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Sherman Anti-Trust Act

SHERMAN ANTI-TRUST ACT

The Sherman Anti-Trust Act of 1890 (15 U.S.C.A. §§ 1 et seq.), the first and most significant of the U.S. antitrust laws, was signed into law by President benjamin harrison and is named after its primary supporter, Ohio Senator john sherman.

The prevailing economic theory supporting antitrust laws in the United States is that the public is best served by free competition in trade and industry. When businesses fairly compete for the consumer's dollar, the quality of products and services increases while the prices decrease. However, many businesses would rather dictate the price, quantity, and quality of the goods that they produce, without having to compete for consumers. Some businesses have tried to eliminate competition through illegal means, such as fixing prices and assigning exclusive territories to different competitors within an industry. Antitrust laws seek to eliminate such illegal behavior and promote free and fair marketplace competition.

Until the late 1800s the federal government encouraged the growth of big business. By the end of the century, however, the emergence of powerful trusts began to threaten the U.S. business climate. Trusts were corporate holding companies that, by 1888, had consolidated a very large share of U.S. manufacturing and mining industries into nationwide monopolies. The trusts found that through consolidation they could charge monopoly prices and thus make excessive profits and large financial gains. Access to greater political power at state and national levels led to further economic benefits for the trusts, such as tariffs or discriminatory railroad rates or rebates. The most notorious of the trusts were the Sugar Trust, the Whisky Trust, the Cordage Trust, the Beef Trust, the Tobacco Trust, John D. Rockefeller's Oil Trust (Standard Oil of New Jersey), and J. P. Morgan's Steel Trust (U.S. Steel Corporation).

Consumers, workers, farmers, and other suppliers were directly hurt monetarily as a result of the monopolizations. Even more important, perhaps, was that the trusts fanned into renewed flame a traditional U.S. fear and hatred of unchecked power, whether political or economic, and particularly of monopolies that ended or threatened equal opportunity for all businesses. The public demanded legislative action, which prompted Congress, in 1890, to pass the Sherman Act. The act was followed by several other antitrust acts, including the clayton act of 1914 (15 U.S.C.A. §§ 12 et seq.), the Federal Trade Commission Act of 1914 (15 U.S.C.A. §§ 41 et seq.), and the robinson-patman act of 1936 (15 U.S.C.A. §§ 13a, 13b, 21a). All of these acts attempt to prohibit anticompetitive practices and prevent unreasonable concentrations of economic power that stifle or weaken competition.

The Sherman Act made agreements "in restraint of trade" illegal. It also made it a crime to "monopolize, or attempt to monopolize … any part of the trade or commerce." The purpose of the act was to maintain competition in business. However, enforcement of the act proved to be difficult. Congress had enacted the Sherman Act pursuant to its constitutional power to regulate interstate commerce, but this was only the second time that Congress relied on that power. Because Congress was somewhat uncertain of the reach of its legislative power, it framed the law in broad common-law concepts that lacked detail. For example, such key terms as monopoly and trust were not defined. In effect, Congress passed the problem of enforcing the law to the executive branch, and to the judicial branch, it gave the responsibility of interpreting the law. Still, the act was a far-reaching legislative departure from the predominant laissez-faire philosophy of the era.

Initial enforcement of the Sherman Act was halting, set back in part by the decision of the Supreme Court in United States v. E. C. Knight Co., 156 U.S. 1, 15 S. Ct. 249, 39 L. Ed. 325 (1895), that manufacturing was not interstate commerce. This problem was soon circumvented, and President theodore roosevelt promoted the antitrust cause, calling himself a "trustbuster." In 1914, Congress established the Federal Trade Commission (FTC) to formalize rules for fair trade and to investigate and curtail unfair trade practices. As a result, a number of major cases were successfully brought in the first decade of the century, largely terminating trusts and basically transforming the face of U.S. industrial organization.

During the 1920s, enforcement efforts were more modest, and during much of the 1930s, the national recovery program of the new deal encouraged industrial collaboration rather than competition. During the late 1930s, an intensive enforcement of antitrust laws was undertaken. Since world war ii, antitrust enforcement has become increasingly institutionalized in the Antitrust Division of the justice department and in the Federal Trade Commission, which over time, was granted greater authority by Congress. Justice Department enforcement activities against cartels are particularly vigorous, and criminal sanctions are increasingly sought. In 1992, the Justice Department expanded its enforcement policy to cover foreign company conduct that harms U.S. exports.

Restraint of Trade

Section one of the Sherman Act provides that "[e]very 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 hereby declared to be illegal." The broad language of this section has been slowly defined and narrowed through judicial decisions.

The courts have interpreted the act to forbid only unreasonable restraints of trade. The Supreme Court promulgated this flexible rule, called the Rule of Reason, in Standard Oil Co. of New Jersey v. United States, 221 U.S. 1, 31 S. Ct. 502, 55 L. Ed. 619 (1911). Under the Rule of Reason, the courts will look to a number of factors in deciding whether the particular restraint of trade unreasonably restricts competition. Specifically, the court considers the makeup of the relevant industry, the defendants' positions within that industry, the ability of the defendants' competitors to respond to the challenged practice, and the defendants' purpose in adopting the restraint. This analysis forces courts to consider the pro-competitive effects of the restraint as well as its anticompetitive effects.

The Supreme Court has also declared certain categories of restraints to be illegal per se: that is, they are conclusively presumed to be unreasonable and therefore illegal. For those types of restraints, the court does not have to go any further in its analysis than to recognize the type of restraint, and the plaintiff does not have to show anything other than that the restraint occurred.

