Antitrust, Business, Corporate and Contract Law
ANTITRUST, BUSINESS, CORPORATE AND CONTRACT LAW
Law that addresses business activities cover a broad range of economic topics including laws related to contracts, corporations, and trusts and monopolies. Responsibility for governmental oversight has greatly changed through time and is split between various governmental parts. For example, the Supreme Court has had relatively little affect on contract and corporate law where states have the primary responsibility for oversight. The federal government has responsibility in certain situations, such as interstate commerce.
Early History of Corporation and Contract Law
One of the most common types of business worldwide is the corporation. A corporation is a business that has been formally chartered (grant of ownership rights) by a state. It gains its own identity apart from the owners and investors. Chartering corporations has a long history. In the sixteenth century English merchants faced the dangers of the high seas both from weather and pirates. The shipping businesses sought protection from financial responsibility for cargo losses. As a result, early corporate charters granted by the English monarchy limited liability (financial responsibility) for any losses of corporate property. Many of these early corporations were also given monopoly (one company dominates a particular market) powers over territories and industries that the crown considered critical to English interests. In fact, English law had granted monopolies to specific trade and craft guild organizations by decree even in the Middle Ages. Some of the best known early English corporations in the eighteenth century were the East Indian Company and Hudson's Bay Company. The American colonies, with settlement beginning in the seventeenth century, were also chartered corporations. However, drafted in 1787, the U.S. Constitution makes no mention of corporations. They were primarily subject to state regulation. By 1800 the states had granted about 200 corporate charters.
To enforce business agreements including contracts, the English Parliament passed the Statute of Frauds in 1677. The law established standards for settling legal disputes over contracts. Later after American independence, all U.S. states adopted various forms of the English act establishing the basis for U.S. contract law. The only mention of contracts in the Constitution was the Contract Clause of Article I which reads, "No State shall . . . make any . . . Law impairing the Obligation [responsibility] of Contracts." Early in U.S. history, the Supreme Court applied the Contract Clause in ruling a state law unconstitutional in Fletcher v. Peck (1810). The Court gave a broad definition to what a contract is. Thus, employers were quite free to contract for labor with their employees and establish agreements with other businesses. Cases involving the Contract Clause were numerous in the nation's early years.
In 1819 the Court in Dartmouth College v. Woodward first recognized private profit-making corporations by extending protection of the Contract Clause to corporate charters. The Court considered the corporate charter a form of contract between the state and the private corporation. Protection of corporations by the Clause from unreasonable state regulation provided assurance to individuals to invest money in corporations and spur economic growth of the nation. In Charles River Bridge v. Warren Bridge (1837) the Court further defined a balance between a state interest in regulating corporations and protecting corporations from arbitrary (inconsistent) laws.
Freedom to Trade
Efforts by businesses to restrain trade by blocking activities of competitors in some way is as old as profit-making business itself. Early English and later U.S. efforts at restricting such anti-competitive behavior in business was largely based on common law principles dealing with contracts and conspiracies. Approaches varied greatly among the states. The Court ruled in Swift v. Tyson (1842) that federal courts should decide business disputes including accusations of restraint of competition using a "rule of reason." The rule of reason worked in the following manner. If state law applied restrictions broadly, the restrictions were often considered illegal. If more limited in time or geographic extent, the restraints might be allowed.
Congress held constitutional powers to regulate interstate commerce (trade or business across state lines) in the Commerce Clause in Article I, Section 8, of the Constitution. The Clause states that Congress could "regulate Commerce . . . among the several states." But the Court long interpreted the clause very narrowly and the federal government had little means to address unfair business practices. The courts through the nineteenth century were very protective of business interests shielding them from most forms of government interference. They supported a laissez-faire economy believing the marketplace, not government regulation, should primarily guide economic growth.
Rise of Trusts
Following the Civil War (1861–1865) the rise of industrialization greatly increased the output of U.S. manufacturers, as a result big business expanded rapidly. As the nation's economy changed from agriculture to industry. At the same time, construction of a national railroad system provided cheaper transportation for the increased supply of goods, greatly expanding markets.
As competition heightened because the supply of goods soon exceeded the demand, businesses sought means of protecting profits. However, state corporate laws strictly controlled mergers, forbidding companies to own stock in other companies. An alternative was for businesses to simply join with their competitors to set prices and control production. Therefore, given few legal restrictions over the rules of business competition, companies began to join together forming trusts to protect themselves from competition.
Trusts involved creating one corporation to manage the stocks of the cooperating corporations. Standard Oil became the first trust in 1882. Trusts began accumulating great economic power which they used to fix prices and drive out new competitors through price wars. Such business combinations in various industries, such as oil, steel, mining, tobacco, beef, whiskey, and sugar, led to concentration of capital (available money) and control by only a few people. Trust became a general term applied to national monopolies. Consumers, farmers, and small business owners became powerless. In addition, railroads often gave special treatment in the form of lower rates to their larger customers, the trusts. Yet, even more protections were extended to businesses rather than consumers. The Court ruled in Santa Clara County v. Southern Pacific Railroad (1886) that private corporations are "persons" under the Equal Protection Clause of the Fourteenth Amendment. This decision meant that corporations were protected by the Bill of Rights including freedom of speech.
