A Brief History of US Antitrust Law

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A Brief History of U.S. Antitrust Law – Part One

By The Fatty Fish Editorial Team - January 10, 2022

In this series, A Brief History of US Antitrust Law, we will attempt to condense the history of antitrust law and enforcement in as concise and relevant a format as possible. Our goal is to make it easier and faster to gain a practical understanding of how antitrust thinking and jurisprudence have evolved over the last century and a half.

The Sherman Antitrust Act of 1890 and the Establishment of U.S. Antitrust Law

The Sherman Antitrust Act (26 Stat. 209, 15 U.S.C. §§ 1–7), which was passed by the United States Congress in 1890 and is named for Senator John Sherman, its principal author, forms the basis of modern United States antitrust law prescribing a framework for free market competition.

In 1890, when the Sherman Act was enacted, federal statutes were woefully inadequate to address the problem of “trusts” and combined businesses (like cartels) that could weaponize enormous amounts of capital and resources to gain monopolistic control of relevant markets through a systematic suppression of competition. The objective of the Act was to empower the Department of Justice to push back against such attacks on free and fair competition which resulted in higher prices, less choice, and restrained production, causing harm to consumers as well as competition and trade. One of the reasons the Sherman Act became necessary was because many forms of anti-competitive behavior by trusts occurred across state lines, making antitrust action by individual states ineffective. The solution to the problem needed to be a federal solution, and so Congress enacted the Sherman Act in 1890.

The Sherman Act broadly prohibits both anti-competitive agreements and conduct that qualifies as monopolistic or aims to establish a market monopoly. The Act empowers the Department of Justice to bring suits against entities engaged in conduct deemed to violate the Act. It also allows private parties claiming injury by such conduct to bring suits for punitive treble damages, which are three times the financial amount that the violation can be shown to have actually cost them.

The Sherman Act was divided into three sections. Section 1 outlines and prohibits specific means of anticompetitive conduct. Section 2 focuses on outcomes that are anti-competitive in nature. Section 3 is more administrative in nature, and merely extends the provisions of Section 1 to U.S. territories and the District of Columbia.

Section 1:

“Every 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 declared to be illegal.”

Section 2:

“Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony.”

Over time, the United States Supreme Court has affirmed that the Act is not meant to be used against businesses that become dominant in their market on their own merit, but rather to be used only against businesses that deliberately come to dominate a market through misconduct, in the form of conspiratorial conduct of the kind forbidden by Section 1 of the Sherman Act, and later Section 3 of the Clayton Act. Case in point, in Spectrum Sports, Inc. v. McQuillan (506 U.S. 447) the Supreme Court ruled as recently as 1993 that:

“The purpose of the [Sherman] Act is not to protect businesses from the working of the market; it is to protect the public from the failure of the market. The law directs itself not against conduct which is competitive, even severely so, but against conduct which unfairly tends to destroy competition itself.”

The Rule of Reason

In its landmark Standard Oil Co. of New Jersey v. United States decision in 1911, the U.S. Supreme Court reframed U.S. antitrust law as a so-called “rule of reason.” The government had just successfully argued that the Standard Oil Company had violated the law by making economic threats against competitors and by way of secret rebate deals with railroad companies to create and maintain a monopoly in the oil refining industry. Though Standard Oil appealed, the Supreme Court ruled that Standard Oil’s high market share was proof of its monopoly power and ordered the company broken up into 34 separate companies.

The Court’s decision interpreted the Sherman Act’s language outlawing “every” trade restraint somewhat liberally, assigning a new standard of “unreasonable” restraints on trade. It argued that the provisions specified under the Sherman Act should be interpreted as a “rule of reason,” essentially granting the courts the authority to evaluate the competitive impact of any and all suspect business practices on a case-by-case basis, though also arguing that only the most egregious behaviors should be considered illegal per se.

Many pushed back against the Supreme Court’s decision, believing that it represented an effort to weaken the still rather young antitrust laws. In response, Congress quickly passed two new laws in 1914. One was the Clayton Antitrust Act, which outlawed using mergers and acquisitions to achieve monopolies, and exempted collective bargaining from antitrust action, and the other was the Federal Trade Commission Act, which created the U.S. Federal Trade Commission (FTC) an independent agency that was to share jurisdiction with the Department of Justice over federal antitrust enforcement.

The Clayton Antitrust Act of 1914 and the Expansion of U.S. Antitrust Regulations

The Clayton Antitrust Act (Pub.L. 63–212, 38 Stat. 730), enacted October 15, 1914, was the second major milestone in U.S. antitrust law and aimed to strengthen the Sherman Act by preventing anticompetitive practices in their incipiency. The Clayton Act specified new prohibited conduct, a three-level enforcement scheme, exemptions, and remedies.

The Clayton Act breaks down its substantive additions to antitrust law in four sections that address key principles of economic trade and business:

Price discrimination between different purchasers if such a discrimination substantially lessens competition or tends to create a monopoly in any line of commerce (Act Section 2, 15 U.S.C. § 13);
Sales on the condition that the buyer or lessee not deal with the competitors of the seller or lessor (“exclusive dealings”), or the buyer also purchase another different product (“tying”) but only when these acts substantially lessen competition (Act Section 3, 15 U.S.C. § 14);
Mergers and acquisitions where the effect may substantially lessen competition (Act Section 7, 15 U.S.C. § 18) or where the voting securities and assets threshold is met (Act Section 7a, 15 U.S.C. § 18a);
And any person from being a director of two or more competing corporations, if those corporations would violate the antitrust criteria by merging (Act Section 8; 15 U.S.C. § 19).

Regarding Section 3, an unintended consequence of the Sherman Act was that it had triggered a tsunami of mergers when businesses quickly came to realize that forming a single corporation was more advantageous (and legal) than forming cartels. A Commission on Industrial Relations was established to study the problem, which inspired Alabama representative Henry De Lamar Clayton Jr. to introduce new antitrust legislation in the U.S. House of Representatives.

An interesting difference between the Clayton Act and the Sherman Act is the Clayton Act’s exemptions for labor unions and agricultural organizations, based on the argument that “the labor of a human being is not a commodity or article of commerce.” This meant that peaceful strikes and picketing, as well as collective bargaining, were exempt from the statute. This was an important distinction and departure from the Sherman Act, as until then, U.S. courts had generally interpreted the Sherman Antitrust Act of 1890’s prohibition against cartels as also applying to trade unions. This had obviously created a problem for workers who felt that they needed to organize in order to achieve some measure of legally protected and fair bargaining power against their employers. The Clayton Act served as a remedy for that imbalance.

In Part Two of this Brief History of Antitrust Law series, we will tackle the Celler–Kefauver Act of 1950 and the Hart–Scott–Rodino Antitrust Improvements Act of 1976.

Disclosure: Fatty Fish is a research and advisory firm that engages or has engaged in research, analysis, and advisory services with many technology companies, including those mentioned in this article. The author does not hold any equity positions with any company mentioned in this article.

Image Credit: McGowan, Hood and Felder

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.