Sherman Antitrust Act

Excerpt from the Sherman Antitrust Act of 1890

Reprinted from The Statutes at Large and Proclamations of the United States of America from December, 1889, to March, 1891, Vol. XXVI

Published in 1891

Since 1890 the Sherman Antitrust Act has been the key law representing America's commitment to a free market economy. A free market economy, one where competition operates free from private or government restraints, assures the best goods and services at the lowest prices for consumers. The Sherman Antitrust Act outlaws any business "combination" or "conspiracy" that unreasonably restrains trade or commerce between states and foreign nations.

In the act, restraining trade or commerce means hindering or preventing competition. Agreements or "conspiracies" among competitors to fix prices, rig a bidding process for a contract, or divide up a customer base are all examples of illegal competition. The act also forbids a company to "monopolize or attempt to monopolize" a product or service by using unreasonable or unfair methods. A business monopoly is the complete control over the manufacture and distribution of a product, or control of a service by one company thereby eliminating competition.

"Every contract, combination in the form of trust or otherwise . . . of trade or commerce among the several States, or with foreign nations, is hereby declared illegal."

Growth of a Trust in the Late Nineteenth Century

Businessman John D. Rockefeller established Standard Oil Company in 1870 in Cleveland, Ohio. At that time Standard Oil refined less than 4 percent of oil in the United States. More than 250 competitors also refined oil. Rockefeller entered into agreements with other oil companies to pool transportation of their oil to receive very cheap railroad transport rates. Only those who agreed to cooperate received the cheap rates. By 1873 through these various agreements Rockefeller managed to control 80 percent of the oil refining in Cleveland, which represented about one-third of the country's total refining ability.

By 1880 Standard Oil controlled most U.S. refineries. In 1882 the approximately forty companies that had entered into agreements with Standard Oil reorganized into Standard Oil Trust, the first large trust in America. The shareholders of those companies turned their shares over to nine individuals or trustees (hence the name trust) who ran all operations. In return shareholders received "trust certificates." The trustees paid out earnings to the holders of the trust certificates.

Later in 1882 the Ohio courts dissolved the huge oil trust but Standard merely reestablished in New Jersey, a state allowing trusts. When Congress passed the Sherman Antitrust Act in 1890, Standard again reformed calling itself a holding company, which again was allowable in New Jersey and allowed the firm to avoid the term "trust." By 1900 Standard Oil controlled 90 percent of U.S. oil refinery business and the Rockefeller family had become enormously wealthy.

In 1911 the U.S. Supreme Court in Standard Oil of New Jersey v. United States found Standard in violation of the Sherman Antitrust Act. The Court ordered the breakup of Standard Oil into smaller companies. The names of those companies included American Standard, Chevron, Esso, Exxon, and Mobil. Competition among the smaller oil companies resumed.

What is a trust?

In the twenty-first century the word "trust" in a business sense is generally thought of by the public as an arrangement where an individual or "trustee" is appointed to manage the affairs of a child or impaired adult. In the late nineteenth century and early twentieth century the word "trust" was commonly used to describe an arrangement where stockholders of several companies turned over their company shares to a single group of individuals called trustees who then administered and controlled the affairs of the newly combined companies.

The combined companies were called a trust. The stockholders received trust certificates entitling them to receive earnings from the trust. The first large U.S. trust, Standard Oil Trust, was formed in 1882 in Ohio. Nine trustees ran the oil trust and monopolized the oil refinery business in America. The term monopoly is more commonly used and understood in the twenty-first century than the term trust. The two terms can be used interchangeably. Whenever the term antitrust appears in this chapter it could also read as antimonopoly.

Congress passes the Sherman Antitrust Act of 1890

By the late nineteenth century businesses producing refined oil, sugar, or providing services such as railroad transportation fought for market dominance by agreeing to become trusts. Both the government and public were becoming alarmed at the rapid growth of trusts and their power to limit competition. Limited competition results in higher prices, reduced availability, and lowered quality. Methods used to hinder competition included forcing rivals out of business through price fixing; buying out competitors; and, forcing customers to sign long-term contracts with one trust.

Congress passed the Sherman Antitrust Act in 1890 as the first federal legislation to prohibit trusts. The act was named after Senator John Sherman of Ohio. The act passed in the Senate on April 8, 1890, by a vote of 51 to 1 and in the House on June 20, 1890, by a vote of 242 to 0. The vote illustrated the high level of concern over trusts among lawmakers. President Benjamin Harrison (1833–1901; served 1889–93) signed the act into law on July 2, 1890.

The Sherman Antitrust Act allowed the federal government, under direction of the attorney general, to prosecute trusts and dissolve them (break them up). Any trust found to restrain trade—hamper or eliminate competition—was illegal. The original act allowed any person forming such an illegal trust to be subject to fines of up to $5,000 and a year in jail. Businesses as well as individuals who suffered economic losses due to trust actions could sue the trust for three times as much as they lost.

The following primary source is the entire Sherman Antitrust Act as approved and signed into law in 1890. Sections 1 and 2 prohibit the formation of trusts, monopolies, or conspiracy to restrain interstate (between states) or foreign trade, trade meaning competition. Section 3 is worded exactly as Section 1 and merely adds that restraint of trade is also illegal in territories of the United States and in the District of Columbia. Sections 4, 5, and 6 define legal procedures to be followed when an individual or company is suspected of restraint of trade. Section 7 allows for victims to recover damages. Section 8 defines the terms "person" and "persons" found in the act.