Public demand for government intervention into trusts and unfair business practices that posed a threat to free market competition rose dramatically through the 1880's. In response, states began adopting various laws, but these proved inconsistent and did not apply to interstate commerce which was federal responsibility. Congress responded with two landmark pieces of federal legislation. First, Congress passed the Interstate Commerce Act of 1887 requiring railroads to maintain fair rates and stop their discriminatory practices against smaller customers.
In 1890 Congress passed the Sherman Antitrust Act, the first major national legislation addressing business practices. For the first time, national consistency existed for business regulation. Adopting the notion that competitive decisions made by businesses acting independently is the best guide for the American economy, the act prohibited trusts and other forms of cooperation which could potentially restrain interstate or international trade. In other words, the more independent companies competing with each other the better. Basically, all restraint of trade through cooperation is unacceptable. The act allowed for both criminal and civil prosecution of violators. The act also targeted actions of individual companies acting as monopolies.
Though strongly worded, the act was vague concerning enforcement leaving decisions to the courts and executive branch of government. Enforcement of antitrust law has been heatedly debated since. For example, President Grover Cleveland (1893–1897) did not favor enforcement believing trusts were a natural result of technological advances and actually kept the nation's economy stable by eliminating waste. Applying the narrow view of commerce, the Supreme Court even ruled in United States v. E.C. Knight (1895) that manufacturing was not considered interstate commerce although the goods produced were shipped throughout the United States. Consequently, despite the Sherman Antitrust Act, many key industries were left free to continue operating under trusts out of reach of government regulation. In this business climate, a major wave of mergers resulted in the late 1890s and early 1900s.
Antitrust Movements—A Zig-Zag Process
Bt the start of the twentieth century there was still no coordinated broad structure to the nation's economy. Neither a federal government tax collection system nor a safely regulated stock market existed. Britain remained the dominant player in the world economy and American business was largely controlled by wealthy industrialists. A few hundred large companies controlled almost half of U.S. manufacturing and greatly influenced almost all key industries. In 1901 J.P. Morgan and John D. Rockefeller together controlled 112 corporations consisting of over $22 billion in assets under the trust, Northern Securities Corporation of New Jersey.
Public concern lead to more federal antitrust enforcement efforts. The trustbusting movement took off in 1904 with the Supreme Court's decision in Northern Securities Co. v. United States (1904) breaking up a railroad trust. Over forty antitrust lawsuits were filed under President Theodore Roosevelt (1901–1909). Though best known as the "trustbuster," Roosevelt actually sought a middle ground in government oversight of corporate activities not intending to end all corporate mergers, just those causing hardships on consumers. Roosevelt believed the courts were favoring powerful business leaders and that some regulation was needed.
Another important victory for recognizing federal authority came in the Swift & Co. v. United States (1905) ruling. The Court reversed the previous Knight ruling and adopted a "stream of commerce" doctrine. The doctrine significantly broadened the Court's interpretation of congressional powers under the Commerce Clause. All business, including manufacturing, that may have an affect on interstate commerce was subject to congressional regulation.
However, other barriers to regulation of economic matters quickly came forward. The Due Process Clause in the Fifth and Fourteenth amendments states "No person shall be . . . deprived of life, liberty, or property, without due process of law." The courts looked at businesses and pursuit of business success as property and liberty protected from government control under those amendments. The Court began striking down state laws regulating work conditions such as hours and wages as in Lochner v. New York (1905) using the Due Process Clause to protect freedom of contract. Use of the Due Process Clause in the Fourteenth Amendment largely took the place of the Contract Clause in Article I to negate state laws regulating business activities and the Fifth Amendment blocked federal government regulations.
Nevertheless, antitrust law remained effective. Major Supreme Court decisions in 1911 ordered the break-up of Standard Oil in Standard Oil Co. of New Jersey v. United States, a corporate giant controlling railroads, sugar, and oil, and the tobacco trust in United States v. American Tobacco Co. These were the two largest industrial combinations in existence. Though the decisions supported the federal government's role in overseeing marketplace economics, they also reaffirmed the Court's use of the "rule of reason" in determining when regulations are too restrictive for specific business practices being questioned.
The continued unpredictability of antitrust rulings led, yet again, to public pressure for more effective trustbusting laws. Congress responded with the 1914 Clayton Act. The act more clearly described prohibited business practices that significantly limited competition or created a monopoly. Under that act companies could not charge different buyers different prices for the same products, or force buyers to sign contracts restricting them from doing business with competitors. It also restricted business mergers between competing companies and companies from buying stock in competing companies. Importantly, the act prohibited application of antitrust law against unions. Congress also passed the 1914 Federal Trade Commission Act creating the Federal Trade Commission (FTC) to tackle unfair business practices. Congress gave the FTC legal powers to issue cease-and-desist orders to combat unfair business activities.
