West's Encyclopedia of American Law

ANTITRUST LAW

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 businesses 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 competitors, contractual arrangements between sellers and buyers, the pursuit or maintenance of monopoly power, and mergers.

The Sherman Anti-Trust Act of 1890 (15 U.S.C.A. § 1 et seq.) is the basis for 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 had the leading role in shaping how these laws are applied.

Enforcement of antitrust law depends largely on two agencies, the Federal Trade Commission (FTC), which may issue cease and desist orders to violators, and the U.S. Department of Justice's Antitrust Division, 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 can collect triple the amount of damages they have suffered as a result of injuries.

Origins
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 quite 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 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 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 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 (naked restraint) or particularly limited in time and geography (ancillary restraint). Naked restraints were unreasonable, but ancillary restraints were often acceptable. Exceptions to the rule grew as the economic philosophy of laissez-faire (meaning "let the people do what they please") spread its doctrine of noninterference in business. As rival businesses formed cartels to fix prices and 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 put a high premium on the freedom to enter 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 saw cartels as 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 out.

The Sherman Act and Early Enforcement
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 "[e]very contract, combination in the form of trust or otherwise, or conspiracy," that restrained interstate or foreign trade. Section 2 banned 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.

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 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 expecting overnight change, the process worked all too slowly. President Grover Cleveland's Justice Department, which disliked the Sherman Act, made little effort to enforce it.

Initial setbacks also came from the 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 manufacturing was exempt from the Sherman Act, then they had little to worry about. The Court only began strongly supporting use of the law in the late 1890s, starting with cases against railroad cartels. By 1904, some three hundred 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" predicted one important aspect of the future of antitrust enforcement: it would depend largely on political will from the executive branch of government. Roosevelt and his successor, President William Howard Taft, responded to public criticism over the rapid merger of even more industries by pursuing more vigorous legal action, and steady prosecution in the first decade of the twentieth century brought the downfall of trusts.

In 1911, the Supreme Court ordered the dissolution of the Standard Oil Company and the American Tobacco Company in landmark rulings that brought down two of the most powerful industrial trusts. But these were ambiguous victories. In Standard Oil Co. of New Jersey v. United States, 221 U.S. 1, 31 S. Ct. 502, 55 L. Ed. 619, for example, the Court dissolved the trust into thirty-three companies, but held that the Sherman Act outlawed only restraints that were anticompetitive---subject, furthermore, to a rule of reason. Critics of all stripes jumped on this decision. Some feared that conservative judges would now gut the Sherman Act; others predicted a return to lax enforcement; and businesses worried that in the absence of specific unlawful restraints, the rule of reason gave courts too much freedom to read the law subjectively.

Congressional Reform up to 1950
Dissatisfaction brought new federal laws in 1914. The first of these was the Clayton Act, which answered the criticism that the Sherman Act was too general. It declared four practices illegal but not criminal: (1) price discrimination---selling a product at different prices to similarly situated buyers; (2) tying and exclusive-dealing contracts---sales on condition that the buyer stop dealing with the seller's competitors; (3) corporate mergers---acquisitions of competing companies; and (4) interlocking directorates---boards of competing companies, with common members.

Quick to hedge its bets, the Clayton Act qualified each of these prohibited activities. They were only illegal where the effect "may be substantially to lessen competition" or "tend to create a monopoly." This language was intentionally vague. Despite specifying different tests for violations, Congress still wanted the courts to make the difficult decisions. One important limitation was added: the Clayton Act exempted unions from the scope of antitrust law, refusing to treat human labor as a commodity.

The second piece of federal legislation in 1914 was the Federal Trade Commission Act. Without attaching criminal penalties, the law provided that "unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce are hereby declared illegal." This was more than a symbolic attempt to buttress the Sherman Act. The law also created a regulatory agency, the FTC, to interpret and enforce it. Lawmakers fearing judicial hostility to the Sherman Act saw the FTC as a body that would more closely follow their preferences. Originally, the commission was designed to issue prospective decrees and share responsibilities with the Antitrust Division of the Justice Department. Later court rulings would allow it greater latitude in attacking Sherman Act violations.

