Sherman Antitrust Act - Sherman Act

The Sherman Antitrust Act (Sherman Act, 26 Stat. 209, 15 U.S.C. §§ 1â€"7) is a landmark federal statute in the history of United States antitrust law (or "competition law") passed by Congress in 1890. Passed under the presidency of Benjamin Harrison, it prohibits certain business activities that federal government regulators deem to be anti-competitive, and requires the federal government to investigate and pursue trusts.

In the general sense, a trust is a centuries-old form of a contract whereby one party entrusts its property to a second party. These are commonly used to hold inheritances for the benefit of children, for example. The specific sense from 19th Century America used in the law refers to a type of trust which combines several large businesses for monopolistic purposes - to exert complete control over a market - though the law addresses monopolistic practices even if they have nothing to do with this specific legal arrangement. In most countries outside the United States, antitrust law is known as "competition law."

The law attempts to prevent the artificial raising of prices by restriction of trade or supply. "Innocent monopoly", or monopoly achieved solely by merit, is perfectly legal, but acts by a monopolist to artificially preserve that status, or nefarious dealings to create a monopoly, are not. The purpose of the Sherman Act is not to protect competitors from harm from legitimately successful businesses, nor to prevent businesses from gaining honest profits from consumers, but rather to preserve a competitive marketplace to protect consumers from abuses.

Over time, the Act has also been used more broadly, to oppose the combination of entities that could potentially harm competition, such as monopolies or cartels.

Provisions

Original text

The Sherman Act is divided into three sections. Section 1 delineates and prohibits specific means of anticompetitive conduct, while Section 2 deals with end results that are anti-competitive in nature. Thus, these sections supplement each other in an effort to prevent businesses from violating the spirit of the Act, while technically remaining within the letter of the law. Section 3 simply extends the provisions of Section 1 to U.S. territories and the District of Columbia.

Section 1:

"Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal."

Section 2:

"Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony [. . . ]"

Subsequent legislation expanding its scope

The Clayton Antitrust Act, passed in 1914, proscribes certain additional activities that had been discovered to fall outside the scope of the Sherman Antitrust Act. For example, the Clayton Act added certain practices to the list of impermissible activities:

• price discrimination between different purchasers, if such discrimination tends to create a monopoly
• exclusive dealing agreements
• tying arrangements
• mergers and acquisitions that substantially reduce market competition.

The Robinsonâ€"Patman Act of 1936 amended the Clayton Act. The amendment proscribed certain anti-competitive practices in which manufacturers engaged in price discrimination against equally-situated distributors.

Legacy

The federal government began filing cases under the Sherman Antitrust Act in 1890. Some cases were successful and others were not; many took several years to decide, including appeals.

Notable cases filed under the act include:

• United States v. Workingmen's Amalgamated Council of New Orleans (1893), which was the first to hold that the law applied to labor unions (reversed by the Clayton Antitrust Act).
• Chesapeake & Ohio Fuel Co. v. United States (1902), in which the trust was dissolved
• Northern Securities Co. v. United States (1904), which reached the Supreme Court, dissolved the company and set many precedents for interpretation.
• Hale v. Henkel (1906) also reached the Supreme Court. Precedent was set for the production of documents by an officer of a company, and the self-incrimination of the officer in his or her testimony to the grand jury. Hale was an officer of the American Tobacco Co.
• Standard Oil Co. of New Jersey v. United States (1911), which broke up the company based on geography, and contributed to the Panic of 1910â€"11.
• United States v. American Tobacco Co. (1911), which split the company into four.
• Federal Baseball Club v. National League (1922) in which the Supreme Court ruled that Major League Baseball was not interstate commerce and was not subject to the anti-trust law.
• United States v. National City Lines (1953), related to the General Motors streetcar conspiracy.
• United States v. AT&T Co., which was settled in 1982 and resulted in the breakup of the company.
• United States v. Microsoft Corp. was settled in 2001 without the breakup of the company.

Legislative intent

As explained by the U.S. Supreme Court in Spectrum Sports, Inc. v. McQuillan 506 U.S. 447 (1993):

The purpose of the [Sherman] Act is not to protect businesses from the working of the market; it is to protect the public from the failure of the market. The law directs itself not against conduct which is competitive, even severely so, but against conduct which unfairly tends to destroy competition itself.