With the economic boom years of the 1920s, political desire to protect business by freeing them from regulations increased. Protection of the freedom of contract rose to its height with decisions such as Adkins v. Children's Hospital (1923) overturning a minimum wage law, therefore allowing businesses to set their own wages in contracts with employees. Given a relatively free hand in dealing with employees, unions, and consumers, corporations flourished in the 1920s but came to a crashing halt in 1929.
Dramatic Shift to Regulation
The stock market crash of 1929 resulted in the collapse of the American economy. Public confidence in business leaders dwindled in the early 1930's during the Great Depression. Federal regulation of business activity expanded considerably with passage of the Securities Exchange Act of 1934 placing securities (documents representing a right held in something, like stocks) under strict oversight. The public wanted greater reliability in what they actually were purchasing interest in, including protection from fraud in common stocks. In 1936 Congress passed the Robinson-Patman Act. Designed to protect small businesses from larger competitors, the act prohibited price discrimination in which companies favor one business over others through the prices they charge. Coupled with President Franklin D. Roosevelt's (1933–1945) attack on monopolies in the late 1930s trustbusting had returned. Eighty antitrust suits were filed in 1940.
In the late 1930s the Court and the nation made a dramatic shift away from emphasizing protection of business to accepting substantial government regulation of economic matters. Passage of the National Labor Relations Act of 1935 promoting labor unions and the landmark ruling in National Labor Relations Board v. Jones & Laughlin (1937) marked that transition. The liberty of contract doctrine under the Due Process Clause came to an end, as did use of the Contract Clause by the Court in recognizing states power to regulate private business. The Fair Labor Standards Act of 1938 established wage and hour regulations for all businesses involved in interstate commerce.
Following World War II, two key court decisions came in 1945. In International Shoe Co. v. State of Washington the Court recognized state authority to regulate out-of-state corporations operating within their boundaries. A lower court in United States v. Aluminum Company of America recognized the social, as well as economic, importance of antitrust law. With the Clayton Act ban on mergers rarely applied in courts, in 1950 Congress passed the last trustbusting law, the Celler-Kefauver Antimerger Act, closing some Clayton Act loopholes. Through the 1970s, demand grew for extensive and uniform regulation in the form of a body of federal corporate law. However, the Court in Santa FeIndustries v. Green (1977) reaffirmed the states' primary role in regulating corporations except in matters concerning securities.
Trustbusting continued with the FTC decreasing the Xerox Company's control of the photocopy industry and the break-up of American Telephone and Telegraph (AT&T), accused of restricting competition in long-distance telephone service and telecommunications equipment. AT&T lost control over Western Electric, the manufacturing part of the company, and various regional operating telephone companies. Courts were skeptical of any cooperation between competitors and of mergers.
With the President Ronald Reagan (1981–1989) administration in power, the 1980s brought a major change in acceptance of government oversight. Reagan reduced the FTC budget as a historic wave of corporate mergers occurred in the mid-1980s. By 1990 states began picking up the slack as they increasingly challenged mergers. By the early 1990s federal interest grew again to examine anticompetitive practices. President Bill Clinton (1993–) increased the budgets of the Justice Department's Antitrust Division as 33 lawsuits were filed in 1994. The most publicized antitrust case involved the Microsoft Corporation, one of the most successful companies of the late twentieth century, accused of various monopolistic activities. Yet, another wave of mergers swept the United States in the late 1990s.
The Global Scene
With the end of World War II (1939–1945) in sight, forty-four nations met in New Hampshire to plan ahead for a new global economy. The meeting led to establishment of three important international organizations as special agencies to the United Nations: the International Bank for Reconstruction and Development more commonly known as the World Bank; the International Monetary Fund (IMF), and the General Agreement on Tariffs and Trade (GATT). Other arrangements followed In 1993 the United States, Canada, and Mexico signed the North American Free Trade Agreement (NAFTA) to share labor and resources. In 1995 the World Trade Organization (WTO) was created by GATT for enforcement of international trade and commerce agreements.
By the beginning of the twenty-first century, the age-old question still persisted as to how much government should limit corporate power and activities. Public opinion was mixed as it had been throughout much of history. In addition, the various international agreements and organizations greatly altered trade and commerce in general. Business issues and disputes became increasingly global in nature. Given increased international competition, public support for government regulation declined. Antitrust concerns also began changing in recognition of new kinds of corporate structures brought on by the transition from a manufacturing to information economy. New technologies challenged past notions of market domination. Ironically, recognition that mergers served to actually increase competitiveness in some global markets rose. Potential economic benefits to the nation and to business efficiency became much more important factors weighed in court decisions concerning both government and private interests.
Suggestions for further reading
Friedman, Milton, and Rose Friedman. Free to Choose. New York: Harcourt Brace Jovanovich, 1980.
Heynes, Paul T. The Economic Way of Thinking. Seventh Edition. New York: Macmillan, 1994.
Sharp, Ansel M., Charles A. Register, and Richard Leftwich. The Economics of Public Issues. Eleventh Edition. Burr Ridge, IL: Irwin, 1994.