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Antitrust law

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Description: Set of statutes regulating economic competition by prohibiting anticompetitive agreements, monopolization, attempted monopolization, conspiracies to monopolize, and mergers and acquisitions that may tend to substantially injure competition.


Significance: After the Sherman Antitrust Act was passed in 1890, the Supreme Court defined the scope of antitrust law and interpreted its wording and intent, delineating the permissible bounds of business behavior.


The Sherman Antitrust Act of 1890 was a broad statute prohibiting various forms of attempted and actual monopolies and agreements that restrained trade. The act allowed people who suffered injuries to their business and property to recover three times their actual damages, plus attorney fees and costs. One of the principal purposes of antitrust laws was to give the federal courts jurisdiction to create a federal common law of competition.


Interpreting the Antitrust Acts

In the early 1900's, the Supreme Court engaged in a longrunning battle to define the scope of the interstate and foreign commerce subject to the Sherman Antitrust Act and to define the act's key words. The Court's early interpretations focused on whether the act prohibited all restraints of free trade or only those that were unreasonable under the common law. It also considered what, if anything, constituted a reasonable restraint of trade. In Standard Oil Co. v. United States (1911), the Court adopted the rule of reason, under which only agreements that unreasonably restrained competition were unlawful under the Sherman Act. The uncertainty of the rule of reason led to great criticism of the Court by both defenders and critics of the antitrust laws. The Standard Oil decision also prompted Congress, in 1914, to enact the Clayton Act, which listed more specific types of antitrust offenses, and to create the Federal Trade Commission, a federal agency with the power to prohibit “unfair methods of competition.” The Court began to define categories of offenses that were per se unreasonable and hence illegal under the ruling reached in Standard Oil. Virtually all price-fixing agreements were unlawful if it could be proved that an agreement between competitors had been reached as to the price of goods or services being bought or sold by those firms. It would be no defense that the firm operated in an industry where competition produced unusual or even harmful results, that the competitors had agreed on a “reasonable” price, or even that the firms lacked the power to raise prices pursuant to their agreement. This trend condemning price-fixing agreements culminated in United States v. Socony-Vacuum Oil Co. (1940), which held that all price agreements between competitors were per se unlawful under the Sherman Act. The Court subsequently extended per se treatment to a wide variety of both horizontal and vertical agreements (agreements between manufacturers of similar products and between manufacturers and suppliers or distributors, respectively). Per se rules were created or modified to condemn agreements between competitors as to the territories or customers they served in Timken Roller Bearing Co. v. United States (1951), maximum- and minimum-price agreements between competitors in Arizona v. Maricopa County Medical Society(1982), maximum- and minimum-price agreements between sellers and their customers in Albrecht v. Herald Co. (1968), certain types of group boycotts in Klor's v. Broadway-Hale Stores (1959), so-called tying agreements that required a customer to take one product or service in order to obtain another in United States v. Northern Pacific Railway Co. (1958), and most nonprice vertical agreements between sellers and their customers limiting the territory or manner in which goods or services could be sold in United States v. Arnold, Schwinn and Co. (1967). In each of these cases, the Court cited the effect on consumers and competitors and the leading economic thinking of the times to justify the use of per se rules that did not permit the defendant to argue that its particular agreement might, on balance, promote, rather than injure, competition. During this same period, the Court also struggled with the concept of how the Sherman and Clayton Acts applied to mergers and acquisitions. Neither act had proved effective in stemming the tide of mergers that periodically swept the nation. In 1950 Congress passed the Celler-Kefauver Act, which eliminated most of the technical loopholes in the Clayton Act and made it clear that the antitrust laws prohibited any merger or acquisition that had the tendency to injure competition. Beginning with the Brown Shoe Co. v. United States decision in 1962, the Court held in an unbroken string of victories for the government that virtually any quantitatively substantial merger would violate the antitrust laws if the government could show that the market shares of the merging firms and overall industry concentration would increase as a result of the merger or acquisition.


An Economic Analysis

The increasing severity of these court-made antitrust rules in the 1950's, 1960's, and early 1970's led to a backlash of scholarly criticism focused on the negative economic effects of the Court's antitrust jurisprudence. Prominent law and economics scholars such as Richard Posner and Robert H. Bork, each of whom later became influential judges, argued that the Court's antitrust decisions were inconsistent with what they argued was the principal purpose of the antitrust laws to increase wealth, consumer welfare, and economic efficiency. The Court quickly proved receptive to this economically oriented style of antitrust analysis. In the area of agreements between competitors, the Court retained the basic per se rule against hard-core price-fixing agreements but showed an increasing willingness to look under the surface of agreements to determine whether the agreement contained any plausible procompetitive justification that merited further inquiry. In a number of cases, including National Society of Professional Engineers v. United States (1978), Broadcast Music v. Columbia Broadcasting System (1979), and National Collegiate Athletic Association v. Board of Regents of the University of Oklahoma (1984), the Court ultimately condemned anticompetitive agreements between competitors relating to price but only after the type of searching inquiry that would not be possible under a true rule of per se illegality. At the same time, the Court quickly condemned agreements between competitors relating to price in Federal Trade Commission v. Superior Court Trial Lawyers Association (1990) or territory in Jay Palmer et al. v. BRG of Georgia et al. (1990), if they lacked a plausible procompetitive justification, regardless of the precise test or label being utilized by the Court. Other per se rules were modified to require a showing of substantial market power before the practice would be condemned as per se unreasonable. For example, the Court modified the per se rule in both tying cases (Jefferson Parish Hospital Dist. No. 2 v. Hyde, 1984) and group boycotts (Northwest Wholesale Stationers v. Pacific Stationery and Printing Co., 1985) to require the plaintiff to prove that the defendant enjoyed substantial market power before any liability be imposed. It is difficult to characterize such rules as per se liability because they recognize that these arrangements are not inevitably anticompetitive under all circumstances and typically require the proof of the relevant product and geographic market and the defendant's power within that market, all complicated factual issues that the original per se rule was designed to avoid.