Restraints of trade can be classified as horizontal or vertical. A horizontal agreement is one involving direct competitors at the same level in a particular industry, and a vertical agreement involves participants who are not direct competitors because they are at different levels. Thus, a horizontal agreement can be among manufacturers or retailers or wholesalers, but it does not involve participants from across the different groups. A vertical agreement involves participants from one or more of the groups—for example, a manufacturer, a wholesaler, and a retailer. These distinctions become difficult to make in certain fact situations, but they can be significant in determining whether to apply a per se rule of illegality or the Rule of Reason. For example, horizontal market allocations are per se illegal, but vertical market allocations are subject to the rule-of-reason test.

Concerted Action

Section one of the Sherman Act prohibits concerted action, which requires more than a unilateral act by a person or business alone. The Supreme Court has stated that an organization may deal or refuse to deal with whomever it wants, as long as that organization is acting independently. But if a manufacturer and certain retailers agree that a manufacturer will only provide products to those retailers and not to others, then that is a concerted action that may violate the Sherman Act. A company and its employees are considered an individual entity for the purposes of this act. Likewise, a parent company and its wholly owned subsidiaries are considered an individual entity.

Evidence of a concerted action may be shown by an express or written agreement, or it may be inferred from circumstantial evidence. Conscious parallelism (similar patterns of conduct among competitors) is not sufficient in and of itself to imply a conspiracy. The courts have held that conspiracy requires an additional element such as complex actions that would benefit each competitor only if all of them acted in the same way.

Joint ventures, which are a form of business association among competitors designed to further a business purpose, such as sharing cost or reducing redundancy, are generally scrutinized under the Rule of Reason. But courts first look at the reason that the joint venture was established to determine whether its purpose was to fix prices or engage in some other unlawful activity. Congress passed the National Cooperative Research Act of 1984 (15 U.S.C.A. §§ 4301-06) to permit and encourage competitors to engage in joint ventures that promote research and development of new technologies. The Rule of Reason will apply to those types of joint ventures.

Price Fixing

The agreement to inhibit price competition by raising, depressing, fixing, or stabilizing prices is the most serious example of a per se violation under the Sherman Act. Under the act, it is immaterial whether the fixed prices are set at a maximum price, a minimum price, the actual cost, or the fair market price. It is also immaterial under the law whether the fixed price is reasonable.

All horizontal and vertical price-fixing agreements are illegal per se. Horizontal price-fixing agreements include agreements among sellers to establish maximum or minimum prices on certain goods or services. This can also include competitors' changing their prices simultaneously in some circumstances. Also significant is the fact that horizontal price-fixing agreements may be direct or indirect and still be illegal. Thus, a promotion or discount that is tied closely to price cannot be raised, depressed, fixed, or stabilized, without a Sherman Act violation. Vertical price-fixing agreements include situations where a wholesaler mandates the minimum or maximum price at which retailers may sell certain products.

Market Allocations

Market allocations are situations where competitors agree to not compete with each other in specific markets, by dividing up geographic areas, types of products, or types of customers. Market allocations are another form of price fixing. All horizontal market allocations are illegal per se. If there are only two computer manufacturers in the country and they enter into a market allocation agreement whereby manufacturer A will only sell to retailers east of the Mississippi and manufacturer B will only sell to retailers west of the Mississippi, they have created monopolies for themselves, a violation of the Sherman Act. Likewise, it is an illegal agreement that manufacturer A will only sell to retailers C and D and manufacturer B will only sell to retailers E and F.

Territorial and customer vertical market allocations are not per se illegal but are judged by the Rule of Reason. In 1985, the Justice Department announced that it would not challenge any restraints by a company that has less than 10 percent of the relevant market or whose vertical price index, a measure of the relevant market share, indicates that collusion and exclusion are not possible for that company in that market.

Boycotts

A boycott, or a concerted refusal to deal, occurs when two or more companies agree not to deal with a third party. These agreements may be clearly anticompetitive and may violate the Sherman Act because they can result in the elimination of competition or the reduction in the number of participants entering the market to compete with existing participants. Boycotts that are created by groups with market power and that are designed to eliminate a competitor or to force that competitor to agree to a group standard are per se illegal. Boycotts that are more cooperative in nature, designed to increase economic efficiency or make markets more competitive, are subject to the Rule of Reason. Generally, most courts have found that horizontal boycotts, but not vertical boycotts, are per se illegal.

Tying Arrangements

When a seller conditions the sale of one product on the purchase of another product, the seller has set up a tying arrangement, which calls for close legal scrutiny. This situation generally occurs with related products, such as a printer and paper. In that example, the seller only sells a certain printer (the tying product) to consumers if they agree to buy all their printer paper (the tied product) from that seller.

Tying arrangements are closely scrutinized because they exploit market power in one product to expand market power in another product. The result of tying arrangements is to reduce the choices for the buyer and exclude competitors. Such arrangements are per se illegal if the seller has considerable economic power in the tying product and affects a substantial amount of interstate commerce in the tied product. If the seller does not have economic power in the tying product market, the tying arrangement is judged by the Rule of Reason. A seller is considered to have economic power if it occupies a dominant position in the market, its product is advantaged over other competing products as a result of the tying, or a substantial number of consumers has accepted the tying arrangement (evidencing the seller's economic power in the market).

Monopolies

Section two of the Sherman Act prohibits monopolies, attempts to monopolize, or conspiracies to monopolize. A monopoly is a form of market structure where only one or very few companies dominate the total sales of a particular product or service. Economic theories show that monopolists will use their power to restrict production of goods and raise prices. The public suffers under a monopolistic market because it does not have the quantity of goods or the low prices that a competitive market could offer.

