Key Acts, Cases, and Concepts in American Antitrust History

The following brief review of key acts and cases in American antitrust history as well as the legal theories they spawned may help introduce readers to the twisted, contradictory, and utterly unjust morass that is antitrust.

Sherman Act (1890): Section 1: Forbade all behavior "in restraint of trade." It was interpreted to prohibit price fixing, price discrimination, and cooperation with competitors. It had the unintended consequence of creating greater incentives for firms to merge, since the act blocked firms' abilities to cooperate with their competitors.

Section 2: Prohibited "monopolizing behavior," even if such behavior was unsuccessful. The meaning of "monopolizing behavior" is ambiguous, as businesses always try to undercut their competitors by offering better products and services at more attractive prices. The act did not specify the behaviors which qualified as "monopolizing."

Rule of Reason vs. Per Se Rule: First introduced in the 1911 Standard Oil Case, the Rule of Reason stated that only "unreasonable" attempts to monopolize violated the Sherman Act and left it up to the judges to figure out which particular business activities qualified as unreasonable. This has led to interpretation of antitrust laws to be unpredictable and subject to the changing fashions of the day, as both the standard for what is "reasonable" and the precedents referred to by judges changed dramatically over the subsequent decades. The Rule of Reason failed to set up clear rules of the game and thus made it impossible for firms to know in advance whether their behaviors constituted a violation of antitrust laws.

An action is illegal per se if there is no acceptable legal justification for undertaking the action. A few types of price discrimination under the Robinson-Patman Act cannot be justified as being "reasonable" restraints of trade and do not come under the Rule of Reason; they are illegal in all circumstances.

Clayton Act (1914): Section 2: Explicitly forbade price discrimination which substantially lessened competition or created a monopoly - but allowed certain loopholes, such as price discrimination based on quantity sold, different costs of transportation, or the effort to meet the prices of competitors in particular markets.

Section 3: Forbade tying contracts (having to buy good X to obtain good Y) and exclusive dealing arrangements (which forced a buyer to purchase its entire supply of a commodity from one seller).

Section 7: Meant to restrict horizontal mergers - firms merging with direct competitors. Section 7 forbade companies from acquiring the stock of competitors when such acquisition would lessen competition and restrain trade. Limited to horizontal mergers with direct competitors - but horizontal mergers increased after the passage of the act, because firms could simply acquire competitors' assets instead of their stocks.

Section 8: Forbade interlocking directorates between any two competing corporations.

Federal Trade Commission Act (1914): Established the Federal Trade Commission, an independent antitrust agency, to enforce the Clayton Act. Section 5: Commission is empowered regulate commerce to prevent "unfair methods of competition"-- an extremely broad mandate potentially encompassing any business practice. This does not explain to whom the methods of competition must be unfair - to the consumer or to other competitors, for consumers often benefit when competitors are at each other's throats. The Department of Justice and the FTC split up antitrust enforcement among themselves.

Robinson-Patman Act (1936):Amended Section 2 of the Clayton Act - motivated by the perfect competition model, this act protected competitors rather than competition and ended up reducing competition in practice. This act has been used in cases where price discrimination injured even one competitor, even if the price discrimination actually increased competition overall. The act allowed certain kinds of price discrimination only if competitors showed "good faith effort to meet the competition." It also made certain kinds of price discrimination illegal per se. Section 2(c) forbade payment of any brokerage commission except for services actually rendered by an independent broker. Section 2(d) forbade suppliers from paying their buyers for promotional services, Section 2(e) forbade the supplier from providing promotional services to any buyer unless these services are made available to all buyers on "proportionally equal terms."

Celler-Kefauver Act (1950): The Celler-Kefauver Act amended Section 7 of the Clayton Act to forbid all mergers "in restraint of trade" - including mergers through the acquisition of the assets of another corporation. Furthermore, the Act extended Section 7 to apply to all mergers rather than only mergers between direct competitors.

Antitrust Penalties vs. Remedies: In criminal cases, penalties include fines of up to $10 million company fine per violation (as of 1992) and $1 million individual fine per violation, as well as a maximum of 10 years in jail per violation. The FTC has the power to impose a daily fine of $10,000 for refusal to abide by an FTC order. For privately initiated lawsuits, the damages can be trebled. In civil cases, only remedies can be imposed. Remedies include conduct or structural changes. Injunctions can be issued to forbid certain kinds of conduct, such as price discrimination or tying; these injunctions change future behavior without penalizing the defendant for past behavior. Structural remedies include breaking up the company, divestiture, dissolution, and divorcement - used most commonly in merger cases.

