.svg)
Sen. John Sherman (R–OH), the principal author of the Sherman Antitrust Act
The Sherman Antitrust Act of 1890 (26 Stat. 209, 15 U.S.C. §§ 1–7) was a United States antitrust law that was passed by Congress under the presidency of Benjamin Harrison, which regulates competition among enterprises.
The Sherman Act broadly prohibits (1) anticompetitive agreements
and (2) unilateral conduct that monopolizes or attempts to monopolize
the relevant market. The Act authorizes the Department of Justice to bring suits to enjoin
(i.e. prohibit) conduct violating the Act, and additionally authorizes
private parties injured by conduct violating the Act to bring suits for treble damages
(i.e. three times as much money in damages as the violation cost them).
Over time, the federal courts have developed a body of law under the
Sherman Act making certain types of anticompetitive conduct per se
illegal, and subjecting other types of conduct to case-by-case analysis
regarding whether the conduct unreasonably restrains trade.
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.
Background
In Spectrum Sports, Inc. v. McQuillan 506 U.S. 447 (1993) the Supreme Court said:
| “ | 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 interfere 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;
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:
Section 2:
- 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.
- 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 Robinson–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[14]
- 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 1910–11.
- 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.
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; and
- (3) which affects interstate commerce.
A Section 2 monopolization 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.
Section 2 also bans attempted monopolization, which has the following elements:
- (1) qualifying exclusionary or anticompetitive acts designed to establish a monopoly
- (2) specific intent to monopolize; and
- (3) dangerous probability of success (actual monopolization).
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 evidence (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 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
Alan Greenspan, in his essay entitled Antitrust
described 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."
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.
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 went 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."
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.
Conversely, liberal Supreme Court Justice William O. Douglas
criticized the judiciary for interpreting and enforcing the antitrust
law unequally: "From the beginning it [the Sherman Act] has been applied
by judges hostile to its purposes, friendly to the empire builders who
wanted it emasculated... trusts that were dissolved reintegrated in new
forms... It is ironic that the Sherman Act was truly effective in only
one respect, and that was when it was applied to labor unions. Then the
courts read it with a literalness that never appeared in their other
decisions."
According to a 2018 study in the journal Public Choice,
"Senator John Sherman of Ohio was motivated to introduce an antitrust
bill in late 1889 partly as a way of enacting revenge on his political
rival, General and former Governor Russell Alger of Michigan, because
Sherman believed that Alger personally had cost him the presidential
nomination at the 1888 Republican national convention... Sherman was
able to pursue his revenge motive by combining it with the broader
Republican goals of preserving high tariffs and attacking the trusts. "
