Sherman Antitrust Act

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The Sherman Antitrust Act was established as a way to keep competition fair in the business world. It did this by making it a crime to monopolize any part of the trade or commerce systems. The term “antitrust” refers to the laws that are put in place to protect commerce from unfair business practices that could limit competition and, as a result, control prices. To explore this concept, consider the following Sherman Antitrust Act definition.

Definition of Sherman Antitrust Act

Noun

  1. A federal statute that prohibits companies from engaging in unfair business practices.

Origin

July 2, 1890     Congressional Legislation initiated by Senator John Sherman

History of the Sherman Antitrust Act

At the end of the 19th Century, a new form of business organization spawned arrangements known as trusts. This signaled the beginning of the history of the Sherman Antitrust Act. Under trusts, stockholders of a company would assign their shares to trustees. Trustees are parties who have the power to vote on, and therefore sway, the decisions that a company makes.

Many believed that these trusts worked to effectively stamp out the competition and create monopolies, which reduces the opportunity for price manipulation. Monopolies are defined as companies gaining exclusive control over a particular product or service, meaning that the company becomes the only one to offer that product or service.

Some state governments began passing laws to rein corporations in so as to prevent them from creating monopolies and stifling competition. However, businesses found and exploited a loophole: they simply reestablished themselves in those states that had not enacted these laws.

This situation resulted in the passage of the Sherman Antitrust Act, which was the first federal antitrust law. The Act authorized the federal government to prosecute unfair business practices that ultimately restricted trade and manipulated prices.

Congress believed, however, that while the Act would satisfy the public’s concerns, it would be difficult to actually enforce. This was due to the fact that the wording of the Act was rather vague, and it would ultimately be years before the courts would agree to solid definitions of the words “trust” and “combinations,” as well as the phrase “restraint of trade.” Because of this, during the first 10 years of the history of the Sherman Antitrust Act, significantly more actions were brought against unions than corporations.

The Act is divided into three sections:

  • Section 1 – defines and bans specific behaviors that could be considered anticompetitive.
  • Section 2 – handles the end results of an action that can be considered anticompetitive.
  • Section 3 – extends the provisions of Sections 1 and 2 to cover the U.S. territories and the District of Columbia.

Section 1 states:

“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.”

Section 2 goes on to state:

“Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony.”

Violations of the Sherman Antitrust Act

Violations of the Sherman Antitrust Act can be grouped into two categories: violations “per se,” and violations of the “rule of reason.”

Violations “per se” are violations of the Sherman Antitrust Act that fall within the description provided in Section 1 of the Act. In order to prove a per se civil violation, all one needs to do is prove that unlawful conduct has occurred and that it could be categorized within the per se category. Examples of Sherman Antitrust Act violations of this capacity include price-fixing and refusals to make deals.

Violations of the “rule of reason” are violations of the Sherman Antitrust Act that work to suppress market competition. Unlike per se violations, rule of reason violations revolve around intent and motive, since the decisions made here affect what will happen in the future.

In these cases, the courts look at such elements as the history of the business’ efforts to restrain competition, as well as the reasons why such restraint was imposed. This is done in an effort to determine the business’ effect on the overall competitive market.

Clayton Antitrust Act

The Clayton Antitrust Act was passed in 1914. It amended the Sherman Antitrust Act by adding additional activities that were discovered after the Sherman Antitrust Act was passed, but that should still be considered prohibited. Examples of Sherman Antitrust Act behaviors that were not listed but that were now covered under the Clayton Antitrust Act included:

  • Mergers and acquisitions that significantly reduce market competition
  • Price discrimination between purchasers, especially if that discrimination ends up creating a monopoly
  • Tying arrangements

In 1936, the Robinson-Patman Act was passed, amending the Clayton Antitrust Act. This amendment banned anticompetitive business practices that allowed manufacturers to engage in price discrimination against equally situated distributors.

Tying Arrangements

Tying arrangements are agreements that are made between a seller and a buyer wherein the seller agrees to sell something (the “tying” product) to the buyer – only if the buyer agrees to purchase a different product (a “tied” product) from the seller. Failing that, the buyer can also agree not to purchase the tied product from a different seller. Tying arrangements are named for their purpose of “tying” together the purchase of different products and services.