Although the language of the Sherman Act forbids all monopolies, the courts have held that the act only applies to those monopolies attained through abused or unfair power. Monopolies that have been created through efficient, competitive behavior are not illegal under the Sherman Act, as long as honest methods have been employed. In determining whether a particular situation that involves more than one company is a monopoly, the courts must determine whether the presence of monopoly power exists in the market. Monopoly power is defined as the ability to control price or to exclude competitors from the marketplace. The courts look to several criteria in determining market power but primarily focus on market share (the company's fractional share of the total relevant product and geographic market). A market share greater than 75 percent indicates monopoly power, a share less than 50 percent does not, and shares between 50 and 75 percent are inconclusive in and of themselves.

In focusing on market shares, courts will include not only products that are exactly the same but also those that may be substituted for the company's product based on price, quality, and adaptability for other purposes. For example, an oat-based, round-shaped breakfast cereal may be considered a substitutable product for a rice-based, square-shaped breakfast cereal, or possibly even a granola breakfast bar.

In addition to the product market, the geographic market is also important in determining market share. The relevant geographic market, the territory in which the firm sells its products or services, may be national, regional, or local in nature. Geographic market may be limited by transportation costs, the types of product or service, and the location of competitors.

Once sufficient monopoly power has been proved, the Sherman Act requires a showing that the company in question engaged in unfair conduct. The courts have differing opinions as to what constitutes unfair conduct. Some courts require the company to prove that it acquired its monopoly power passively or that the power was thrust upon them. Other courts consider it an unfair power if the monopoly power is used in conjunction with conduct designed to exclude competitors. Still other courts find an unfair power if the monopoly power is combined with some predatory practice, such as pricing below marginal costs.

Attempts to Monopolize Section two of the Sherman Act also prohibits attempts to monopolize. As with other behavior prohibited under the Sherman Act, courts have had a difficult time developing a standard that distinguishes unlawful attempts to monopolize from normal competitive behavior. The standard that the courts have developed requires a showing of specific intent to monopolize along with a dangerous probability of success. However, the courts have no uniform definition for the terms intent or success. Cases suggest that the more market power a company has acquired, the less flagrant its attempt to monopolize must be.

Conspiracies to Monopolize Conspiracies to monopolize are unlawful under section two of the Sherman Act. This offense is rarely charged alone, because a conspiracy to monopolize is also a combination in restraint of trade, which violates section one of the Sherman Act.

In accordance with traditional conspiracy law, conspirators to monopolize are liable for the acts of each co-conspirator, even their superiors and employees, if they are aware of and participate in the overall mission of the conspiracy. Conspirators who join in the conspiracy after it has already started are liable for every act during the course of the conspiracy, even those events that occurred before they joined.

further readings

Hylton, Keith N. 2003. Antitrust Law: Economic Theory and Common Law Evolution. New York: Cambridge Univ. Press.

Mann, Richard A., and Barry S. Roberts. 2004. Essentials of Business Law. 8th ed. Mason, Ohio: Thomson/South-Western West.

Posner, Richard A. 2002. Antitrust Law. 2d ed. Chicago: Univ. of Chicago Press.

cross-references

Antitrust Law; Mergers and Acquisitions; Unfair Competition; Vertical Merger.

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Sherman Antitrust Act

SHERMAN ANTITRUST ACT

SHERMAN ANTITRUST ACT was passed by Congress and signed into law by President Benjamin Harrison on 2 July 1890. Introduced and vigorously promoted by Senator John Sherman (R–Ohio), the law was designed to discourage "trusts," broadly understood as large industrial combinations that curtail competition. Its first section declares "every contract, combination in the form of trust or otherwise, or conspiracy in restraint of trade" to be illegal. The second section makes monopolistic behavior a felony subject to imprisonment ("not exceeding three years") and/or fines (not exceeding $10 million for corporations and $350,000 for private individuals). Civil actions may be brought by both the government and private parties. The act vests federal district courts with primary jurisdiction, and assigns the U.S. attorney general and "the several United States attorneys" chief enforcement authority.

Trusts were seemingly ubiquitous in the 1880s: thousands of businesses combined to control product pricing, distribution, and production. These associations were formed, among other reasons, to counter uncertainty created by rapid market change, such as uncoordinated advancements in transportation, manufacturing, and production. While many of these trusts were small in scale and managerially thin, the most notorious were controlled by industry giants such as Standard Oil, American Tobacco, and United States Steel. These large-scale, long-term trusts were seen as coercive and rapacious, dominating markets and eliminating competition.

The trust "problem" varied in the late nineteenth century, depending on who was describing it. For some, trusts perverted market forces and posed a threat to the nation's consumers—only big business gained from restricting free commerce and manipulating prices. (Some proponents of this view admitted, however, that the rise of the trusts corresponded with a general lowering of prices.) Popular journalists such as Henry Demarest Lloyd and Ida Tarbell stoked this distrust, arguing that trusts held back needed goods in order to make a profit under the ruse of overproduction. Others stressed the threat trusts posed to individual liberty by constricting citizens' ability to freely enter into trades and contracts. Many considered the threat to small businesses an assault on American values. Trusts were also seen as the cause of profound political problems. The money of men like Jay Gould and John D. Rockefeller was thought to corrupt politicians and democratic institutions, a view growing out of an American tradition equating concentrated power with tyranny and despotism. Fighting the trusts offered a way to combat new and pernicious versions of prerogative and corruption.

