Sherman Antitrust Act
Prohibited businesses from conspiring or merging to form dominance and was passed in 1890 prohibiting these groups from dictating, influencing, and manipulating prices in a specific market.
What Is the Sherman Antitrust Act?
The Sherman Antitrust Act was a landmark United States law that prohibited businesses from conspiring or merging to form dominance. In addition, the law passed in 1890 prohibited these groups from dictating, influencing, and manipulating prices in a specific market.
The Act aimed to promote economic fairness and competitiveness while regulating interstate commerce.
The Act was the United States Congress's first attempt to answer the use of trusts to enable a small number of individuals to handle specific significant industries.
Over time, the federal courts have developed a body of law under the Sherman Act that makes certain types of anti-competitive- conduct illegal in and of themselves while subjecting other types of conduct to case-by-case analysis to determine whether the conduct unreasonably restrains trade.
The law attempts to prevent artificial price increases through trade or supply restrictions. "Innocent monopoly," or monopoly obtained solely through merit, is legal; however, acts by a monopolist to artificially maintain that status or nefarious dealings to create competition are not.
The Sherman Act's purpose is not to protect competitors from legitimately established companies, nor to prevent businesses from making honest profits from consumers, but rather to maintain a competitive marketplace to protect consumers from abuses.
Understanding the Sherman Antitrust Act
It was the first antitrust legislation passed by Congress in the United States. It was first used during the presidency of U.S.S. President Benjamin Harrison.
The law was named after John Sherman, an Ohio politician specializing in trade and commerce regulation. Sherman sculpted the law to prevent the accumulation of power in the hands of a few large corporations at the expense of smaller corporations.
The Act specifically attempted to prohibit market monopolization and anti-competitive contracts that drive small businesses and new entrants out of the market.
The Act empowered the federal government and the Department of Justice to file lawsuits against businesses that violated the Act.
The Act was intended to restore competition, but it was poorly written and failed to define key terms such as "trust," "combination," "conspiracy," and "monopoly."
Violations of the Sherman Act can lead to severe consequences. Although most legal actions are civil, those who violate them may face legal action by the Department of Justice (D.O.J.). Typically, criminal prosecutions are limited to intentional and apparent violations.
The Sherman Act prohibits:
- anti-competitive agreements and
- unilateral behavior that monopolizes or attempts to monopolize the relevant market.
The Act authorizes the Department of Justice to file suits to enjoin conduct in violation of the Act and private parties injured by such behavior to file lawsuits for treble damages.
Sections of the Antitrust Act
The Act is broken down into three sections:
SECTION -1
Trade-restraining anti-competitive practices
One of the Act's provisions makes all anti-competitive practices that restrict interstate trade illegal. Examples of such techniques that form cartels are agreements to set prices, exclude specific competitors, and limit production outputs.
Any person or entity who enters into an anti-competitive contract or combination commits a felony. The convicted party will face a fine of up to $10 million for a corporate body or $350,000 for an individual, three years in prison, or both, as the court sees fit.
SECTION - 2
Monopolization or attempts to monopolize trade or commerce are prohibited.
The second provision prohibits monopolization or monopolization attempts in the United States. Mergers and acquisitions that focus too much power in the hands of one entity to the detriment of smaller enterprises are examples of such behavior.
The Federal Trade Commission (F.T.C) has the authority to approve or reject mergers and acquisitions transactions in the United States. Individuals and corporations who violate the provision commit a felony, and the Department of Justice may take legal action against them.
SECTION - U.S.
U.S. Territories and the District of Columbia
The Sherman Act's third section extends the provisions of sections one and two to the District of ColumbiaU.S. U.S. territories.'
Historical Context Of The Sherman Antitrust Act
The Sherman Act is codified in Title 15 of the United States Code as 15 U.S.C. 1-38. It was enacted during the Gilded Age (the 1870s to 1900), a period of significant change in the economy, government, and technology in the United States.
American workers were paid more than their European counterparts at the time, resulting in an influx of millions of European immigrants.
The influx accelerated industrialization, with the railroad industry undergoing remarkable growth. However, rapid growth resulted in brutal competition as large enterprises grew while small businesses struggled to maintain profit margins.
In response to growing public outrage over railroad companies' abuses of power and malpractices, Congress passed the Interstate Commerce Act in 1887, forming the Interstate Commerce Commission (I.C.C.).
Its mission was to oversee interstate transportation companies. The I.C.C. had jurisdiction over all common carriers and railroads in the United States, requiring them to disclose annual reports and prohibiting unfair practices such as discriminatory rates.
Throughout the first half of the twentieth century, Congress consistently expanded the I.C.C.'s power to the point where, despite its intended purpose, some believed the I.C.C. was frequently guilty of assisting the companies it was tasked to regulate by favoring mergers that created unfair monopolies.
At the height of what Mark Twain called the Gilded Age of American history, Congress passed the Sherman Antitrust Act.
The Gilded Age, which lasted from the 1870s to around 1900, was characterized by political scandals and robber barons, the expansion of railroads, the growth of oil and electricity, and the formation of America's first giant corporations.
The Gilded Age was characterized by rapid economic growth. As a result, corporations grew in popularity during this period, partly because they were simple to establish and, unlike today, did not require any incorporation fees.
Legal Application of the Sherman Antitrust Act
The Sherman Anti-Trust Act empowered the federal government to initiate proceedings to dissolve trusts. Any arrangement "in the form of trust or restraint in trade or business among the several states, or with foreign countries ' was declared illegal.