The Sherman Antitrust Act and the Clayton Act both prohibit tying arrangements. Under the Sherman Antitrust Act, they are considered “contracts in restraint of trade,” and may also constitute supporting monopolization. Under the Clayton Act, tying arrangements are considered to be arrangements that “may substantially lessen competition.”

Over the years, however, the courts have warmed to the idea of tying arrangements, narrowing the terms by which they can be considered unlawful. Situations wherein tying arrangements are strictly prohibited include:

  • Separate Products – Situations wherein two completely separate products or services are involved.
  • Coercion – Situations wherein the sale, or agreement to sell, a product or service depends on the buyer’s agreement to purchase another product or service.
  • Market Power – Situations wherein the seller is a powerful enough force in the market for the tying product that it can enable the restriction of competition for the tied product.
  • Not Insubstantial Amount of Commerce Affected – Situations wherein the tying arrangement affects what can be considered a “not insubstantial” level of commerce.

Some courts have held that there must be proof that an anticompetitive act has taken place in the market for the tied product in order for a punishable offense to have occurred.

Sherman Antitrust Act Example that Set Precedent

The first significant example of a Sherman Antitrust Act challenge in the history of the Act came in 1892, when the American Sugar Refining Company took over the E.C. Knight Company, along with three others. This resulted in the American Sugar Refining Company becoming a monopoly that controlled 98% of the American sugar refining industry. President Grover Cleveland directed the government to sue the Knight Company under the Sherman Antitrust Act so as to prevent the monopoly from continuing.

The U.S. filed a civil lawsuit in the Federal Circuit Court for the Eastern District of Pennsylvania. In the lawsuit, E.C. Knight Company and several others were charged with violating the Sherman Antitrust Act, specifically Section 1, which read:

“Every contract, combination in the form of trust, or otherwise, or conspiracy, in restraint of trade or commerce among the several States is illegal, and that persons who shall monopolize or shall attempt to monopolize, or combine or conspire with other persons to monopolize trade and commerce among the several states, shall be guilty of a misdemeanor … “

Further, the U.S. claimed that the total product of the four refineries named in the suit added up to 33% of the total sugar that was being refined in the U.S., and that they were also competitors to the American Sugar Refining Company. The complaint then alleged that, in order for the American Sugar Refining Company to gain complete control over the price of sugar in the U.S., it had engaged in an “unlawful and fraudulent scheme” to “purchase the stock, machinery, and real estate” of those four corporations.

The circuit court ultimately held that the facts presented did not prove that a conspiracy or contract to “restrain or monopolize trade or commerce” existed, and so the court dismissed the lawsuit. The government appealed the circuit court’s decision, but the appellate court agreed with the lower court. Finally, the matter was heard by the U.S. Supreme Court.

The Supreme Court also ruled against the government, holding that, while “the result of the transaction was the creation of a monopoly in the manufacture of a necessary of life,” it could not be stopped by the provisions found within the Sherman Antitrust Act. The Court ruled that the manufacturing of the sugar was a local activity, and therefore was not subject to the congressional regulation that interstate commerce was governed by.

Under this landmark ruling, any action that a party wanted to take against a manufacturing monopoly would have to be brought by the individual state, not the federal government. This made the regulation of out-of-state monopolies significantly more difficult. However, the ruling was eventually defeated by the end of the 1930s, when the Supreme Court decided to take a different stance on the national government’s power insofar as being able to regulate the economy. The case was never overturned per se, but in cases to follow, the Court clarified the steps of the manufacturing process that were to be regulated, and how.

Related Legal Terms and Issues

  • Civil Lawsuit – A lawsuit brought about in court when one person claims to have suffered a loss due to the actions of another person.
  • Intent – A resolve to perform an act for a specific purpose; a resolution to use a particular means to a specific end.
  • Monopoly – Control or advantage held by one entity over the commercial market in any specific geographical region.
  • Motive – A person’s reason for doing something; the goal of a person’s actions.