade is illegal. A person could interpret that very broadly and indeed, for about the first 20 years of the law's life, it seemed like some federal judges, including some Supreme Court justices, did interpret it very broadly. So the language, if you think about it, could apply to essentially any contract at all. So for example, a noncompete clause, very clearly restrained trade, but so do all other kinds of contracts. For example, if Lindsey Graham is an auto dealer and you enter into a contract to sell me a car, that effectively restrains me from buying anybody else's car. So any contract of any kind could in some sense be said to restraint trade. So there was a big problem for the courts. It seemed like Congress had adopted a law that on at least one interpretation would produce kind of a crazy result. So the 130 years of the law's life has essentially been an effort to figure out exactly what it is that makes a contract be one in restraint of trade. And there is plenty of uncertainty about that even now. What if your family was the victim of a home invasion, or you woke up in the morgue, or you were seriously injured miles from help? What would you do? This is actually happening, asks our listeners this very question, while we bring you captivating real life stories of trauma and perseverance. This is actually happening brings listeners extraordinary true stories from the people who lived them. You'll hear stories about conflict, turmoil, or threats that dramatically alter the course of someone's life. Each episode is an exploration of the human spirit and how survivors manage to overcome hardship and move on with their lives, even thriving afterward. The new season of this is actually happening is available ad free only with Wondry Plus. And if this new season isn't enough, you can listen to more than 120 exclusive episodes available only to Wondry Plus subscribers. Join Wondry Plus on Apple podcasts or on the Wondry app. Well, let's continue talking about the Sherman Antitrust Act of 1890. It passed the house unanimously and it passed the Senate by 51 to one vote. It's unimaginable today. So what was the political climate like in America around the time the bill was passed? There was a really significant transition going on in the American economy up until about the Civil War. The United States was essentially an agrarian, mostly rural economy in which there was plenty of business activity, but most businesses were very, very small. Most businesses were either family farms or they were family businesses involving one or a few partners. The large corporation essentially didn't exist until about mid century and large numbers of large businesses did not happen until the 1880s basically. That caused a lot of concern in the populace as you might guess. The common fear in the United States of consolidated power is very old. It predates the formation of the United States. Late in the 18th century, early in the 19th century, it had a different focus then what it came to be later on. Specifically, the focus early in the history of the United States was with the government itself, with the federal and the state governments. In particular, when there was a popular fear of business, when there was a fear that business itself might be the problem, the fear was primarily directed at government action in the following sense. Power in the hands of business was perceived to come not from the size of big businesses because there weren't really any or from the anti competitive conduct of businesses, nothing like that. When businesses got powers because government gave it to them. Early in the history of the country, it was relatively common for governments to try to spur business activity by subsidizing it with money or by granting legal monopolies to businesses to do this or that or the other thing. Commonly, the firms that built the original canals that were the major distribution system for American business, the companies that built the railroads, the companies that built the communications network and so on. They were given government benefits to do what they did and these things were quite controversial. Well, that begins to change sometime following the Civil War. Once businesses start to get big all on their own without the help of government at all and once they plainly had power to interfere with the interests of average folks, then people realized that there was another possible bad guy to worry about it just wasn't the government anymore. On top of all that, the only real solution to dealing with that problem of business was the government itself, which used to be the bad guy. The political climate of the late 19th century that leads up to the adoption of the Sherman Act includes a really big change in the average person's political philosophy. This unrest and uncertainty that our government was afraid of was certainly contributed to by journalism, by what the common person was reading and consuming at the time. One journalist, of course, was Ida Tarrable. Between 1902 and 1904, she wrote a 19 part series that detailed Rockefeller's corporate misdeeds in her eyes. To what extent would you say that her investigative journalism contributed to the anti trust lawsuit that Standard Oil would face just two years later in 1906? So this is an excellent question. There is no doubt in my mind that her work was indispensable to the popular unrest that existed in the early 20th century. I mean, by 1906, when the case against Standard Oil was brought, we were kind of in a second period of substantial unrest. The late 1880s saw people demanding that Congress do something in Congress. Did the problem was that for a period of some years, a decade or more, the law wasn't used very much. The government didn't bring very many