Because of fears during the late 1800s that monopolies were dominating America's free market economy, Congress passed the Sherman Antitrust Act in 1890. This was done to combat anticompetitive practices, reduce market domination by individual corporations, and preserve competition. The Sherman Antitrust Act forms the foundation and the basis for most federal antitrust litigation.
As for the states, many have adopted antitrust statutes that parallel the Sherman Antitrust Act to prevent anticompetitive behavior within individual states.
Federal Antitrust Acts
Congress derived its power to pass the Sherman Act through its constitutional authority to regulate interstate commerce. Therefore, the Sherman Act can only be used when the conduct in question restrains or substantially affects interstate commerce or trade. To satisfy this jurisdictional requirement, the plaintiff must show that the conduct in question occurs during the flow of interstate commerce or has an appreciable effect on some activity that occurs during interstate commerce.
The Sherman Act is divided into three sections. Section 1 delineates and prohibits specific means of anticompetitive conduct, and Section 2 deals with end results that are anticompetitive in nature. Sections 1 and 2 supplement each other in an effort to outlaw all types of anticompetitive conduct. Congress designed the supplementary relationship to prevent businesses from violating the spirit of the Act, while technically remaining within the letter of the law. Section 3 simply extends the provisions of Section 1 to U.S. territories and the District of Columbia.
The penalties for violating the Sherman Act can be severe. Although most enforcement actions are civil, the Sherman Act is also a criminal law, and individuals and businesses that violate it may be prosecuted by the Department of Justice. Criminal prosecutions are typically limited to intentional and clear violations such as when competitors fix prices or rig bids. The Sherman Act imposes criminal penalties of up to $100 million for a corporation and $1 million for an individual, along with up to 10 years in prison. Under federal law, the maximum fine may be increased to twice the amount the conspirators gained from the illegal acts or twice the money lost by the victims of the crime, if either of those amounts is over $100 million.
Because the courts found certain activities to fall outside the scope of the Sherman Antitrust Act, Congress passed the Clayton Antitrust Act of 1914 to further widen its scope. For example, the Clayton Act added the following practices to the list of impermissible activities: price discrimination between different purchasers, exclusive dealing agreements; and mergers and acquisitions that substantially reduce market competition.
Another notable aspect of the Clayton Act is its treble damages provision. This provision allows successful plaintiffs to seek damages three times the actual amount of the ascertained financial injury sustained.
The Robinson-Patman Act of 1936 amended the Clayton Act to outlaw certain practices in which manufacturers discriminated in price between equally-situated distributors decrease competition. The Hart-Scott-Rodino Antitrust Improvements Act also amended the Clayton Act to require companies to notify the government of any large forthcoming mergers or acquisitions.
The Per se Rule v. the Rule of Reason
Violations under the Sherman Act take one of two forms - either as a per se violation or as a violation of the rule of reason. Section 1 of the Sherman Act characterizes certain business practices as per se violations. A per se violation requires no further inquiry into the practice's actual effect on the market or the intentions of those individuals who engaged in the practice. Some business practices, however, at times constitute anticompetitive behavior and at other times encourage competition within the market. For these cases, the court applies a "totality of the circumstances test" and asks whether the challenged practice promotes or suppresses market competition. Courts often find intent and motive relevant in predicting future consequences during a rule of reason analysis.
Congress designed these federal antitrust laws to eradicate certain frequently used anticompetitive practices of which the following are a few.
Section 2 of the Sherman Act prohibits monopolization, attempts to monopolize, and conspiring to monopolize. Any such act constitutes a felony. A monopoly conviction requires proof of the individual having intent to monopolize with the power to monopolize, regardless of whether the individual actually exercised the power.
Price-fixing occurs when a company or companies within a given market artificially set or maintain the price of goods or services at a certain level, contrary to the workings of the free market. Section 1 provides that price-fixing is an illegal restraint on trade, regardless of whether a vertical or horizontal scheme. A vertical scheme is a scheme among parties in the same chain of distribution. A horizontal scheme occurs among competitors on the same level.
In Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007), the Supreme Court held that vertical price-fixing may not necessarily inhibit competitive markets, and accordingly, held that courts should apply the rule of reason when analyzing vertical price-fixing schemes. By subjecting all vertical limitation schemes only to the rule of reason, Leegin requires courts to compare the market-promoting and market-suppressing effects of vertical limitation schemes.
Collusive bidding occurs when two or more competitors agree to change the bids they otherwise would offer absent the agreement. Under Section 1, collusive bidding is per se illegal.
A tying arrangement is an agreement by a party to sell one product only on the condition that the buyer agrees either to buy different products from the seller or not to buy those different products from another seller. Tying arrangements are subject to the rule of reason unless the arrangement shuts out a substantial quantity of commerce in which case the scheme is per se illegal.
Section 2 makes illegal a firm's refusal to deal with another firm if the refusing firm refuses for the purpose of trying to monopolize the market. Meanwhile, Section 1 prohibits a group from refusing to deal with a particular firm. A group refusal to deal is known as a group boycott. Complex decisions on this area of law have created some uncertainty, yet salient guidelines have been elucidated. Klor's, Inc. v. Broadway-Hale Stores, Inc., 359 U.S. 207 (1959) dictates that all horizontal group boycotts constitute per se violations of the Sherman Act. Later, the Supreme Court in NYNEX Corp. v. Discon, Inc., 525 U.S. 128 (1998) clarified that, while the Supreme Court in Klor's applied to boycotts established by horizontal agreements, group boycotts involving vertical schemes remain subject to the rule of reason.