Vertical Agreements

The most significant changes were in vertical restraints dealing with the distribution of products and services. In Continental T.V. v. GTE Sylvania (1977), the Court held that all vertical restraints, other than those dealing with price, would be judged under the full rule of reason, weighing the pro- and anticompetitive effects of the arrangements before rendering judgment under the antitrust laws. As a practical matter, the vast majority of such restricted distribution systems became lawful as a result of this decision. Although vertical agreements dealing with price were nominally per se unreasonable, they became very difficult to prove. The Court in Business Electronics Corp. v. Sharp Electronics Corp. (1988) narrowed the definition of vertical price-fixing agreements subject to the per se rule, leaving everything else subject to the more generous Sylvania rule of reason approach. In Monsanto Co. v. Spray-Rite Service Corp. (1984), the Court narrowed the type of evidence that plaintiffs could show to demonstrate unlawful vertical price fixing. In Atlantic Richfield Co. v. USA Petroleum Co. (1990), the Court limited who could sue for unlawful vertical price fixing. Finally, in State Oil Co. v. Khan (1997), the Court reversed one of its earlier precedents and held that maximum vertical price fixing would be treated under the full rule of reason because it was not inevitably anticompetitive and had the potential to help consumers in certain cases. After Sylvania, the Court generally restricted antitrust liability by increasing the substantive and procedural hurdles necessary for either the government or private plaintiffs to prevail. Notable decisions include Brooke Group Ltd. v. Brown and Williamson Tobacco Corp. (1993), which limited liability for predatory pricing to those situations in which the defendant has both priced below some appropriate measure of cost and has the ability in the real world to recoup any losses and actually exercise monopoly power following the demise of its competitors. Few plaintiffs were able to prevail under this demanding standard. Although the center of antitrust activity shifted from the courts to the enforcement agencies, the Court remained actively involved in shaping antitrust law and policy. It continued the trend of shrinking the categories of offenses that are per se unlawful in NYNEX Corp. v. Discon (1998) and of narrowly interpreting exemptions and immunities to the antitrust laws, while ensuring that state and local governments could regulate or avoid competition without undue interference from the federal antitrust laws. Despite a general trend toward limiting federal legislative and regulatory power over the economy, the Court preserved the antitrust laws as the preeminent use of the commerce clause, holding that the antitrust statutes extend to the full limit of the power of Congress over both interstate and foreign commerce. The Court is the final arbiter of the legality of business behavior that affects competition as was intended by Congress in 1890. The precise rules and the tests used by the courts changed over the years in line with the current political and economic thinking. Antitrust law always looked toward economics as a source of wisdom although not as the only factor in deciding the evolution of the legal rules that set the ground rules for the market. The Court uses antitrust law as a flexible instrument determining the bounds between lawful competition and unlawful collusion or exploitation of market power to the detriment of competition and competitors.



Further Reading

  • A good starting point is Antitrust Law and Economics in a Nutshell, by Ernest Gellhorn, William E. Kovacic, and Stephen Calkins (St. Paul, Minn.: West Publishing, 2004), a handy and authoritative guide to the essentials of antitrust law. For an overview of the history of the antitrust laws see Rudolph J. R. Peritz's Competition Policy in America, 1888-1992 (New York: Oxford University Press, 1996) and Hans B. Thorelli's The Federal Antitrust Policy (Baltimore, Md.: Johns Hopkins University Press, 1955). For the leading treatises on antitrust doctrine and the Court decisions discussed in this article, see Philip Areeda and Donald Turner's Antitrust Law (3 vols., Boston: Little, Brown, 1978) and Antitrust Law Developments (4th ed., 2 vols., Chicago: American Bar Association, 1997). The classic economic analyses of the antitrust laws can be found in Robert H. Bork's The Antitrust Paradox: A Policy at War with Itself (2d ed., New York: Free Press, 1993) and Richard A. Posner's Antitrust Law (2d ed. Chicago: University of Chicago Press, 2001). The leading analysis of the application of U.S. antitrust law to international business is Spencer Weber Waller's James R. Atwood and Kingman Brewster's Antitrust and American Business Abroad (3d ed., New York: Clark Boardman Callaghan, 1997).