Prior to 1890, trusts were regulated exclusively at the state level, part of the general police power held by municipalities and states. States tackled the trust problem in various ways. Some attempted to eliminate collusion through the use of regulation; fifteen antitrust laws were passed between 1888 and 1891. More frequently they tried to limit business behavior without enacting legislation. State judges were receptive to arguments, raised by state attorneys general, that trusts violated long-standing legal principles; the common law provided a useful tool in battling "unreasonable" restraints of trade. However, several states, like New Jersey, Delaware, and New York, passed incorporation statutes allowing trusts and holding companies within their jurisdictions with the goal of attracting businesses.

Pressure to enact a federal antitrust law came from many quarters. Farmers and wage laborers, for example, saw industrialists as the major threat to their political and economic power; national control of trusts, under the banner of social justice, promised to increase their bargaining position. Small companies lobbied heavily for a federal antitrust law because they welcomed the chance to limit the power of their large competitors—competitors who disproportionately benefited from revolutions in distribution and production. Many were simply dissatisfied with state regulation, arguing that only the federal government could effectively control unfair business practices. Interestingly, evidence suggests that the trusts themselves were in favor of central regulation. They may have hoped a national law would discourage state antitrust activity, or, more cynically, serve as a useful distraction while they pursued more important goals. The New York Times of October 1890 called the Sherman Act a "humbug and a sham" that was "passed to deceive the people and to clear the way" for other laws, like a high protective tariff, that clearly benefited businesses.

When it was introduced, the Sherman Act raised serious objections in Congress. Like the Interstate Commerce Act of 1887, it was one of the first national laws designed to control private business behavior, and its legitimacy was uncertain. Concerns were allayed by three arguments. First, the law was needed: states were unable to fight trusts that operated outside their borders. Second, it was constitutional: antitrust activity was a legitimate exercise of Congress's authority to regulate interstate commerce. Finally, defenders argued that it did not threaten state sovereignty. The act, instead of preempting state antitrust activity, merely supplemented it.

Although the act passed by overwhelming margins in both the House (242–0) and Senate (52–1), many battles were fought between its introduction and final passage. The Senate Finance and Judiciary committees heavily revised the original bill, and both chambers added and withdrew numerous amendments. Senator Sherman, for example, supported an amendment exempting farm groups and labor unions from the law's reach, and Senator Nelson W. Aldrich (R–Rhode Island) proposed that the law not be applied to combinations that "lessen the cost of production" or reduce the price of the life's "necessaries." Some historians argue that the debate leading up to the Sherman Act reflected an ideological split between proponents of the traditional economic order and a new one. Congressmen divided sharply over the value of free competition in a rapidly industrializing society and, more generally, over the value of laissez-faire approaches to social and economic problems. Not surprisingly, the final language of the Sherman Act was broad, allowing a good deal of enforcement discretion.

The Sherman Act's effects on trusts were minimal for the first fifteen years after enactment. Indeed, large-scale monopolies grew rapidly during this period. There was no concerted drive to prosecute trusts, nor was there an agency charged to oversee industry behavior until a special division in the Justice Department was created in 1903 under President Theodore Roosevelt. (The Bureau of Corporations was formed the same year within the Department of Commerce and Labor to gather industry information.) "Trust busting," however, was not neglected during this period. States continued to pass antitrust laws after 1890, many far more aggressive than the federal version. More importantly, federal courts assumed a leader-ship role in interpreting the act's broad provisions, a role that they have never abandoned.

Supreme Court justices openly debated the act's meaning from 1890 to 1911, an era now known as the law's formative period. Two prominent justices, John Marshall Harlan and Chief Justice Melville W. Fuller, differed over the scope of federal power granted under the act, specifically, how much authority Congress has to regulate in-state business behavior. Fuller's insistence on clear lines of distinction between state power and federal power (or police powers and the commerce power) re-flected his strong attachment to dual federalism and informed decisions such as United States v. E. C. Knight Company (1895). For Fuller, manufacture itself is not a commercial activity and thus cannot be regulated under Congress's commerce power. According to this view, the federal government has no authority over things that have merely an "indirect" effect on commerce. Harlan's alternative position—that monopolistic behavior is pervasive, blurring distinctions between in-state and interstate activities—held sway in cases like Northern Securities Company v. United States (1904) and Swift and Company v. United States (1905). This understanding significantly broadened Congress's commerce power and was accepted conclusively by the Court in the 1920s under the stewardship of Chief Justice William Howard Taft in Stafford v. Wallace (1922) and Board of Trade of City of Chicago v. Olsen (1923).

In addition to disagreements over the reach of federal power, the justices differed over the intent of the act itself, namely what types of trade restraints were forbidden. The Court concluded that the section 1 prohibition against "every" contract and combination in restraint of trade was a rule that must admit of exceptions. Justices advocated prohibitions by type (the per se rule) and a more flexible, case-by-case analysis. A compromise was reached in Standard Oil Company of New Jersey v. United States (1911) known as the "rule of reason": the Sherman Act only prohibits trade restraints that the judges deem unreasonable. Some anticompetitive activity is acceptable, according to the rule. The harm of collusion may be outweighed by its pro-competitive ramifications.

The rule of reason may have solved an internal debate among the justices, but it did little to eliminate the ambiguity of federal antitrust enforcement. Indeed, internal Court debate before 1912 convinced many observers that the act invited too much judicial discretion. Proposals to toughen the law were prevalent during the Progressive Era and were a central feature of the presidential contest of 1912. The Clayton Antitrust Act of 1914 clarified the ambiguities of the law by specifically enumerating prohibited practices (such as the interlinking of companies and price fixing). The Federal Trade Commission Act, passed the same year, created a body to act, as President Woodrow Wilson explained, as a "clearing-house for the facts … and as an instrumentality for doing justice to business" (see Federal Trade Commission). Antitrust law from that point on was to be developed by administrators as well as by federal judges.