An exclusive dealing agreement requires a retailer or distributor to purchase exclusively from the manufacturer. These arrangements make it difficult for new sellers to enter the market and find prospective buyers, thus depressing competition. However, because companies widely use requirements contracts, which essentially are exclusive dealing agreements, for purposes that promote competition, exclusive dealing arrangements are subject only to the rule of reason.
Below-cost pricing intended to eliminate specific competitors and reduce overall competition is known as predatory pricing. While low prices are generally advantageous for consumers, they can have an injurious effect on markets when they allow a single firm to establish a monopoly and subsequently inflate prices in the absence of competition. Section 2 disallows this conduct. In Brooke Group Ltd. v. Brown & Williamson Tobacco, 509 U.S. 209 (1993), the U.S. Supreme Court devised a two-part test to determine if predatory pricing had occurred. First, the plaintiff must establish that the defendant's production costs surpass the market price charged for the item. Second, the plaintiff must establish that a "dangerous probability" exists that the defendant will recover the investment in above-cost inputs. In Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., the Supreme Court said that this test also applies when determining if a predatory bidding scheme exists. In the case of predatory bidding, the complainant must show that the purported violator has induced below-cost pricing and stands to recover any potential losses through the monopsony power established as an exclusive purchaser.
Certain practices and organizations have received exemption from the federal antitrust laws. First, patent owners received an exemption in the Sherman Act because federal policy favors incentivizing innovation. Of course, as expressed in Carbice Corp. v. Patents Development Corp., 283 U.S. 27 (1931), the exemption does not go beyond the granted patent monopoly.
Second, the Clayton Act exempted labor unions and agricultural organizations from the Sherman Act's reach.
Third, the Securities Exchange Act of 1934 (1934 Act) heavily regulates securities trading; thus, certain activities that fall within the scope of the 1934 Act are exempt from antitrust law. The U.S. Supreme Court took up this issue in Credit Suisse Securities (USA) LLC v. Billing, 551 U.S. 264 (2007). The Court decided that if securities regulation and antitrust law are incompatible, then the securities regulation prevails and individuals who would otherwise violate antitrust law receive antitrust immunity. Determining incompatibility requires the presence of the following four criteria: 1) behavior squarely within securities regulation; 2) clear and adequate Securities and Exchange Commission (SEC) authority to regulate; 3) active and ongoing SEC regulation; and 4) a serious conflict between regulatory and antitrust regimes.
Penalties for violating the Sherman Act can be both criminal and civil (most enforcement actions are civil). Criminal prosecutions are limited to intentional and clear violations (ex. price-fixing and rig bids). Criminal penalties for corporations can reach up to $100 million and $1 million for individuals with up to 10 years in prison. Additionally, the maximum fine may be increased to twice the amount the conspirators gained from the illegal act or twice the amount of money lost by the victims of the crime, if either of those amounts is over $100 million.
Federal Trade Commission and Merger Review
The Federal Trade Commission Act of 1914 (FTCA) bolstered the Sherman Act and Clayton Act by providing that the Federal Trade Commission (FTC) could proactively and directly protect consumers rather than only offer indirect protection by protecting business competitors. Congress empowered the FTC to fill gaps remaining in antitrust law or to stop new business practices not yet invented at the time of the Clayton Act's enactment but contrary to public policy. Section 5 of the FTCA gives the FTC broad powers to address new threats to the competitive free market.
Further, corporations looking to merge need to file with both the FTC and the DOJ, one of which will “clear” to the other to take over the merger review process. In the review process, the “cleared” agency will gain access to non-public information from the parties and other industry participants to make a preliminary determination. The agency will then often make a request for additional information, which often signals the agency’s intent to challenge the proposed merger. Once the agencies decide to challenge the merger, they will often file an action for a preliminary injunction in the federal district court to stop the entire transactions pending an administrative trial on the merits. The review process includes the agency’s review of the current market conditions of the particular industry and the potential pro-competitive or anti-competitive effect of the proposed merger on the industry.
In Brown Shoe Co. Inc. v. United States, 370 U.S. 294 (1962), the Supreme Court held that in making the review decision, the courts are concerned with the probabilities, as opposed to certainties, of the negative consequences of merger on competition. However, as per F.T.C. v. Advocate Health Care Network, 841 F. 3d 460 (7th Cir. 2016), to find a Clayton Act Section 7 violation, the courts must identify the relevant line of commerce and section of the country.
Amended by Krystyna Blokhina Gilkis 6.10.19
menu of sources
U.S. Constitution and Federal Statutes
Federal Judicial Decisions
- Supreme Court:
- Recent Antitrust Decisions
- Stoneridge v. Scientific-Atlanta (06-43) (2008)
- Leegin Creative Leather Products, Inc. v. PSKS, Inc. (06-480), 551 U.S. (2007)
- Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., Inc. (05-381) (2007)
- Credit Suisse Securities (USA) v. Billing (05-1157) (2007)
- Bell Atlantic Corp. v. Twombly (05-1126) (2007)
- Earlier Important Antitrust Decisions
- liibulletin Oral Argument Previews
- Recent Antitrust Decisions
- U.S. Circuit Courts of Appeals: Recent Antitrust Decisions
State Judicial Decisions
- N.Y. Court of Appeals:
- Appellate Decisions from Other States
Key Internet Sources
- Federal Agencies:
- ABA's Antitrust page
- SEC's EDGAR Database of Corporate Information
- Senate Judiciary Committee (includes information from Subcommittee on Antitrust, Business Rights,and Competition)
Useful Offnet (or Subscription - $) Sources
- Good Starting Point in Print: Thomas V. Vakerics, Antitrust Basics, New York Law Publishing Company (1985).