Supreme Court Orders American Tobacco Breakup, Applying Rule of Reason to Tobacco Trust

The U.S. Supreme Court, in a 9-0 unanimous decision applying the new “rule of reason” doctrine, ruled that the American Tobacco Company violated the Sherman Antitrust Act and ordered the tobacco trust dissolved. Founded in 1890 by James Duke, American Tobacco controlled nearly 90% of domestic cigarette sales through aggressive acquisition of competitors and predatory pricing. The government filed suit in 1907 against 65 companies and 29 individuals for price fixing. The Supreme Court sustained the lower court’s 1908 guilty verdict and ordered dissolution in November 1911, splitting American Tobacco into 16 successor companies including a new American Tobacco Company, Liggett & Myers, P. Lorillard, and R.J. Reynolds. However, the breakup proved limited in effectiveness: the successor companies continued to wield significant market power, and by 1946 they were again convicted of Sherman Act violations for price fixing and monopolization. R.J. Reynolds, which received no cigarette business in the breakup, launched Camel cigarettes in 1913 and by 1919 controlled 40% of domestic sales—demonstrating how “competition” among the fragments reconsolidated market power. This case, decided the same day as Standard Oil, established the “rule of reason” as antitrust law’s governing standard, fundamentally weakening enforcement by requiring proof of “unreasonable” rather than any restraint of trade.