The reach of the Sherman Act has varied with time, paralleling judicial and political developments. Sections have been added and repealed, but it continues to be the main source of American antitrust law. Civil and criminal provisions have been extended to activity occurring out-side of the United States, and indications suggest its international reach may become as important as its domestic application.

BIBLIOGRAPHY

Bork, Robert. The Antitrust Paradox: A Policy at War with Itself. New York: Basic Books, 1978.

Hovenkamp, Herbert. Enterprise and American Law, 1836–1937. Cambridge, Mass.: Harvard University Press, 1991.

McCraw, Thomas K. Prophets of Regulation. Cambridge, Mass.: Harvard University Press, 1984.

Peritz, Rudolph J. R. Competition Policy in America, 1888–1992: History, Rhetoric, Law. New York: Oxford University Press, 1996.

Thorelli, Hans B. The Federal Antitrust Policy: Origination of an American Tradition. Baltimore: Johns Hopkins Press, 1954.

Troesken, Werner. "Did the Trusts Want a Federal Antitrust Law? An Event Study of State Antitrust Enforcement and Passage of the Sherman Act." In Public Choice Interpretations of American Economic History. Edited by Jac C. Heckelman et al. Boston: Kluwer Academic Press, 2000.

Wiebe, Robert H. The Search for Order, 1877–1920. New York: Hill and Wang, 1967. Reprint, Westport, Conn: Greenwood Press, 1980.

KimberlyHendrickson

See alsoBusiness, Big ; Corporations ; Monopoly ; Trusts .

The general government is not placed by the Constitution in such a condition of helplessness that it must fold its arms and remain inactive while capital combines, under the name of a corporation, to destroy competition. … The doctrine of the autonomy of the states cannot properly be invoked to justify a denial of power in the national government to meet such an emergency, involving, as it does, that freedom of commercial intercourse among the states which the Constitution sought to attain.

source: From United States v. E. C. Knight Company (1895), Justice Harlan dissenting.

That which belongs to commerce is within the jurisdiction of the United States, but that which does not belong to commerce is within the jurisdiction of the police power of the state.…Itis vital that the inde pendence of the commercial power and of the police power, and the delimitation between them, however sometimes perplexing, should always be recognized and observed, for, while the one furnishes the strongest bond of union, the other is essential to the preservation of the autonomy of the states as required by our dual form of government; and acknowledged evils, however grave and urgent they may appear to be, had better be borne, than the risk be run, in the effort to suppress them, of more serious consequences by resort to expedients of even doubtful constitutionality.

source: From United States v. E. C. Knight Company (1895), Chief Justice Fuller, majority opinion.

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Sherman Antitrust Act (1890)

Sherman Antitrust Act (1890)

Herbert Hovenkamp

In 1890 public hostility toward the monopoly actions of large corporations was at a feverish pitch. The Sherman Antitrust Act (26 Stat 209) was designed to limit monopolistic and other anticompetitive practices by large American corporations such as Standard Oil Company. The act, immensely popular when it was passed, was named after Senator John Sherman of Ohio, one of the senators who originally proposed such a law. Congress's main concern was that individual states were unable to deal effectively with large multistate corporations because state courts could control actions only within their own state. The control of corporations that did business in many states required a federal statute because federal power could reach across the entire United States.

The theory of the Sherman Act is grounded in the basic capitalist idea that prices are lowest when multiple firms in a market are forced to compete with each other. Further, such competition is believed to produce the most innovation and to maximize the quality and variety of goods and services. Although the Sherman Act was not controversial when it was passed, there have always been disputes about its meaning. Its explicit goal was to protect the public from monopolies, but many critics have charged that more often it ended up protecting small, inefficient businesses from larger and more efficient firms. That debate has never fully been resolved.

The Sherman Act contains two main provisions. The act makes it unlawful (1) for a group of firms to enter into contracts or conspiracies "in restraint of trade" and (2) for a single firm to "monopolize" a particular market.

AGREEMENTS IN RESTRAINT OF TRADE

As section 1 of the act puts it, "Every contract, combination, ... or conspiracy in restraint of trade or commerce among the several States, or with foreign nations, is hereby declared to be illegal." The term "restraint of trade" is a very old one that had been used by British courts since before the seventeenth century. Today it describes actions that are unreasonably anticompetitive. The words "contract," "combination," and "conspiracy" all refer to types of agreements involving two or more persons or firms. A firm acting by itself cannot violate section 1 of the Sherman Act.

Horizontal Agreements Unlawful agreements in restraint of trade can be roughly grouped into two classifications, horizontal and vertical. An agreement is said to be horizontal if it involves two or more firms in competition with each other. The most common horizontal agreement in restraint of trade is price fixing, which occurs when two or more firms stop competing on price and agree that they will charge a specific price. In United States v. Trans-Missouri Freight Association (1897), the Supreme Court first held that price fixing was automatically unlawful under section 1 of the Sherman Act and a criminal violation. Price fixers could be sent to prison and also be fined.

The other horizontal agreements most frequently condemned as unreasonably anticompetitive are market division agreements and boycotts. A market division agreement occurs when competing firms "divide" the market by agreeing they will not sell in the same territory or to the same customers, or that they will not make products that can compete with each other. For example, two makers of a highly desired commercial cleanser might agree that one will sell only to retailers while the other will sell only to hospitals and professional offices. As a result, the two firms will not compete with each other for the same sales, and each can charge monopoly prices.