According to its authors, it was not intended to impact market gains obtained by honest means, by benefiting the consumers more than the competitors. Senator George Hoar of Massachusetts, another author of the Sherman Act, said the following:

"... [a person] who merely by superior skill and intelligence...got the whole business because nobody could do it as well as he could was not a monopolist..(but was if) it involved something like the use of means which made it impossible for other persons to engage in fair competition."

At Apex Hosiery Co. v. Leader 310 U. S. 469, 310 U. S. 492-93 and n. 15:

The legislative history of the Sherman Act, as well as the decisions of this Court interpreting it, show that it was not aimed at policing interstate transportation or movement of goods and property. The legislative history and the voluminous literature which was generated in the course of the enactment and during fifty years of litigation of the Sherman Act give no hint that such was its purpose. They do not suggest that, in general, state laws or law enforcement machinery were inadequate to prevent local obstructions or interferences with interstate transportation, or presented any problem requiring the interposition of federal authority. In 1890, when the Sherman Act was adopted, there were only a few federal statutes imposing penalties for obstructing or misusing interstate transportation. With an expanding commerce, many others have since been enacted safeguarding transportation in interstate commerce as the need was seen, including statutes declaring conspiracies to interfer e or actual interference with interstate commerce by violence or threats of violence to be felonies. The law was enacted in the era of "trusts" and of "combinations" of businesses and of capital organized and directed to control of the market by suppression of competition in the marketing of goods and services, the monopolistic tendency of which had become a matter of public concern. The goal was to prevent restraints of free competition in business and commercial transactions which tended to restrict production, raise prices, or otherwise control the market to the detriment of purchasers or consumers of goods and services, all of which had come to be regarded as a special form of public injury. For that reason the phrase "restraint of trade," which, as will presently appear, had a well understood meaning in common law, was made the means of defining the activities prohibited. The addition of the words "or commerce among the several States" was not an additional kind of restraint to be prohibited by the Sherman Act, but was the means used to relate the prohibited restraint of trade to interstate commerce for constitutional purposes, Atlantic Cleaners & Dyers v. United States, 286 U. S. 427, 286 U. S. 434, so that Congress, through its commerce power, might suppress and penalize restraints on the competitive system which involved or affected interstate commerce. Because many forms of restraint upon commercial competition extended across state lines so as to make regulation by state action difficult or impossible, Congress enacted the Sherman Act, 21 Cong.Rec. 2456. It was in this sense of preventing restraints on commercial competition that Congress exercised "all the power it possessed." Atlantic Cleaners & Dyers v. United States, supra, 286 U. S. 435.

At Addyston Pipe and Steel Company v. United States, 85 F.2d 1, affirmed, 175 U. S. 175 U.S. 211;

At Standard Oil Co. of New Jersey v. United States, 221 U. S. 1, 221 U. S. 54-58.

Legal application

Constitutional basis for legislation

Congress claimed power to pass the Sherman Act through its constitutional authority to regulate interstate commerce. Therefore, federal courts only have jurisdiction to apply the Act to conduct that restrains or substantially affects either interstate commerce or trade within the District of Columbia. This requires that the plaintiff must show that the conduct occurred during the flow of interstate commerce or had an appreciable effect on some activity that occurs during interstate commerce.

Elements

A Section 1 violation has three elements:

1. An agreement
2. which unreasonably restrains competition
3. and which affects interstate commerce.

A Section 2 violation has two elements:

(1) the possession of monopoly power in the relevant market and

(2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.

Violations "per se" and violations of the "rule of reason"

Violations of the Sherman Act fall (loosely) into two categories:

