Antitrust Law
| Author | Jeffrey Lehman, Shirelle Phelps |
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Legislation enacted by the federal and various state governments to regulate trade and commerce by preventing unlawful restraints, price-fixing, and monopolies; to promote competition; and to encourage the production of quality goods and services at the lowest prices, with the primary goal of safeguarding public welfare by ensuring that consumer demands will be met by the manufacture and sale of goods at reasonable prices.
Antitrust law seeks to make enterprises compete fairly. It has had a serious effect on business practices and the organization of U.S. industry. Premised on the belief that free trade benefits the economy, businesses, and consumers alike, the law forbids several types of restraint of trade and monopolization. These fall into four main areas: agreements between or among competitors, contractual arrangements between sellers and buyers, the pursuit or maintenance of MONOPOLY power, and mergers.
A wood engraving from an 1884 Harper's Monthly shows Daniel Shays and his comrades occupying a Massachusetts courthouse to prevent the court from directing legal action at debt-ridden farmers in 1786.
The Sherman Anti-Trust Act of 1890 (15U.S.C.A. § 1 et seq.) is the basis for U.S. antitrust law, and many states have modeled their own statutes upon it. As weaknesses in the Sherman Act became evident, Congress added amendments to it at various times through 1950. The most important are the CLAYTON ACT of 1914 (15 U.S.C.A. § 12 et seq.) and the ROBINSON-PATMAN ACT of 1936 (15 U.S.C.A. § 13 et seq.). Congress also created a regulatory agency to administrate and enforce the law, under the Federal Trade Commission Act of 1914 (15 U.S.C.A. §§ 41?58). In an ongoing analysis influenced by economic, intellectual, and political changes, the U.S. Supreme Court has played the leading role in shaping the ways in which these laws are applied.
Enforcement of antitrust law depends largely on two agencies: the FEDERAL TRADE COMMISSION (FTC), which may issue cease-and-desist
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orders to violators, and the Antitrust Division of the U.S. DEPARTMENT OF JUSTICE (DOJ), which can litigate. Private parties may also bring civil suits. Violations of the Sherman Act are felonies carrying fines of up to $10 million for corporations, and fines of up to $350,000 and prison sentences of up to three years for persons. The federal government, states, and individuals may collect treble (i.e., triple) the amount of damages that they have suffered as a result of injuries.
Antitrust law originated in reaction to a public outcry over trusts, which were late-nineteenth-century corporate monopolies that dominated U.S. manufacturing and mining. Trusts took their name from the legal device of business incorporation called trusteeship, which consolidated control of industries by transferring stock in exchange for trust certificates. The practice grew out of necessity. Twenty-five years after the Civil War, rapid industrialization had blessed and cursed business. Markets expanded and productivity grew, but output exceeded demand, and competition sharpened. Rivals sought greater security and profits in cartels (mutual agreements to fix prices and control output). Out of these arrangements sprang the trusts. From sugar to whiskey to beef to tobacco, the process of merger and consolidation brought entire industries under the control of just a few powerful people. Oil and steel, the backbone of the nation's heavy industries, lay in the hands of the corporate giants John D. Rockefeller and J.P. Morgan. The trusts could fix prices at any level. If a competitor entered the market, the trusts would sell their goods at a loss until the competitor went out of business, and then they wold raise prices again. By the 1880s, abuses by the trusts brought demands for reform.
History gave only contradictory direction to the reformers. Before the eighteenth century, COMMON LAW concerned itself with contracts, combinations, and conspiracies that resulted in restraint of free trade, but it did little about them. English courts generally let restrictive contracts stand because they did not consider themselves to be suited to judging adequacy or fairness. Over time, courts looked more closely into both the purpose and the effect of any restraint of trade. The turning point came in 1711 with the establishment of the basic standard for judging close cases, "the rule of reason." Courts asked whether the goal of a contract was a general restraint of competition (a naked restraint) or particularly limited in time and geography (an ancillary restraint). Naked restraints were unreasonable, but ancillary restraints were often acceptable. Exceptions to the rule grew as the economic philosophy of laissez-faire economics (meaning "let the people do what they please") spread its doctrine of non-interference in business. As rival businesses formed cartels to fix prices and to control output, the late-eighteenth-century English courts often nodded in approval.
By the time the U.S. public was complaining about the trusts, common law in U.S. courts was somewhat tougher on restraint of trade. Yet it was still contradictory. The courts took two basic views of cartels: tolerant and condemning. The first view accepted cartels as long as they did not stop other merchants from entering the market. It used the rule of reason to determine this, and it put a high premium on the freedom to enter into contracts. Businesses and contracts mattered. Consumers, who suffered from price-fixing, were irrelevant; the wisdom of the market would protect them from exploitation. The second view was that cartels are thoroughly bad. It reserved the rule of reason only for judging more limited ancillary restrictions. Given these competing views, which varied from state to state, no comprehensive common law could be said to exist. But one approach was destined to win.
In 1890, Congress took aim at the trusts with passage of the SHERMAN ANTI-TRUST ACT, named for Senator JOHN SHERMAN (R-Ohio). It went far beyond the common law's refusal to enforce certain offensive contracts. Clearly persuaded by the more restrictive view that saw great harm in restraint of trade, the Sherman Act outlawed trusts altogether. The landmark law had two sections. Section 1 broadly banned group action in agreements, forbidding "every contract, combination in the form of trust or otherwise, or conspiracy," that restrained inter-state or foreign trade. Section 2 barred individuals from monopolizing or trying to monopolize. Violations of either section were punishable by a maximum fine of $50,000 and up to one year in jail. The Sherman Act passed by nearly unanimous votes in both houses of Congress.
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Although sweeping in its language, the Sherman Act soon revealed its limitations. Congress had wanted action even though it did not know what steps to take. Historians would later dispute what its precise aims had been, but clearly the lawmakers intended for the courts to play the leading role in promoting competition and attacking monopolization: Judges would make decisions as cases arose, slowly developing a body of opinions that would replace the confusing precedents of state courts. For a public that expected overnight change, the process worked all too slowly. President GROVER CLEVELAND's Department of Justice, which disliked the Sherman Act, made little effort to enforce it.
Initial setbacks also came from the U.S. Supreme Court's first consideration of the statute, in United States v. E. C. Knight Co., 156 U.S. 1, 15 S. Ct. 249, 39 L. Ed. 325 (1895). Rejecting a challenge to a sugar trust that controlled over 98 percent of the nation's sugar-refining capacity, the Court held that manufacturing was not interstate commerce. This was good news for trusts. If manufacturers were exempt from the Sherman Act, then they would have little to worry about from federal antitrust regulators. The Court only began strongly supporting the use of the law in the late 1890s, starting with cases against railroad cartels. By 1904, some 300 large companies still controlled nearly 40 percent of the nation's manufacturing assets and influenced at least 80 percent of its vital industries.
After the turn of the twentieth century, federal enforcement picked up speed. President THEODORE ROOSEVELT's announcement that he was a "trustbuster" foreshadowed one important aspect of the future of antitrust enforcement: It would depend largely on political will from the EXECUTIVE BRANCH of government...
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