Sherman Antitrust Act: Definition and Much More from Answers.com

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.

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.

This entry contains information applicable to United States law only.

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.

The common law traditionally has favored competition, finding agreements and contracts that restrain trade to be illegal and unenforceable. During the 1800s several states enacted antitrust statutes, but by the late 1800s these statutes proved ineffective in stopping the rapidly growing and powerful trusts, because many forms of restraint on commercial competition extended across state lines. The trusts were corporate holding companies that, by 1888, had consolidated a very large share of U.S. manufacturing and mining industries into nationwide monopolies. These monopolies were popularly called "trusts" because the original legal form of their organization had been as business trusts. But changes in state business laws in the 1800s allowed them to act as holding companies, leading to the combinations. 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, and they demanded legislative action. 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 equality of opportunity to aspiring business venturers. The public's intense demands for legislative action in the late 1800s prompted Congress to pass the Sherman Act, followed by several other antitrust acts. 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) are also significant antitrust laws that, together with the Sherman Act, prohibit anticompetitive practices and prevent unreasonable concentrations of economic power that stifle or weaken competition.

The Sherman Act made agreements "in restraint of trade" and "monopolization" illegal, subject to civil remedies and criminal penalties. Courts can issue injunctions to stop violations of the act, also subjecting the violator to treble (triple) damages by anyone injured by the violation. Private parties can bring actions seeking treble damages, and the U.S. Department of Justice and the Federal Trade Commission (FTC) have the duty to institute actions for other violations of the antitrust laws. The purpose of the act was to make competition the rule in U.S. trade and commerce and to outlaw conduct that might lead to monopoly, but its general language provided virtually no standards. Congress enacted the Sherman Act pursuant to its constitutional power to regulate commerce, and this was only the second occasion in the one hundred years of the existence of the nation in which Congress relied on that power. Because Congress was somewhat uncertain of the reach of that legislative power, it framed the law in broad common-law concepts that lacked details. This in effect passed the problem along to the executive branch to determine how to enforce the law and also to the judicial branch to determine how to interpret 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." A number of major cases were successfully brought in the first decade of the century, largely terminating the 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 the antitrust laws was undertaken. Since World War II, antitrust enforcement has become increasingly institutionalized in the Antitrust Division of the Justice Department and in a more professional Federal Trade Commission. Justice Department enforcement activities against cartels are particularly vigorous, and criminal sanctions are increasingly sought. The number of private treble damage suits, often in class actions, has grown rapidly in recent years. 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 others, 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 Department of Justice 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 coconspirator, 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.

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