A boycott, or concerted refusal to deal, occurs when two or more actors agree with each other to keep some other set of actors out of the market. A common rationale for boycotts is exclusion of firms that might charge lower prices or offer more innovative products. A group of firms that are fixing prices might pressure a supplier to stop selling to a competitor who is charging lower prices. Many claimed boycotts resulted from activities such as efforts within a profession to set standards. Courts must then decide whether the exclusion is reasonable under the circumstances or unreasonably anticompetitive. For example, in Wilk v. American Medical Association (1990), a federal court concluded that it was anticompetitive for the AMA to pass an "accreditation rule" that forced hospitals to exclude chiropractors from access to medical facilities. The AMA claimed the exclusion was necessary because the chiropractors were not using proven methods of health care. However, the court decided that this choice should be made by consumers themselves and not through coerced exclusion of chiropractors from the market.

Vertical Agreements. A vertical agreement is one between a seller and a buyer. For example, if Goodyear sells tires to Ford, the tire-selling agreement between them would be described as vertical. Nearly all vertical agreements are lawful under the antitrust laws, but there are two exceptions. First, "resale price maintenance," or "vertical price fixing," occurs when a seller forces a buyer to charge a certain retail price. For example, Colgate might sell toothpaste to Osco Drugs with a contract requiring Osco to retail the toothpaste for $2.00 per tube. Such a practice is unlawful. Second, vertical "nonprice" restraints are agreements under which a manufacturer limits the locations or territories in which a retailer may sell or some other significant aspect of the retailer's business. In Continental TV v. GTE Sylvania (1977), however, the Supreme Court held that very few agreements of this nature are competitively harmful. Since then, almost none have been declared illegal.

MONOPOLIZATION

Section 2 of the Sherman Act provides that "every person who shall monopolize, or attempt to monopolize ... any part of the trade or commerce among the several States, or with foreign nations shall be deemed guilty...." This section of the Sherman Act reaches "unilateral" practices by "dominant" firmsin other words, anticompetitive conduct by monopolists that increases their power. Typically a firm must control at least 70 percent of the market in which it operates to be considered a monopoly. Even then, the firm is not behaving unlawfully. To be considered guilty of monopolization, the firm must also engage in one or more "exclusionary practices."

An exclusionary practice is something that is "unreasonably anticompetitive," which generally means it causes more harm to rivals than by ordinary competitive processes. Monopolists generally use such practices to strengthen or prolong their monopoly positions, because a monopoly is usually very profitable. In United States v. Standard Oil Co. (1911), the Supreme Court held that Standard violated section 2 by using "predatory pricing" to drive rivals out of business. Standard allegedly charged very low prices in a town until competitors were forced to declare bankruptcy or to sell their plants to Standard at very low prices.

Other exclusionary practices involve misuse of patents or other intellectual property rights. For example, in Walker Process Equip. v. Food Machinery Corp. (1965), the Supreme Court held that it was unlawful for a monopoly firm to obtain a patent fraudulently (by lying on its patent application) and then use the patent to exclude other firms from making its product.

In United States v. Microsoft Corp. (2002), a federal court in Washington, D.C., held that it was unlawful for Microsoft to engage in a number of practices that tended to prolong Microsoft's monopoly of personal computer operating systems. The practices generally limited the ability of rivals to produce competing operating systems that would have forced Microsoft to cut its prices. For example, the Netscape Internet browser and the Java programming language threatened to create an avenue through which computer users could run their programs on several different operating systems. Microsoft responded to the threat by "bundling" its own browser, Internet Explorer, into its Windows program and by developing an alternative version of Java that was incompatible with other operating systems. The result made it much more difficult for users of programs running on Windows to run them on other operating systems as well.

See also: Clayton Act of 1914; Federal Trade Commission Act.

BIBLIOGRAPHY

Chamberlain, John. The Enterprising Americans: A Business History of the United States. New York: Harper and Row, 1974.

Faulkner, Harold U. American Economic History. New York: Harper, 1960.

Hovenkamp, Herbert. Federal Antitrust Policy: The Law of Competition and Its Practice, 2d ed. St. Paul, MN: West Group, 1999.

Sklar, Martin J. The Corporate Reconstruction of American Capitalism, 18901916. Cambridge, U.K.: Cambridge University Press, 1988.

Thorelli, Hans B. The Federal Antitrust Policy: Origination of an American Tradition. Baltimore: Johns Hopkins University Press, 1955.

Standard Oil Company

The Standard Oil Company was incorporated by John D. Rockefeller in Ohio in 1870. At the time, the refining business was highly competitive, and Standard Oil had more than 250 competitors. Rockefeller negotiated with the railroads to secure low shipping rates in return for regular business, and reduced costs still further through vertical integration, purchasing oil wells, pipelines, and retail outlets. With these advantages he began to drive competitors out of business, particularly as deteriorating market conditions increased competitive pressure on smaller firms. Rockefeller was then able to buy out independent refineries in Pennsylvania, New York, and New Jersey at very low prices. In 1882 Rockefeller formed the Standard Oil Trust as a holding agency for forty companies. This corporate structure, which was the first of its kind, gave authority to a board of trustees which governed on behalf of the member companies' shareholders, centralizing control while allowing Rockefeller to maneuver around state laws that might restrict his operations. The power wielded by Standard Oil and other monopolies engendered public opposition that led to the passage of the Sherman Antitrust Act in 1890. By the turn of the century, Standard Oil controlled more than 90 percent of the market for petroleum refining. Critics alleged that the company engaged in unfair practices, such as charging excessively high prices for products with no competition and using the profits to subsidize artificially low prices in contested markets, thereby driving competitors out of business. In 1906 Standard Oil was charged with violating the Sherman Act by conspiring "to restrain the trade and commerce in petroleum ... in refined oil, and in other products of petroleum," and was found guilty in 1909. The company appealed, and two years later the Supreme Court upheld the decision and ordered Standard Oil dismantled. The companies created in the dissolution included the future Exxon, Chevron, and Mobil.

