Clayton Antitrust Act: Definition from Answers.com

The political seed for the Clayton Act (38 Stat. 730) was sown in the 1912 presidential election, a three-way contest between William Howard Taft, the incumbent Republican; Woodrow Wilson, the Democrat challenger; and Theodore Roosevelt, running for his old job on the Progressive Party, or "Bull Moose," ticket. All three parties believed that the Supreme Court had been far too lenient to large corporations and that antitrust laws needed to be strengthened. When Wilson won the election, he instructed Congress to work on new legislation, and the Clayton Act emerged two years later in 1914.

The principal provisions of the Clayton Act, which is far more detailed than the Sherman Act, the law it was meant to supplement, include (1) a prohibition on anticompetitive price discrimination; (2) a prohibition against certain tying and exclusive dealing practices; (3) an expanded power of private parties to sue and obtain treble (triple) damages; (4) a labor exemption that permitted union organizing; and (5) a prohibition against anticompetitive mergers.

Price Discrimination

Section 2 of the Clayton Act states that: "It shall be unlawful ... to discriminate in price between different purchasers of commodities ... where the effect of such discrimination may be to substantially lessen competition or tend to create a monopoly." The drafters of the Clayton Act believed that large firms such as Standard Oil perpetuated their monopolies by engaging in selective, or discriminatory predatory pricing. For example, Standard might be charging ten cents per gallon for its fuel oil in towns where it had a monopoly. It might then cut the price to below cost in a competitive town until it drove the competitors out of business, using the high profits from the monopoly towns to finance the below-cost prices in the competitive town. Section 2 was intended to prevent this strategy by forbidding Standard from charging two different prices in the two sets of town if the result was to extend Standard's monopoly.

The provision against predatory pricing was widely used through the 1960s to condemn this type of price discrimination. However, critics increasingly argued that the provision condemned hard competition and actually forced firms to charge more than they otherwise would. In Brooke Group Ltd. v. Brown & Williamson Tobacco Co. (1993), the Supreme Court developed strict standards for proving that price discrimination did in fact "substantially lessen competition." Since then, it has been almost impossible for plaintiffs to win any cases.

Tying and Exclusive Dealing

Section 3 of the Clayton Act provides that: "It shall be unlawful ... to make a sale ... of goods ... on the condition ... that the ... purchaser ... shall not use or deal in the goods ... of a competitor ... where the effect ... may be to substantially lessen competition or tend to create a monopoly...." This provision of the Clayton Act was passed in response to the Supreme Court's decision in Henry v. A.B. Dick & Co. (1912). The Court had found no violation when A. B. Dick required users of its mimeograph machines (an early form of copy machine) to purchase all their paper and ink from that company as well. Congress believed that firms like A.B. Dick used such "tying arrangements" to expand one monopoly into two. In this case, the company already had a monopoly on its patented mimeograph machine. By requiring everyone who used the machine to use its paper and ink, the company could also monopolize the market for paper and ink used in those machines.

Today most economists and others interested in antitrust law believe this practice is rarely competitively harmful. In fact, A.B. Dick may have had good reasons to tie paper and ink. For example, its machine might work better when its own paper and ink are used, making consumers happier. In its 1984 decision in Jefferson Parish Hospital v. Hyde, the Supreme Court made unlawful tying more difficult to prove. That case approved an arrangement under which the hospital required all surgical patients to use its own approved anesthesiology firm. Competition was not harmed, the Supreme Court concluded, because the hospital admitted only 30 percent of the patients in the area, meaning there was ample room for other anesthesiologists to practice their profession.

The other practice that section 3 of the Clayton Act occasionally condemns is exclusive dealing, which occurs when a firm insists that retailers handle its brand exclusively. In Standard Oil of California v. United States (1949), the Supreme Court found it unlawful for Standard to require its gasoline stations to sell Standard's gasoline exclusively. In more recent years we are inclined to think decisions like this are harmful, because they limit a manufacturer's power to control the quality of its products. For example, in Krehl v. Baskin-Robbins Ice Cream Co. (1982), the court held that Baskin-Robbins could require its stores to sell only Baskin-Robbins ice cream. Otherwise, customers might be deceived into buying cheaper brands when they thought they were getting the real thing. Today most, but not all, exclusive dealing is legal.

Private Lawsuits

Both the United States government and individual states have the power to enforce antitrust laws. Yet 90 percent of lawsuits are brought by private parties such as consumers or business firms. Section 4 of the Clayton Act states: "any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue therefore in any district court of the United States ... and shall recover threefold the damages by him sustained, and the cost of suit, including a reasonable attorney's fee." This provision creates a major inducement to sue because it means that a private plaintiff can obtain a damage award three times as large as the actual loss. Further, if the plaintiff wins, the defendant will have to pay the plaintiff's attorneys' fees.