• Violations "per se": these are violations that meet the strict characterization of Section 1 ("agreements, conspiracies or trusts in restraint of trade"). A per se violation requires no further inquiry into the practice's actual effect on the market or the intentions of those individuals who engaged in the practice. Conduct characterized as per se unlawful is that which has been found to have a "'pernicious effect on competition' or 'lack[s] . . . any redeeming virtue'" Such conduct "would always or almost always tend to restrict competition and decrease output." When a per se rule is applied, a civil violation of the antitrust laws is found merely by proving that the conduct occurred and that it fell within a per se category. (This must be contrasted with rule of reason analysis.) Conduct considered per se unlawful includes horizontal price-fixing, horizontal market division, and concerted refusals to deal.
• Violations of the "rule of reason": A totality of the circumstances test, asking whether the challenged practice promotes or suppresses market competition. Unlike with per se violations, intent and motive are relevant when predicting future consequences. The rule of reason is said to be the "traditional framework of analysis" to determine whether Section 1 is violated. The court analyzes "facts peculiar to the business, the history of the restraining, and the reasons why it was imposed," to determine the effect on competition in the relevant product market. A restraint violates Section 1 if it unreasonably restrains trade.

Quick-look: A "quick look" analysis under the rule of reason may be used when "an observer with even a rudimentary understanding of economics could conclude that the arrangements in question would have an anticompetitive effect on customers and markets," yet the violation is also not one considered illegal per se. Taking a "quick look," economic harm is presumed from the questionable nature of the conduct, and the burden is shifted to the defendant to prove harmlessness or justification. The quick-look became a popular way of disposing of cases where the conduct was in a grey area between illegality "per se" and demonstrable harmfulness under the "rule of reason".

Modern trends

Inference of conspiracy

A modern trend has increased difficulty for antitrust plaintiffs as courts have come to hold plaintiffs to increasing burdens of pleading. Under older Section 1 precedent, it was not settled how much evidence was required to show a conspiracy. For example, a conspiracy could be inferred based on parallel conduct, etc. That is, plaintiffs were only required to show that a conspiracy was conceivable. Since the 1970s, however, courts have held plaintiffs to higher standards, giving antitrust defendants an opportunity to resolve cases in their favor before significant discovery under FRCP 12(b)(6). That is, to overcome a motion to dismiss, plaintiffs, under Bell Atlantic Corp. v. Twombly, must plead facts consistent with FRCP 8(a) sufficient to show that a conspiracy is plausible (and not merely conceivable or possible). This protects defendants from bearing the costs of antitrust "fishing expeditions," however it deprives plaintiffs of perhaps their only tool to acquire eviden ce (discovery).

Manipulation of market

Second, courts have employed more sophisticated and principled definitions of markets. Market definition is necessary, in rule of reason cases, for the plaintiff to prove a conspiracy is harmful. It is also necessary for the plaintiff to establish the market relationship between conspirators to prove their conduct is within the per se rule.

In early cases, it was easier for plaintiffs to show market relationship, or dominance, by tailoring market definition, even if it ignored fundamental principles of economics. In U.S. v. Grinnell, 384 U.S. 563 (1966), the trial judge, Charles Wyzanski, composed the market only of alarm companies with services in every state, tailoring out any local competitors; the defendant stood alone in this market, but had the court added up the entire national market, it would have had a much smaller share of the national market for alarm services that the court purportedly used. The appellate courts affirmed this finding; however, today, an appellate court would likely find this definition to be flawed. Modern courts use a more sophisticated market definition that does not permit as manipulative a definition.

Monopoly

Section 2 of the Act forbade monopoly. In Section 2 cases, the court has, again on its own initiative, drawn a distinction between coercive and innocent monopoly. The act is not meant to punish businesses that come to dominate their market passively or on their own merit, only those that intentionally dominate the market through misconduct, which generally consists of conspiratorial conduct of the kind forbidden by Section 1 of the Sherman Act, or Section 3 of the Clayton Act.

Application of the act outside of pure commerce

The Act was aimed at regulating businesses. However, its application was not limited to the commercial side of business. Its prohibition of the cartel was also interpreted to make illegal many labor union activities. This is because unions were characterized as cartels as well (cartels of laborers). This persisted until 1914, when the Clayton Act created exceptions for certain union activities.

