The history of antitrust in the U.S. is generally thought to have commenced with passage of the Sherman Act in 1890, although the first antitrust laws were passed by several states prior to a federal law.2 In 1914, two additional federal laws were passed: the Clayton Act and the Federal Trade Commission (FTC) Act. Although there have been amendments to these three federal laws (most importantly, the 1936 Robinson-Patman Act and the 1976 Hart-Scott-Rodino Act), the basic framework has not changed since 1914. Most of the states have passed laws that mimic the Sherman and FTC Acts (see annexure for state laws).
Private causes of action are not only permitted, but are encouraged by the statutory trebling of damages and award of attorneys' fees, with the result that an estimated 9 out of 10 antitrust cases are in fact private rather than public. It is private causes of action and criminal sanctions that most noticeably separate the US from other countries' antitrust regimes.
Many people wonder about the word "antitrust". In the second half of the nineteenth century, large industrial organisations rather suddenly appeared in a nation that was then largely rural. Some took the form of trusts (such as the sugar, railroad, oil, and whiskey trusts), in which many separate firms came under the control of a single corporate management seeking monopoly control over an industry. Popular opposition to these combinations on the part of farmers, small businesses, shippers, and consumers led to passage of the Sherman Act in 1890. While "trusts" are no longer around, the imagery of 'trust busting' (a more colourful if highly imprecise way of describing competition policy) has stuck.
The Sherman Act
The Sherman Act has two key sections. Section 1 proscribes agreements in restraint of trade: "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." The collective activity that is central to this provision can be between two or more competing sellers or competing buyers (horizontal), or a seller and its customer (vertical).
Read literally, Section 1 would prohibit all contracts that had the incidental effect of restraining trade, regardless of the effect on competition or economic welfare. In a landmark ruling in 1911, the Supreme Court held that Section 1 prohibited only restraints of trade that unreasonably restrict competition.
Over the years, the concept of unreasonableness has been analysed in two ways: some restraints are per se unreasonable, and others are subject to the so-called Rule of Reason. The former are restraints (such as horizontal price fixing, bid-rigging, or the division of customers or markets) that are considered so unreasonable that there is no need to undertake an elaborate inquiry about the factual context or effect. If prices are fixed, the law is deemed violated.
For restraints that are not per se illegal, on the other hand, it is necessary to weigh the various circumstances and to decide whether the conduct is on the whole pro-competitive or anti-competitive. In recent years, the Rule of Reason has been applied in an increasingly large proportion of cases, although in some circumstances, the investigation is truncated by a "quick look" approach that limits the scope of the inquiry. It is often uncertain where lies the line between per se and Rule of Reason.
Section 2 of the Sherman Act prohibits obtaining a monopoly by anti-competitive methods or the abuse of monopoly (not monopoly itself): "Every person who shall monopolise, or attempt to monopolise, or combine or conspire with any other person or persons, to monopolise any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony."
Thus, great size alone or market share alone is not illegal. Exactly what this means in practice may not always be clear. Given the broad language of both principal sections of the Sherman Act, it is easy to understand that the antitrust law in the U.S. has been largely created through case laws, through the evolution of the common law interpretation of a broad statutory mandate. (It should be noted that judges in the American system are not specialists in antitrust.) This has the advantage of flexibility to respond to changing market conditions and economic learning, but it also creates uncertainty and a substantial quantity of litigation and counselling activity.
It is important to note that the Sherman Act can be enforced as a civil law or as a criminal law, a judgment left to the Antitrust Division of the Department of Justice. Typically, criminal prosecution is directed at the worst per se violations, primarily price fixing, bid rigging and naked divisions of territories or customers.
Corporations have been fined large penalties and individuals have been sent to prison. Criminal penalties are now influenced by Federal Sentencing Guidelines [note: a recent Supreme Court decision has changed these guidelines from mandatory to suggestive]. The criminal penalty for a corporation is effectively 20 percent of the affected commerce. An amnesty programme that provides a degree of leniency for certain cartel members that come forward to cooperate with the Justice Department has proven to be an effective law enforcement tool.
The early enforcement of the Sherman Act revealed certain weaknesses, which were addressed in 1914. The Clayton Act more specifically outlaws a list of specific types of conduct, the effect of which "may be substantially to lessen competition, or to tend to create a monopoly in any line of commerce." The incipient nature of this language, focusing on the probable effects of actions rather than on completed actions, reacts to one weakness in the Sherman Act. Included in the list of specific conduct that is illegal under the Clayton standard are exclusive dealing, tying arrangements, and mergers.
The Clayton Act, by amendment in 1935, contains the Robinson-Patman Act, making it unlawful for any business engaged in interstate or foreign commerce to discriminate in price on sales to resellers between different purchasers of the same type and quality of commodity. A price difference is generally permitted if it is cost-justified or if the lower price is necessary to compete for the business of a particular purchaser.
The Robinson-Patman Act, passed to protect small business against unfair advantages taken by larger competitors, has been criticised by many economists for not serving the goal of economic efficiency. Rarely enforced by the federal antitrust officials, price discrimination is still the frequent subject of private litigation.
Section 7 of the Clayton Act is the principal tool for prohibiting anti-competitive mergers and acquisitions. Both stock and asset acquisitions are included, and case law has also brought joint ventures within the scope of Section 7.
The Federal Trade Commission Act
In 1914, Congress passed the Federal Trade Commission Act, establishing the Federal Trade Commission (FTC) as an independent regulatory agency. Section 5 of the FTC Act provides with great simplicity: "Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful."
The FTC also has power to enforce the Clayton Act and the Robinson-Patman Act (but not Sherman Act's criminal jurisdiction). It is clear, from case law, that Section 5 covers at least the same conduct that is made illegal by all the other antitrust laws, but the extent of the FTC's reach beyond this remains uncertain.
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All material (c) 2006, American Antitrust Institute