For example, suppose that compact disc (CD) manufacturers fix the price of music CDs, including those that you buy, at $18. Price fixing is an automatic violation of section 1 of the Sherman Act. The lawyer managing this suit would probably bring a "class action" on behalf of thousands of people who paid too much for CDs. The lawyer would also hire an expert economist who would testify about the price of CDs in a competitive market. Suppose the jury accepted this expert's testimony that if the price fixing had not occurred the price of CDs would have been $15. In that case you are the victim of an "overcharge" equal to the difference between the cartel price and the competitive price, or $3. At that point you would have to show how many CDs you purchased during the cartel period. Suppose you had purchased twelve. Your "actual" injury would then be $3 times 12, or $36. However, under the antitrust laws this number would be trebled to $108.

Damages awards in antitrust cases can be very high, sometimes as much as $1 billion. This makes antitrust litigation very attractive to lawyers and explains why so many antitrust cases are filed. By some estimates there are as many as 700 antitrust cases filed in the United States every year.

The Labor Exemption

Section 6 of the Clayton Act provides that: "The labor of a human being is not a commodity or article of commerce. Nothing contained in the antitrust laws shall be construed to forbid the existence and operation of labor ... organizations?; nor shall such organizations, or the members thereof, be held or construed to be illegal combinations or conspiracies in restraint of trade, under the antitrust laws."

One thing that surprised many Progressives in the United States was the degree to which the Supreme Court permitted use of the antitrust laws to break labor strikes. A labor strike is an agreement among laborers that they will not work unless they get paid a certain wage. Economically, this agreement is identical to a price fixing agreement in a product such as a CD. Because section 1 of the Sherman Act did not distinguish between price fixing in goods and price fixing in labor, the Supreme Court held that labor strikes were just as unlawful as cartels. (An example can be found in Loewe v. Lawlor [1908], known as the Danbury Hatters case.)

Section 6 was intended to change these outcomes by immunizing labor strikes from antitrust suits. The statute had to be strengthened by other legislation passed during the New Deal and after, but the ultimate outcome was that labor unions are free to organize and agree on a wage without violating the antitrust prohibition against price fixing.

Mergers

Probably the most often used section of the Clayton Act is the prohibition of anticompetitive mergers. A merger occurs when one company buys another and the two firms become one. For example, Chrysler Motors at one point acquired Jeep, Inc. Later, Chrysler was itself acquired by Daimler-Benz, the maker of Mercedes-Benz automobiles. As a result, Mercedes-Benz cars, Jeeps, and Chrysler cars such as Dodge and Plymouth are all manufactured today by the same very large company.

Most mergers are legal, and in general economists think they benefit the economy by enabling manufacturers to produce or distribute goods more cheaply. A few mergers are anticompetitive, however. They might create a monopoly or make price fixing much easier than it was before the merger occurred. Section 7 of the Clayton Act provides: "No person engaged in commerce ... shall acquire ... the whole or any part of ... another person engaged also in commerce ... where in any line of commerce or in ... any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly." The term "person" in this provision refers to a "legal" rather than a biological person. Legally, corporations are also treated as persons. As a result, the provision applies both to firms owned by a single person but also to very large corporations. Only acquisitions involving fairly large firms, however, are typically found to be unlawful.

Mergers are unlawful when they either create a monopoly or make it much easier for the remaining firms in the market to fix prices. A good example is Federal Trade Commission v. Heinz, Inc. (2001), which prohibited a merger between two manufacturers of baby food. Gerber, Heinz, and Beech-Nut were the three major producers of baby food in the United States. Heinz offered to purchase Beech-Nut so the two would become a single firm. Under the law, large mergers have to be reported to the Department of Justice or the Federal Trade Commission, the two federal agencies that enforce the antitrust laws. In this case the Federal Trade Commission challenged the merger. The court accepted its evidence that with three firms in the market there was a significant amount of competition in the baby food market, and this tended to keep prices low. If the merger were permitted, the market would have only two firms and these would not compete as fiercely as firms in a three-firm market. As a result of the court's decision, Heinz abandoned the merger plans and the market continued to have three major baby food producers.

Bibliography

Chamberlain, John. The Enterprising Americans: A Business History of the UnitedStates. New York: Harper & 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, 1890–1916. Cambridge, UK: Cambridge University Press, 1988.