The Robinson-Patman Act of 1936

The Robinson-Patman Actalso known as the Federal AntiPrice Discrimination Actwas created to ensure that suppliers to independent businesses offered them the same prices they gave to chain stores. The legislation strengthened the provisions of the Clayton Act that prohibited price discrimination specifically when it lessened competition or created a monopoly. Robinson-Patman made discrimination illegal if its effect was "to injure, destroy, or prevent competition with any person who either grants or knowingly receives the benefit of such discrimination, or with customers of either of them." In other words, price discrimination would be illegal if it merely harmed a competitor, even without lessening competition or creating a monopoly. Discounts for bulk purchases were only allowed if they were directly attributable to cost savings resulting from the larger purchases.

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Sherman Anti-Trust Act

Sherman Anti-Trust Act

Sources

Rise of the Trusts. By 1878 the Standard Oil Company of Ohio owned seventy-four refineries and controlled 90 percent of the countrys oil. One year later John D. Rockefeller was indicted for creating a monopoly. Though he was not convicted, Rockefeller sensed the danger of creating monopolies. In late December 1881 he decided to turned the ownership of his empire over to nine trustees, who held all the stock from the different companies under Rockefellers control. Thus, Rockefeller, and the trustees, could escape prosecution for creating a monopoly. Soon other industries followed Rockefellers example in creating trusts. Between 1884 and 1887 manufacturers and distributors of cotton oil, linseed oil, whiskey, envelopes, school slate, sugar, meat, and natural gas all formed trusts.

State Antitrust Action. The general public could not see the difference between a trust and a monopoly. Reformers called for regulation of the trusts, and some states complied. In 1889 Michigan, Nebraska, and Kansas passed antitrust laws, and by 1900 twenty-seven states prohibited or regulated trusts. These antitrust laws followed a principle of common law, that combinations which restrained trade unreasonably or monopolies that were hostile to the public good were illegal. States could regulate some trusts, but many were too big to be controlled or intimidated by the laws of any one state. When the state of Ohio moved against the Standard Oil Company in 1892, Rockefeller simply reformed the company under the more business-friendly laws of New Jersey.

The Sherman Anti-Trust Act. In 1887 President Grover Cleveland told Congress, As we view the achievements of aggregated capital we discover the existence of trusts, combinations, and monopolies, while the citizen is struggling far in the rear or is trampled to death beneath an iron heel. Corporations which should be carefully restrained creatures of the law and servants of the people, are fast becoming the peoples masters. In 1888, in response to public demands to do something about trusts but conscious of the importance of trusts to business organization, Sen. John Sherman of Ohio introduced an antitrust measure in the Senate. In 1890, after considerable revisions by Massachusetts senator George Hoar and Vermont senator George Edmunds, Congress passed a national antitrust law. The law barred any contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade and made it a federal crime to monopolize or attempt to monopolize, or combine or conspire . . . to monopolize any part of the trade or commerce among the several states.

Enforcing the Sherman Act. Unlike the Interstate Commerce Act, which established a commission to investigate violations of the law, the Sherman Act left enforcement up to the U.S. attorney general. Most attorneys general did not think it necessary to move against trusts. Richard Olney, a corporate lawyer who served as attorney general in the Cleveland administration, took the responsibility of not prosecuting under a law I believed to be no good. The presidential administrations of Benjamin Harrison, Cleveland, and William McKinley filed a total of eighteen antitrust suits. More combinations and trusts were formed between 1897 and 1901 than at any other time in American history.

United States v. E. C. Knight. In 1894 the E. C. Knight Company, part of the sugar trust, had tried to buy four Pennsylvania refiners, the last remaining competitors to the American Sugar Refining Company. The national government moved to enforce the Sherman Act and asked a federal court to grant an injunction against this buyout; the court refused. In October the Supreme Court heard the case of United States v. E. C. Knight. In January 1895 Chief Justice Melville Fuller declared that the sugar trust was not subject to the Sherman Act. The chief justice noted that the trust refined 98 percent of the sugar sold in the United States, but it did not sell the sugar. Under the Constitution, Congress can regulate commerce between states, but could not regulate manufacturing. The Sherman Act, therefore, could not apply to a manufacturing monopoly. The trust could restrain the sugar trade only in an indirect manner; Congress could only prevent direct restraints on interstate trade.

In re Debs . The Courts decision revealed that it would be difficult to enforce the Sherman Act against trusts. Six months after deciding the sugar case, the Court used the Sherman Act against labor leader Eugene V. Debs. In May 1894 the American Railway Union struck against the Pullman Palace Car Company, which had cut workers wages by 20 percent, while raising executive salaries and paying the dividends to stockholders. The union called for a boycott of Pullman cars, and workers refused to move trains hauling Pullmans. Attorney General Olney said the union was obstructing interstate commerce, and he sought an injunction against Debs and the union under the Sherman Act. Debs refused to call off the strike, and was sentenced to six months in jail for contempt of court. In March 1895 Clarence Darrow and former Illinois senator Lyman Trumbull defended Debs in the Supreme Court. In June the Court upheld the injunction. Justice David Brewer wrote that The strong arm of the national government may be put forth to brush away all obstructions to the freedom of interstate commerce or the transportation of the mails. Debs served his six-month prison sentence at Woodstock, Illinois. Passed to control the abuses of business, the Sherman Act became a weapon against organized labor.