lawsuits. The courts were very opposed to the law and they put a lot of roadblocks in its way. And so the public again came to be fairly unhappy. Standard Oil wasn't the first big case. The first time the federal government seemed to exceed to the popular demand for more action. The Roosevelt administration earlier had brought a very important case involving the railroads, the famous Northern Securities case of 1904. And the government won a significant victory there before the Supreme Court. But the popular attitude was nevertheless very hot. And there were vigorous demands for more action. And just as today, it's natural for the public to sort of find particular symbols of their frustration. And that surely was John Rockefeller. There's no doubt that I, to Tarbel, contributed to that public perception. Her series of magazine articles was instantly, nationally sensational. And I think she made Rockefeller an inevitable target. Standard Oil would lose that lawsuit. The Supreme Court ordered that Standard Oil be split up. What are the consequences of this loss in the Supreme Court? Rockefeller had to split up Standard Oil into separate companies, but ownership was still largely retained by him. What happened to Standard Oil? What the court did was just what you said it did. It broke up the company. And today, that would be seen as a pretty extravagant result, like a really invasive, really powerful remedy. The so called dissolution remedy today is reserved for only the most significant cases involving the biggest monopolies and the most serious violations. And indeed, we haven't seen a dissolution remedy in a long time in American law. The problem with the dissolution remedy in Standard Oil was the court didn't break up the company and sell it off to people who would in fact compete. That is, the court didn't break it up and sell off the pieces to third parties. The court just ordered Standard Oil to give back the companies that it had acquired to the shareholders who initially contributed them to Standard Oil. But that was by and large a small collection of the same people. So the same people owned all these disparate companies and indeed Rockefeller himself owned significant holdings in most of those companies. So you've got a small group of people controlling this large organization essentially both before and after the decree. The subsequent history of the industry moreover also involved quite a lot of reconsolidation of the industry. As I think most people know, and we now are in a situation in which petroleum, globally, is dominated by a relatively small number of firms. And several of the biggest ones are descendants of Standard Oil, which were recombined with one another. So for example, one of the largest firms in the world is ExxonMobil, which is made up largely of Standard Oil descendants. Conoco Phillips is another. Chevron is another of these are the some of the largest companies in the world and they were put back together from the pieces of the dissolved Standard Oil. The 1911 ruling seemed to have put an end to that one monopoly, however, in effectively. But it was no means the end of the Anti Sherman Act and its use in the courts. In ensuing years, we've seen a breakup of Telecom and most recently attention turned to tech giants. I was interested to note that one company that's almost unheard of today has faced significant antitrust action three times in 1921, 1954, 1992. And that's Kodak. Do you have any insight on Kodak and Andy Trustle? Yeah, sure. Kodak is a very interesting case. As you say, the government sued him over and over again. And Kodak never stopped being a monopoly until it was undone by technological change. There's a significant school of thought that all of those actions against Kodak weren't really that effective. And it's a poster child for those who think that antitrust itself is kind of this guided. It's only one of many companies that fall into that category. And it definitely, I mean, I'm a believer in antitrust. I'd like to see the government bring this law back to life. But that case, the case is against Kodak and the case is against any number of other big American firms. Definitely exposed some serious problems in having a competition policy at all. Another tech company these days has gone well beyond tech. It's Amazon. It's more a platform now and a merchant of everything. It's also been the subject of many antitrust probes here and in the European Union. The EU alleges that Amazon has stifled competition by using data collected from third party merchants who sell on its platform to boost its own product offerings. What is the case against Amazon and where is it going? Yeah, excellent question. And Amazon is a very interesting company because it illustrates, I think, one of the enduring inner tensions of competition policy. And one of the things that makes it very difficult to have an effective competition policy, the tension is that on one hand, it seems like the company has done a lot of good for society. It seems that way at least to many people. And it seems more over that it has gotten big or has succeeded only by doing the things that companies are supposed to do, which is provide a better product or sell it more cheaply. You know, Amazon at least to some degree has certainly done that. It's given products and services to people at low prices and with good service and it has succeeded accordingly. The problem is Amazon is also a very aggressive company. I don't think there's meaningful doubt at this point that it's engaged in quite a lot of very sharp elbowed conduct. And I humbly think that the case seems plenty strong that Amazon may have violated the antitrust laws in getting as big as it did. US, what's the case going to be? In the United States, the