Preemption by Section 1 of state statutes that restrain competition

To determine whether a particular state statute that restrains competition was intended to be preempted by the Act, courts will engage in a two-step analysis, as set forth by the Supreme Court in Rice v. Norman Williams Co.:

• First, they will inquire whether the state legislation "mandates or authorizes conduct that necessarily constitutes a violation of the antitrust laws in all cases, or ... places irresistible pressure on a private party to violate the antitrust laws in order to comply with the statute." Rice v. Norman Williams Co., 458 U.S. 654, 661; see also 324 Liquor Corp. v. Duffy, 479 U.S. 335 (1987) ("Our decisions reflect the principle that the federal antitrust laws pre-empt state laws authorizing or compelling private parties to engage in anticompetitive behavior.")
• Second, they will consider whether the state statute is saved from preemption by the state action immunity doctrine (aka Parker immunity). In California Retail Liquor Dealers Association v. Midcal Aluminum, Inc., 445 U.S. 97, 105 (1980), the Supreme Court established a two-part test for applying the doctrine: "First, the challenged restraint must be one clearly articulated and affirmatively expressed as state policy; second, the policy must be actively supervised by the State itself." Id. (citation and quotation marks omitted).

Criticism

The Sherman Act has seen much controversy. One branch of the criticism focuses on whether the Act improves competition and benefits consumers, or merely aids inefficient businesses at the expense of more innovative ones. Alan Greenspan, in his essay entitled Antitrust condemns the Sherman Act as stifling innovation and harming society. "No one will ever know what new products, processes, machines, and cost-saving mergers failed to come into existence, killed by the Sherman Act before they were born. No one can ever compute the price that all of us have paid for that Act which, by inducing less effective use of capital, has kept our standard of living lower than would otherwise have been possible." Greenspan summarized the nature of antitrust law as: "a jumble of economic irrationality and ignorance."

Greenspan at that time was a disciple and friend of Ayn Rand, and he first published Antitrust in Rand's monthly publication The Objectivist Newsletter. Rand, who described herself as "a radical for capitalism," opposed antitrust law not only on economic grounds but also morally, as a violation of property rights, asserting that the "meaning and purpose" of antitrust law is "the penalizing of ability for being ability, the penalizing of success for being success, and the sacrifice of productive genius to the demands of envious mediocrity."

Other normative criticism of antitrust policy has been framed in utilitarian terms. Critics, having assumed that some kind of competition law is inevitable, argue as to what its central policy should be, and raise doubts as to whether it is accomplishing its goal. A common tactic is to choose a goal, and then cite evidence that it supports the opposite. For example, during a debate over the act in 1890, Representative William Mason said "trusts have made products cheaper, have reduced prices; but if the price of oil, for instance, were reduced to one cent a barrel, it would not right the wrong done to people of this country by the trusts which have destroyed legitimate competition and driven honest men from legitimate business enterprise." Consequently, if the primary goal of the act is to protect consumers, and consumers are protected by lower prices, the act may be harmful if it reduces economy of scale, a price-lowering mechanism, by breaking up big businesses. Mason put small business survival, a justice interest, on a level concomitant with the pure economic rationale of consumer interest.

The converse argument is that if lowering prices alone is not the goal, and instead protecting competitions and markets as well as consumers is the goal, the law again arguably has the opposite effect â€" it could be protectionist. Economist Thomas DiLorenzo notes that Senator Sherman sponsored the 1890 William McKinley tariff just three months after the Sherman Act, and agrees with The New York Times which wrote on October 1, 1890: "That so-called Anti-Trust law was passed to deceive the people and to clear the way for the enactment of this Pro-Trust law relating to the tariff." The Times goes on to assert that Sherman merely supported this "humbug" of a law "in order that party organs might say...'Behold! We have attacked the trusts. The Republican Party is the enemy of all such rings.'

Dilorenzo writes: "Protectionists did not want prices paid by consumers to fall. But they also understood that to gain political support for high tariffs they would have to assure the public that industries would not combine to increase prices to politically prohibitive levels. Support for both an antitrust law and tariff hikes would maintain high prices while avoiding the more obvious bilking of consumers."

The criticism of antitrust law is often associated with conservative politics. For example, conservative legal scholar, judge, and failed Supreme Court nominee Robert Bork was well known for his outspoken criticism of the antitrust regime. Another conservative legal scholar and judge, Richard Posner of the Seventh Circuit does not condemn the entire regime, but expresses concern with the potential that it could be applied to create inefficiency, rather than to avoid inefficiency. Posner further believes, along with a number of others, including Bork, that genuinely inefficient cartels and coercive monopolies, the target of the act, would be self-corrected by market forces, making the strict penalties of antitrust legislation unnecessary.