Source: Don E. Waldman and Elizabeth J. Jensen. Industrial Organization: Theory and Practice. Third Edition. Pearson Education. 2007.

Standard Oil Case (1911): By 1895, Standard Oil had a 90% market share in the oil refining business and seemingly engaged in behavior that aimed at maintaining control over the US oil refining business. Standard Oil acquired over 100 competitors, suppliers, and retailers through merger, controlled the major oil pipelines, and obtained freight rebates from railroads on its own and on its competitors' shipments. Many thought that Standard Oil would become a monopolist, but the price of oil declined about tenfold from 1895 to 1911, and consumers were benefited by Standard Oil's activity. But the Supreme Court ruled unanimously against Standard Oil, deciding that it did not matter whether Standard Oil was a monopoly; the problem was its intent to monopolize. This case set a precedent on what "monopolizing behavior" meant. Being a monopoly was not illegal, but actively attempting to monopolize and gain monopoly power was. "The noun is legal, the verb is illegal." It did not matter that Standard Oil's market share had declined substantially during the time over which the proceedings took place - unsuccessful attempts to monopolize were also illegal under the Sherman Act. The Rule of Reason was applied to monopolizing behavior - which had to be proven "unreasonable" to be illegal.

US Steel Case (1920): Judge Elbert Gary, the head of US Steel, would hold the "Gary dinners," at which he invited competitors with the purpose of fixing and stabilizing prices. The Sherman Act was supposed to punish precisely this kind of collusion to fix prices, but the Supreme Court acquitted US Steel and decided that US Steel was not engaging in monopolizing behavior, because if US Steel was a monopoly, it would not need to hold these dinners and attempt to persuade its competitors. The need to conspire with competitors to fix prices meant that US Steel did not have monopoly power. But US Steel was by far the dominant firm on the market and could have aggressively gone after its competitors. Between 1920 and 1945, this precedent protected dominant firms that refrained from predatory actions from Section 2 attack.

ALCOA Case (1945): ALCOA was charged with monopolizing the aluminum ingot market - case was decided by Judge Learned Hand of the New York Court of Appeals. The primary ingot market was defined by Hand to be the relevant market in this case, even though the secondary ingot market - the market for aluminum from scrap metal - also existed. ALCOA controlled over 90% of the primary ingot market, but only 33% of the market defined to include secondary ingot. Hand ruled that because ALCOA produced virtually all primary aluminum, it indirectly controlled the secondary ingot market. So the primary market was the relevant one, and ALCOA was a monopoly. Hand admitted that there was no evidence of forceful behavior to achieve monopoly status and that ALCOA behaved well in its position and did not restrain trade. But Hand also ruled that it is enough to show that the firm has a monopoly to break the law - which was a major departure from the Standard Oil Case precedent. Hand argued that ALCOA was not a firm that had its monopoly position thrust upon it. Rather, ALCOA took active measures by pursuing every new opportunity as it came and taking advantage of its patents, high barriers to entry, and vertical integration - so ALCOA was guilty under Section 2 of the Sherman Act. This radically departed from both the Standard Oil and the US Steel precedents.

United Shoe Machinery Case (1954): United Shoe Machinery was another example of a dominant firm that did not charge high prices, had normal profits, reliable products, low costs, but was found guilty. The Department of Justice charged that USM's market power resulted from an illegal long-term leasing policy. The Supreme Court took issue with the fact that United refused to sell its machines but instead leased them for a minimum of ten years, thus creating potential problems for entrants and eliminating the possibility of a secondhand market forming. But in the ALCOA case, the existence of a secondhand market did not matter - another instance of conflicting antitrust rulings.

Sources

Don E. Waldman and Elizabeth J. Jensen. Industrial Organization: Theory and Practice. Third Edition. Pearson Education. 2007.

Pongracic, Ivan. Lecture on Industrial Organization. Hillsdale College. Hillsdale, MI. August - September, 2007.

All lecture material is used with explicit permission.