These laws helped satisfy the short-term demand for tougher, more explicit action from Congress. Before long, antitrust enforcement would shift with the mood of the country. As World War I and the 1920s reversed the outlook of previous years, antitrust policy was characterized by the hands-off policies of President Calvin Coolidge, who declared, "The business of America is business." Economic trends created and supported this attitude; prosperity seemed a worthwhile reward. In this era, the Justice Department gave more attention to promoting fairness than it did to attacking restrictive practices and monopoly power. Although activities such as price-fixing still came under attack, other kinds of business cooperation flourished and even received official encouragement in the early years of the New Deal. This flirtation lasted a good fifteen years, intensifying after the stock market crash of 1929. Following what historians called the era of neglect, antitrust made a resurgence. In 1935, the Supreme Court struck down President Franklin D. Roosevelt's National Industrial Recovery Act, which coordinated industrywide output and pricing, in ALA Schechter Poultry Corp. v. United States, 295 U.S. 495, 55 S. Ct. 837, 79 L. Ed. 1570. The decision radically affected New Deal--era policy. The following year, Congress passed the Robinson-Patman Act, an attempt to make sense of the Clayton Act's bans on price discrimination. The Robinson-Patman Act explicitly forbade forms of price discrimination, in order to protect small producers from extinction at the hands of larger competitors. By 1937, economic decline brought federal antitrust enforcement back with a vengeance, as Roosevelt's administration began an extensive investigation into monopolies. The effort resulted in more than eighty antitrust suits in 1940. One federal court case in this period, United States v. Aluminum Co. of America, 148 F.2d 416 (2d Cir. 1945) (hereinafter Alcoa), changed antimonopoly law for years to come. Since the 1920s, the Supreme Court had looked skeptically on the role of a business's size in judging monopoly cases. In United States v. United States Steel Corp., 251 U.S. 417, 40 S. Ct. 293, 64 L. Ed. 343 (1920), it said, "[T]he law does not make mere size an offense, or the existence of unexerted power an offense. It, we repeat, requires overt acts." The decision weakened the monopoly ban of the Sherman Act. Rather than focus on abusive business conduct, Alcoa emphasized the role of market power. Judge Learned Hand wrote for the court, "Many people believe that possession of unchallenged economic power deadens initiative, discourages thrift and depresses energy; that immunity from competition is a narcotic, and rivalry is a stimulant, to industrial progress; that the spur of constant stress is necessary to counteract an inevitable disposition to let well enough alone." The standard that emerged from this decision applied a two-part test for determining illegal monopolization: the defendant (1) must possess monopoly power in a relevant market and (2) must have improperly used exclusionary acts to gain or protect that power.

Congress added its last piece of important legislation in 1950 with the Celler-Kefauver Antimerger Act, addressing a weakness in the Clayton Act. Because only anticompetitive stock purchases had been forbidden, businesses would circumvent the Clayton Act by targeting the assets of their rivals. Supreme Court decisions had also undermined the law by allowing businesses to transfer stock purchases into assets before the government filed a complaint. The Celler-Kefauver amendment closed these loopholes.

The Supreme Court and Evolving Doctrine
Vigorous enforcement of antitrust legislation created an immense body of case law. After 1950, Supreme Court decisions did more than anything else to shape antitrust doctrine. Two competing outlooks emerged. One regarded markets as fragile, easily distorted by private firms, and readily correctable through public intervention. Economic efficiency mattered less, in this view, than the belief in the antitrust doctrine's ability to meet social and political goals. The opposing view saw business rivalry as generally healthy, doubted that public intervention could cure defects, and emphasized the self-correcting ability of markets to erode private restraints and private power. This outlook opposed the use of antitrust measures except to stop behavior that clearly harms the efficiency of business.

The most aggressive doctrine was developed under Chief Justice Earl Warren. The Warren Court often saw the need for decentralized social, political, and economic power, a goal it put ahead of the ideal of economic efficiency. In 1962, its first ruling on the Celler-Kefauver Act, Brown Shoe Co. v. United States, 370 U.S. 294, 82 S. Ct. 1502, 8 L. Ed. 2d 510, held that a merger between two firms accounting for only five percent of total industry output violated the principal antimerger provision of the antitrust laws. Brown Shoe also reflected the Court's hostility toward vertical restraints (restrictions imposed in contracts by the seller on the buyer, or vice versa).

