A Brief History of Antitrust Law

A Brief History of Antitrust Law – Part Three

By The Fatty Fish Editorial Team - January 14, 2022

1970 – Present: The Pendulum Swings Back Toward the “Rule of Reason”

The structuralist interpretation of U.S. antitrust law that had shaped the post WW2 era started to lose favor in the early 1970s. Modern economists experimenting with game theory were beginning to assert that purely structuralist interpretations of both the Sherman and Clayton Acts were too rigid to effectively gauge certain types of anticompetitive conduct. In their view, some conduct that had been thought universally anticompetitive wasn’t always so, and more flexibility needed to be given to circumstance and nuance. Moreover, prominent economists from the Chicago School of Economics were beginning to argue that economic efficiency arguments should not be dismissed outright, and that price regulation and the imposition of artificial barriers to entry had become too restrictive and overbearing to free markets.

Prominent law professors from Yale and the University of Chicago Law School, Robert Bork, Richard Posner, and Frank Easterbrook, adapted these economic arguments for U.S. courts, asserting that the original “rule of reason” approach made more legal and practical sense in dealing with antitrust cases than the rigid per-se principles of illegality that had gained favor following the war. One of the key reasons why their arguments gained traction was that they were based on data and pragmatic economic analysis that indicated that a number of the practices that had been deemed anticompetitive under a structuralist model were actually pro-competitive in the real world, and often offered economic benefits that outweighed the potential risks that antitrust action aimed to mitigate.

The first real evidence of this shift back towards the “rule of reason” was the Supreme Court’s Continental Television, Inc. v. GTE Sylvania, Inc 1977 decision, in which the Court ruled that non-price vertical contract restrictions were no longer per se illegal and that they should be evaluated under the “rule of reason.”

As a result of this shift in jurisprudence, the DOJ and FTC lost most of the antitrust cases they brought under section 2 of the Sherman Act in the seventies and eighties. In fact, in 1974, the federal government lost its first merger challenge before the Supreme Court in over 25 years when it failed to prevail in United States v. General Dynamics Corp. The most notable exception came in 1982, when the federal government’s successful United States v. AT&T case resulted in the breakup of Bell Telephone and its telephone monopoly.

In the absence of significant new antitrust legislation, the overall trend in the past few decades has been for government regulators like FTC and DOJ to argue antitrust cases in the courts in the hopes of establishing new case law regarding what constitutes anticompetitive behavior. The resulting stalemate that this model of piecemeal court tests created has resulted in several decades of stability and predictability for companies and investors, but that may be about to change.

Over the course of the last decade and a half, technology companies have adopted a somewhat divergent business model from that of early twentieth century industry giants, which at the time provided mostly products like steel, oil, newspapers and manufactured goods, or services like banking. The rise of platform companies like Amazon, Google, Microsoft, Apple and Meta, which integrate complex layers of interconnected services and capabilities, has triggered a resurgence of interest in antitrust reform. On the one hand, some economic observers, regulators, and lawmakers believe that platform companies, which tend to be technology companies, have become too big and powerful too quickly, and must be reigned in out of principle. On the other hand, some believe that antitrust laws passed in the twentieth century are not well adapted to the realities of platform companies in the twenty-first century, and need to be updated (read: expanded).

While there is some validity to the notion that antitrust legislation could use a refresh to address new challenges posed by a consolidation of power and potential anticompetitive behaviors on the part of platform companies, fear among many economists and antitrust experts is that in the effort to update antitrust regulations, lawmakers may overreach and overcorrect, causing more harm than good to one of the United States’ most successful and important strategic assets: the U.S. technology sector. This is especially dangerous as the United States and China find themselves engaged in a high stakes technological cold war that transcends simple issues of competition. In other words, it would be prudent for U.S. lawmakers and regulators to carefully consider the geostrategic implications of passing (or even pursuing) aggressive antitrust reform, which could harm the U.S. technology sector and unintentionally hand China a dangerous advantage.

Exacerbating the risk of toppling an antitrust regime that has driven decades of innovation and economic growth for the technology sector and all of the market segments it serves (which amounts to all of them) is a decades long protectionist effort by the European Commission, which has demonstrated both zeal and consistency in targeting U.S. “big tech” on antitrust and anticompetive grounds. And while it makes sense on some level for the EC to use its authority and political leverage to protect European technology interests by limiting the scope, influence, and market power of U.S. technology companies, the success of its antitrust actions has caught the attention of U.S. regulators and some political actors looking for a model to help reform U.S. antitrust law and reign in “big tech.” This helps explain why U.S. regulators appear to be engaged in an effort to harmonize antitrust efforts with their European counterparts even though their motives and interests are not aligned.

The challenge for U.S. legislators and regulators in the coming years will be to adjust their antitrust efforts to effectively target areas of legitimate antitrust and anticompetitive concern without causing harm to the U.S. technology sector, and consequently to the ability of the U.S. to continue to act as the last remaining buffer against China’s global ambitions. Areas of specific interest in the next decade are silicon, 5G, AI, and cybersecurity. In other words, no one is arguing that the U.S. isn’t due for some type of antitrust reform. What many worry about is an overzealous overcorrection of antitrust law, and the domino effect of negative unintended consequences that would follow.

To be continued.

The Fatty Fish Editorial Team

The Fatty Fish Editorial Team includes a diverse group of industry analysts, researchers, and advisors who spend most of their days diving into the most important topics impacting the future of the technology sector. Our team focuses on the potential impact of tech-related IP policy, legislation, regulation, and litigation, along with critical global and geostrategic trends — and delivers content that makes it easier for journalists, lobbyists, and policy makers to understand these issues.