The purpose of the Act was to regulate businesses. Its application, however, was not limited to the commercial side of the business. Its prohibition on the cartel was interpreted to make many labor union activities illegal. So it is because unions were also labeled as cartels.
This lasted until 1914, only when the Clayton Act exempted certain union activities.
Following are the applications of the Act:
1. Legislation's constitutional foundation
The Sherman Act was passed by Congress using its constitutional authority to monitor and control interstate commerce. Accordingly, the federal courts can only apply the Act to conduct that restricts or significantly affects either interstate commerce or trade within the District of Columbia.
It requires the plaintiff to demonstrate that the conduct happened during the flow of interstate commerce or had a significant impact on some activity that occurs during the flow of interstate commerce.
2. Application of elements
Section 1 violations consist of three components:
- an agreement;
- that unreasonably restricts competition; and
- that has an impact on interstate commerce.
The violation of Section 2 monopolization has two components:
- monopoly power in the relevant market; and
- willful acquisition or maintenance of that power, as opposed to growth or development resulting from a superior product, business acumen, or historic accident.
3. Applications for violations
Violations of the Sherman Act are classified into two types:
Violations "per se":
These are violations that fall under the strict definition of Section 1. A per se violation necessitates no further investigation into the practice's actual impact on the market or the motives of those who engaged in the practice.
When a per se rule is applied, a civil antitrust violation is established simply by demonstrating that the conduct occurred and fell within a per se category.
Horizontal price-fixing, horizontal market division, and collaborative refuel deals are illegal conduct examples.
Violations of the "rule of the reason":
A totality of the circumstances test is used to determine whether the challenged practice promotes or restricts market competition. In contrast to per se violations, purpose and motive are essential factors in predicting future consequences.
The "traditional framework of analysis" to assess whether Section 1 is violated is said to be the rule of reason.
To find the impact on competition in the relevant product market, the Court examines "facts peculiar to the business, the history of the restraining order, and the reasons why it was imposed."
4. Modern trends
Conspiracy inference
A modern trend has made it more difficult for antitrust plaintiffs, as courts have come to hold plaintiffs to growing pleading burdens. For example, it was unclear how much proof was required to prove a conspiracy under the previous Section 1 precedent.
Courts have used more sophisticated and principled market definitions. For example, in the rule of reason cases, market definition is required for the plaintiff to demonstrate that a conspiracy is harmful.
To prove their conduct is within the per se rule, the plaintiff must also establish the market relationship between the conspirators.
Impact of the Sherman Antitrust Act
The Act was enacted at a time when there was growing hostility toward companies perceived to be monopolizing specific markets.
Examples include the American Railway Union and Standard Oil, which merged and acquired smaller competitors to form conglomerates. The conglomerates conspired to charge consumers high prices while driving small competitors out of business.
They also planned on dividing the market into zones where each entity could operate without interfering with the other party's trading zone. After it was passed, consumers who were victims of monopolization and collusion between large and small businesses applauded the Sherman Antitrust Act.
Northern Securities Co. vs. the United States was notable when the Act was enforced (1904). Northern Securities was a holding company that owned the railroad companies Northern Pacific, Chicago, Great Northern, Burlington, and Quincy.
Northern Securities' threat to monopolize the railroad industry and become the dominant company in the United States alarmed the public.
It sparked public outrage, with citizens and antitrust advocates urging the government to intervene to prevent unfair business practices that harm small and medium-sized businesses.
President Theodore Roosevelt directed the Department of Justice to file a lawsuit against Northern Securities. The Supreme Court heard the case in 1903, and the judges ruled 5 to 4 against the Northern Pacific and Great Northern stockholders.
The judgment dissolved the Northern Securities Company, and the stockholders were pressured to manage each railroad company independently.
A Real-World Example
The American Sugar Refining Company and three others took over the E.C. Knight Company in 1892, marking the first significant example of a Sherman Antitrust Act challenge in the Act's history.
As a result, the American Sugar Refining Company became a monopoly, controlling 98 percent of the American sugar refining industry.
President Grover Cleveland instructed the government to file a lawsuit against the Knight Company under the Act to end the monopoly.
In the Federal Circuit Court for the Eastern District of Pennsylvania, the United States filed a civil lawsuit. In the case, E.C. Knight Company and several others were charged with violating Section 1 of the Sherman Antitrust Act.
Furthermore, the United States claimed that the four refineries named in the suit produced 33 percent of the total sugar refined in the United States and that they were also competitors of the American Sugar Refining Company.
The complaint then claimed that the American Sugar Refining Company had engaged in an "unlawful and fraudulent scheme" to "purchase the stock, machinery, and real estate" of those four corporations to gain complete control over the price of sugar in the United States.
The circuit court ultimately determined that the facts presented did not establish the existence of a conspiracy or contract to "restrain or monopolize trade or commerce" and thus dismissed the lawsuit.
The government challenged the circuit court's decision, but the appellate Court upheld the lower Court's decision. Finally, the case was heard by the United States Supreme Court.
The Supreme Court also ruled against the government, holding that while "the transaction resulted in the creation of a monopoly in the manufacture of a necessary life," it could not be stopped by the Act's provisions.
According to this landmark decision, any action taken against a manufacturing monopoly would have to be brought by the individual state, not the federal government. This made regulating out-of-state monopolies much more difficult.
However, by the end of the 1930s, the Supreme Court had decided to take a different stance on the national government's power to regulate the economy.
The case was never overturned in and of itself, but in subsequent cases, the Court clarified which manufacturing process steps were to be regulated and how.
Researched and authored by Kavya Sharma | LinkedIn
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