This aggressive trend peaked in 1967 in United States v. Arnold, Schwinn & Co., 388 U.S. 365, 87 S. Ct. 1856, 18 L. Ed. 2d 1249. Arnold concerned nonprice vertical restraints (territorial or customer restrictions on the resale of goods). The majority ruled that such restraints were per se illegal---in other words, so harmful to competition that they need not be evaluated. In ensuing years, critics condemned the Court's use of "per se" tests to invalidate agreements between competitors or between sellers and buyers. The so-called Chicago school, led by scholars Robert H. Bork and Richard A. Posner, argued that some nonprice vertical restraints actually led to gains in economic efficiency. These ideas would soon take hold.

By the mid-1970s, the Court backed off its robust interventionism. Two pivotal decisions came in 1977, including the most important since World War II, Continental TV v. GTE Sylvania, 433 U.S. 36, 97 S. Ct. 2549, 53 L. Ed. 2d 568. In a decisive departure from the previous decade's rulings, the Court abandoned its hostility toward efficiency. Now, for evaluating nonprice vertical restraints, it returned to the use of a rule of reason. Per se rules would remain influential, but economic analysis would be the primary tool in formulating and applying antitrust rules. The second powerful change in doctrine was Brunswick Corp. v. Pueblo Bowl-O-Mat, 429 U.S. 477, 97 S. Ct. 690, 50 L. Ed. 2d 701. Brunswick said antitrust laws "were enacted for the `protection of competition, not competitors.' " The irony was addressed to private antitrust litigants. If they wanted to sue, the Court said, they would have to prove "antitrust injury." This decision threw out the old view that the demise of individual firms was plainly bad for competition. Replacing it was the view that adverse effects to businesses are sometimes offset by gains in reduced costs and increased output. Increasingly, after Brunswick, the Supreme Court and lower courts would accept economic efficiency as a justification for dominant firms to defend their market position. By 1986, efficiency-based analysis was widely accepted in federal courts.

Even against this restrictive background, explosive change occurred. The early 1980s saw the dramatic conclusion of a historic monopoly case against the telephone giant American Telephone and Telegraph (AT&T) (United States v. American Telephone & Telegraph Co., 552 F. Supp. 131 [D.D.C. 1982], aff'd in Maryland v. United States, 460 U.S. 1001, 103 S. Ct. 1240, 75 L. Ed. 2d 472 [1983]). The Justice Department settled claims that AT&T had impeded competition in long-distance telephone service and telecommunications equipment. The result was the largest divestiture in history: a federal court severed the Bell System's operating companies and manufacturing arm (Western Electric) from AT&T, transforming the nation's telephone services. But the historic settlement was an exception to the political philosophy and level of enforcement that characterized the decade. As the 1980s were ending, the Justice Department dropped its thirteen-year suit against International Business Machines (IBM). This lengthy battle had sought to end IBM's dominance by breaking it up into four computer companies. Convinced that market forces had done the work for them, prosecutors gave up.

Throughout the 1980s, political conservatism in federal enforcement complemented the Supreme Court's doctrine of nonintervention. The administration of President Ronald Reagan reduced the budgets of the FTC and the Department of Justice, leaving them with limited resources for enforcement. Enforcement efforts followed a restrictive agenda of prosecuting cases of output restrictions and large mergers of a horizontal nature (involving firms within the same industry and at the same level of production). Mergers of companies into conglomerates, on the other hand, were looked on favorably, and the years 1984 and 1985 produced the greatest increase in corporate acquisitions in the nation's history.

As the Supreme Court strengthened requirements for evidence, injury, and the right to bring suit, antitrust cases became harder for plaintiffs to win. Most decisions in this period narrowed the reach of antitrust. A few rare exceptions, such as Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 105 S. Ct. 2847, 86 L. Ed. 2d 467 (1985), which condemned a monopolist's unjustified refusal to deal with a rival, faintly recalled the tough outlook of the Warren Court. Nonintervention, however, took precedence. In the strongest example, Matsushita Electrical Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S. Ct. 1348, 89 L. Ed. 2d 538 (1986), the majority dismissed allegations that Japanese television manufacturers had engaged in a twenty-year pricing conspiracy designed to drive U.S. electronics equipment manufacturers out of business. The Court discouraged claims that rested on ambiguous circumstantial evidence or lacked "economic rationality," suggesting that lower courts settle these by summary judgment (judicial decision without a trial).