Sources

James W. Ely Jr., The Chief Justiceship of Melville W. Fuller, 1888-1910 (Columbia: University of South Carolina Press, 1995);

Lawrence M. Friedman, A History of American Law (New York: Simon & Schuster, 1985);

John E. Semonche, Charting the Future: The Supreme Court Responds to a Changing Society 1890-1920 (Westport, Conn.: Greenwood Press, 1978);

Tinsley E. Yarbrough, Judicial Enigma: The First Justice Harlan (New York: Oxford University Press, 1995).

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Sherman Antitrust Act

Sherman Antitrust Act, 1890, first measure passed by the U.S. Congress to prohibit trusts; it was named for Senator John Sherman. Prior to its enactment, various states had passed similar laws, but they were limited to intrastate businesses. Finally opposition to the concentration of economic power in large corporations and in combinations of business concerns led Congress to pass the Sherman Act. The act, based on the constitutional power of Congress to regulate interstate commerce, declared illegal every contract, combination (in the form of trust or otherwise), or conspiracy in restraint of interstate and foreign trade. A fine of $5,000 and imprisonment for one year were set as the maximum penalties for violating the act.

The Sherman Act authorized the federal government to institute proceedings against trusts in order to dissolve them, but Supreme Court rulings prevented federal authorities from using the act for some years. As a result of President Theodore Roosevelt's "trust-busting" campaigns, the Sherman Act began to be invoked with some success, and in 1904 the Supreme Court upheld the government in its suit for dissolution of the Northern Securities Company. The act was further employed by President Taft in 1911 against the Standard Oil trust and the American Tobacco Company.

In the Wilson administration the Clayton Antitrust Act (1914) was enacted to supplement the Sherman Antitrust Act, and the Federal Trade Commission (FTC) was set up (1914). Antitrust action sharply declined in the 1920s, but under President Franklin Delano Roosevelt new acts supplementary to the Sherman Antitrust Act were passed (e.g., the Robinson-Patman Act), and antitrust action was vigorously resumed. As a result of a suit filed in 1974 under the Sherman Antitrust Act, the American Telephone and Telegraph (AT&T) monopoly was broken up in 1982.

The Hart-Scoss-Rodino Antitrust Improvement Act (1976) made it easier for regulators to investigate mergers for antitrust violations, but few mergers were blocked during the merger boom of the 1980s, when the FTC and Justice Dept. adopted a looser interpretation of antitrust legislation. By the 1990s, still a time of large corporate mergers, the FTC became more litigious in antitrust actions, and the Justice Dept. aggressively pursued the Microsoft Corp. (see Gates, Bill). Antitrust legislation is primarily regulated by the Antitrust Division of the Dept. of Justice and the FTC. U.S. corporations with international operations also face antitrust scrutiny from European Union regulators.

See R. Posner, Anti-Trust Law (1976); R. Bork, The Antitrust Paradox (1978).

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Sherman Anti-Trust Act

SHERMAN ANTI-TRUST ACT


The Sherman Anti-Trust Act was passed by Congress in 1890 in an attempt to break up corporate trusts (corporate trusts are combinations of firms or corporations formed to limit competition and monopolize a market). The legislation stated that "every contract, combination in the form of trust or otherwise, or conspiracy in the restraint of trade" was illegal. While the act made clear that anyone found to be in violation of restraining trade would face fines, jail terms, and the payment of damages, the language lacked clear definition of what exactly constituted restraint of trade. The nation's courts were left with the responsibility of interpreting the Sherman Anti-Trust Act; the Justices proved as reluctant to take on big business as was Congress.

The legislation was introduced in Congress by Senator John Sherman (18231900) of Ohio, in response to increasing outcry from state governments and the public for the passage of national anti-trust laws. Many states passed their own anti-trust bills or made constitutional provisions prohibiting trusts, but the statutes proved difficult to enforce, since big business found ways around them. When the legislation proposed by Sherman reached the Senate, conservative congressmen rewrote it; many charged the Senators with being deliberately vague. In the decade after the legislation's passage, the federal government prosecuted only eighteen anti-trust cases, and court decisions did little to break up monopolies. But after the turn of the century, reformers demanded that government regulate business.

In 1911 the U.S. Justice Department won key victories against monopolies, breaking up John D. Rockefeller's Standard Oil Company of New Jersey and James B. Duke's American Tobacco Company. The decisions set a precedent for how the Sherman Anti-Trust Act would be enforced, and they demonstrated a national intolerance toward monopolistic trade practices. In 1914 national anti-trust legislation was further strengthened by the passage of the Clayton Anti-Trust Act. This act outlawed price fixing (the practice of pricing below cost to eliminate a competitive product); it was also illegal for the same executives to manage two or more competing companies (a practice called interlocking directorates); and a corporation was prohibited from owning stock in another competing corporation. The creation of the Federal Trade Commission (FTC) that same year provided further insurance that U.S. corporations engaging in unfair practices would be investigated by the government.

See also: Clayton Anti-Trust Act, Monopoly, Tobacco Trust


FURTHER READING

Bryan, William Jennings, and Robert W. Cherny. Cross of Gold: Speech Delivered Before the Democratic National Convention at Chicago, July 9, 1896. Lincoln: University of Nebraska Press, 1996.

Calhoun, Catherine. Winter with the Silver Queen. American Heritage, November 1995.

Doty, Richard. American Silver Coinage: 17941891. New York: American Numismatic Society, 1987.

Eichengreen, Barry J., ed., and Marc Flandreau. The Gold Standard in Theory and History. New York: Routledge, 1997.

Dictionary of American History. New York: Charles Scribner's Sons, 1976, s.v. " Sherman Silver Purchase Act."

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"Sherman Anti-Trust Act." Gale Encyclopedia of U.S. Economic History. 2000. Encyclopedia.com. 30 Jun. 2016 <http://www.encyclopedia.com>.

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