antitrust case will be of an optimization case, I think. I mean, if Amazon did anything illegal, it has done what we describe as engaged in anti competitive unilateral action or monopolization, meaning that it hasn't engaged in agreements with its competitors. It's only acted unilaterally, but it's done it with monopoly power and it has done it through anti competitive means. So it has worked to exclude competitors. So if there's a case against Amazon, I think the government is going to say there was unilateral action here that allowed Amazon to use its market position to exclude competitors. That means the government is going to have to prove a couple of things. The government will have to show that Amazon, first of all, has some very large market share in some relevant market. Once you get a big market share in a relevant market, if it's big enough to demonstrate what we describe as monopoly power, then there are a number of things that you can't do. You can't engage in unilateral actions in a number of specific ways that other firms are permitted to do, firms without monopoly power. So the government's first going to have to show a monopoly position in some relevant market. And then it's going to have to show that Amazon engaged in some of these prohibited actions when taken by a monopolist. One of them is a nice little example that you described. And there's a lot of evidence of it. Amazon appears to be doing various things to compete unfairly with its own sellers, its own suppliers on its platform. As you say, one persistent allegation is that Amazon watches the sellers, the third party sellers on its marketplace. And it waits to see which products become successful. And then Amazon rushes out a store ban product to compete with it and uses whatever data it's collected to its advantage. I humbly personally think that Amazon does those things, not so much because it wants to kill off those competitors, but because it wants to get some leverage over them to force them to sort of pony up and pay various fees and marketing by marketing services and so on that Amazon provides. I mean, it's a pretty good business model. If you own the store and you can force everybody who wants to sell through your store to pay you essentially a bribe to stock their product on your shelves, it's kind of a protection racket. And I think there's probably a pretty good case that Amazon's been involved in that. And a good case that it ought to be illegal into the antitrust laws. Well, I just wanted to to continue this discussion of the tension in antitrust law, maybe outside the scope of Amazon. I'll play devil's advocate for a moment. Certainly Rockefeller and Bezos for that matter was notorious, not just for ruthless tactics, but but a devotion to efficiency. His empire was built on scale, but that scale was accomplished, namely by undercutting competitors, forcing them to compete on price and taking losses. So why aren't low prices good for consumers? Isn't an eradication of inefficiency good for the market ultimately? And aren't these tactics the same that would be themselves celebrated later by the Vanguard corporate strategists with concepts like the experience curve and growth share matrix, things that pushed most companies to better profits and higher efficiencies? Yeah, absolutely. That is emphatically the fundamental tension. My basic answer is we ought to try to deal with the problems that it causes by finding the right medicine or by addressing the right illness. A lot of agitation these days is based on the idea that competition itself is the culprit. Unbridled capitalism is the culprit. When you use the business guru speak, like growth distribution matrix or whatever it is that you mentioned, it makes people stomach turn and mine too. It makes it seem like wow, competition really is gross. It's just a way for the rich to get richer. Therefore, the prescriptions that a lot of people come up with. For example, the left wing of the American Democratic Party right now, I think would like to do various things to address real problems by limiting competition itself, by protecting some firms from the furthest reaches of competitive vigor. My sense is I certainly understand that, but it probably isn't the right medicine and it's not the right disease. I think that we ought to let competition do what it does and kind of get out of the way. And that means figuring out how to produce industry be products and do innovation where it's needed. But then fix the problems that it causes, the bad side effects, with policies that would actually work instead of just make things worse or have no effect at all. And that means having progressive fiscal policy and social welfare programs. Chris Sagers, thank you for speaking with me today. Thanks so much for having me. That was my conversation with Chris Sagers, a professor of law at Cleveland State University and a senior fellow for the American Antitrust Institute. Next on American scandal, before there was Fukushima and before Chernobyl, the world had its eyes on another nuclear accident. It took place in Pennsylvania at a nuclear power plant called Three Mile Island. What began as a series of small technological errors soon turned into a crisis. Technicians and government regulators struggled to avoid a massive spread of radiation and nearby residents had to make a gut wrenching decision. Should they flee the area or risk their lives in state. From Wondry, this is episode six of the Breakup of Big Oil for American scandal. American scandal is hosted, edited and executive produced by me Lindsey Graham for airship, audio editing by Molly Bach. This episode was produced by Austin Cross and Gabe Riven. Executive producers are Stephanie Jens, Jenny Lauer Beckman and her nonlop has for Wondry.