The 1990s
Once again proving that antitrust law never remains static, the late 1980s and early 1990s brought more changes in enforcement, economic analysis, and court doctrine. At the state level in the late 1980s, governments attacked mergers and restraints. The Supreme Court gave these efforts support in California v. American Stores Co., 495 U.S. 271, 110 S. Ct. 1853, 109 L. Ed. 2d 240 (1990), upholding the ability of state governments to break up illegal mergers. Another trend came again from academia, where, for years, critics of the Chicago school had been reevaluating its highly influential efficiency model. They concluded that a proper analysis of efficiency goals showed that efficiency demanded tighter antitrust controls, not stubborn nonintervention.

An important 1992 Supreme Court case seemed to support this view. Eastman Kodak Co. v. Image Technical Services, 504 U.S. 451, 112 S. Ct. 2072, 119 L. Ed. 2d 265 (hereinafter Kodak), concerned tying arrangements (contracts between buyer and seller that restrict competition) in the sale and service of photocopiers. Kodak sold replacement parts only to buyers who agreed to have Kodak exclusively service the machines, and the restriction prompted a lawsuit from eighteen independent service organizations (ISOs). The company defended itself by arguing that even if it did monopolize the market, it lacked the necessary market power for a Sherman Act violation. The Court rejected the idea that this was enough to create a legal rule that equipment competition precluded any finding of monopoly power in the parts and services industry. In declaring Kodak's arrangement illegal, Justice Harry A. Blackmun warned about the dangers of relying on economic theory as a substitute for "actual market realities"---in this case, the harm done to ISOs who were shut out of the service market.

After the Reagan years, antitrust attitudes sharpened in Washington, D.C. The administration of President George Bush adopted a slightly more activist approach, reflected in joint guidelines on mergers issued in 1992 by the FTC and the Justice Department. In following the trend away from strict Chicago school efficiency standards, the guidelines looked more closely at competitive effects and tightened requirements. But understaffed government attorneys generally lost court cases. President Bill Clinton took this activism further. Anne K. Bingaman, his appointee to head the Department of Justice's Antitrust Division, beefed up the division's staff with sixty-one new attorneys, declaring her organization the competition agency. The Antitrust Division filed thirty-three civil suits in 1994, roughly three times the annual number brought under Reagan and Bush. It won some victories without going to court, in one instance compelling AT&T to keep a subsidiary private, but it lost a major lawsuit claiming that General Electric had conspired with the South African firm of DeBeers to fix industrial diamond prices.

Under President Clinton, the most important antitrust action involved a federal probe of the computer software giant Microsoft Corporation. In its potential for far-reaching action, this was the biggest antitrust case since those involving AT&T and IBM. Competitors complained that Microsoft used illegal arrangements with buyers to ensure that its disk operating system would be installed in nearly 80 percent of the world's computers. In-depth investigations by the FTC and the Department of Justice followed. In mid-1994, under threat of a federal lawsuit, Microsoft entered a consent decree designed to increase competitors' access to the market. All the parties involved---the original complainants, Microsoft, and the government---expressed relative satisfaction. But in early 1995, a federal judge rejected the agreement, citing evidence of other monopolistic practices by Microsoft. In a highly unusual move, the Justice Department and Microsoft together appealed the decision. The uncertain future of the case carried the threat of further action against the nation's fifth-largest industry.

CROSS-REFERENCES
Bork, Robert; Chicago School; Clayton Act; Corporation; Justice Department; Mergers and Acquisitions; Monopoly; Posner, Richard; Restraint of Trade; Robinson-Patman Act; Sherman Anti-Trust Act; Unfair Competition.

Articles from West's Encyclopedia of American Law are published on West's Legal Directory Law Information Center with the understanding that the publisher is not engaged in rendering legal or other professional advice. If legal advice or other professional assistance is required, the services of a competent professional person should be sought.


West's Legal Directory -- | Search | Law Information Center | Customer Service | Site Map
Comments | West Group Home Page | Copyright 1997 West Group

Go to Top of Form

Contact Dr. Stephen Hartman

Return to Table of Contents