Things to remember while reading excerpts from the Sherman Antitrust Act of 1890:

• In 1890 industries in America were rapidly expanding; freedom of competition was vital to this growth.
• The American competitive business system works only when competitors set prices honestly and independently.
• The intent of antitrust law is to guard freedom of competition and opportunity in the marketplace, not to destroy businesses.
• Competition produces greater choice and better products at a lower cost for consumers.
• Antitrust legislation assures free, uninhibited competition, which results in stronger businesses. Competition constantly tests businesses and helps them become more successful in the worldwide marketplace.

Excerpt from the Sherman Antitrust Act of 1890

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

Sec. 1. 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 hereby declared to be illegal. Every person who shall make any such contract or engage in any such combination or conspiracy, shall be deemed, guilty of a misdemeanor , and, on conviction thereof, shall be punished by fine not exceeding five thousand dollars, or by imprisonment not exceeding one year, or by both said punishments, in the discretion of the court.

Sec. 2. 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 misdemeanor, and, on conviction thereof, shall be punished by fine not exceeding five thousand dollars, or by imprisonment not exceeding one year, or by both said punishments, in the discretion of the court.

Sec. 3. Every contract, combination in form of trust or otherwise, or conspiracy, in restraint of trade or commerce in any Territory of the United States or of the District of Columbia , or in restraint of trade or commerce between any such Territory and another, or between any such Territory or Territories and any State or States or the District of Columbia, or with foreign nations, or between the District of Columbia and any State or States or foreign nations, is hereby declared illegal. Every person who shall make any such contract or engage in any such combination or conspiracy, shall be deemed guilty of a misdemeanor, and, on conviction thereof, shall be punished by fine not exceeding five thousand dollars, or by imprisonment not exceeding one year, or by both said punishments, in the discretion of the court.

Sec. 4. The several circuit courts of the United States are hereby invested with jurisdiction to prevent and restrain violations of this act; and it shall be the duty of the several district attorneys of theUnited States, in their respective districts, under the direction of the Attorney-General, to institute proceedings . . . to prevent and restrain such violations. Such proceedings may be by way of petition setting forth the case and praying that such violation shall be enjoined or otherwise prohibited. When the parties complained of shall have been duly notified of such petition the court shall proceed, as soon as may be, to the hearing and determination of the case; and pending such petition and before final decree, the court may at any time make such temporary restraining order or prohibition as shall be deemed just. . . .

Sec. 5. Whenever it shall appear to the court before which any proceeding under section four of this act may be pending, that the ends of justice require that other parties should be brought before the court, the court may cause them to be summoned, whether they reside in the district in which the court is held or not; and subpoenas to that end may be served in any district by the marshal thereof.

Sec. 6. Any property owned under any contract or by any combination, or pursuant to any conspiracy (and being the subject thereof) mentioned in section one of this act, and being in the course of transportation from one State to another, or to a foreign country, shall be forfeited to the United States, and may be seized and condemned by like proceedings as those provided by law for the forfeiture, seizure, and condemnation of property imported into the United States contrary to law.

Sec. 7. Any person who shall be injured in his business or property by any other person or corporation by reason of anything forbidden or declared to be unlawful by this act, may sue therefore in any circuit court of the United States in the district in which the defendant resides or is found, without respect to the amount in controversy, and shall recover threefold the damages by him sustained, and the costs of suit, including a reasonable attorney's fee.

Sec. 8. That the word "person," or "persons," whenever used in this act shall be deemed to include corporations and associations existing under or authorized by the laws of either the United States, the laws of any of the Territories, the laws of any State, or the laws of any foreign country.

What happened next . . .

The wording of the Sherman Antitrust Act was not specific. It failed to define such key terms as "trust," "conspiracy," "restraint of trade or commerce," "monopolize," or "combine." As a result the U.S. courts struggled through the 1890s to give precise legal meaning to the law.

The first important case to be brought under Sherman was U.S. v. E. C. Knight Company in 1895. About 1890 the American Sugar Refining Company began purchasing stock in four competitors including E. C. Knight Company. By 1892 the resulting American Sugar trust controlled 98 percent of sugar refining in the United States. President Grover Cleveland's (1837–1908; served 1885–89 and 1893–97) administration charged American Sugar for illegal restraints of trade under the Sherman Act.

In 1895 the U.S. Supreme Court ruled the manufacturing (refining) of sugar was an activity that took place in facilities in specific states and was not a restraint of interstate trade. At the time, the decision seemed to end any thought that the provisions of the Sherman Act would actually be used to regulate the formation of trusts.

Little progress was made against trusts until the election of "trust-busting" President Theodore "Teddy" Roosevelt (1858–1919; served 1901–09). Roosevelt, who became president in March 1901, was as concerned as the public over the continued growth of powerful trusts. In 1903 Roosevelt convinced Congress to establish the first new government cabinet-level department since the Civil War (1861–65), the Department of Commerce and Labor. The new department would oversee the actions of business and labor unions. Within the department Roosevelt established the Bureau of Corporations to uncover violations of the Sherman Act. The bureau began to look into various businesses such as oil, tobacco, steel, and meatpacking.

Philander C. Knox, Roosevelt's attorney general, initiated forty-four antitrust suits during the Roosevelt administration. One of the earliest suits was against the Northern Securities Company (NSC). NSC was formed in New Jersey as a holding company, the name given trusts in New Jersey to avoid the Sherman Act. Monopolizing rail traffic between Chicago and the Northwest, NSC controlled railroad stock of the Great Northern, Northern Pacific, and the Chicago, Burlington, and Quincy railroads.

Wealthy businessmen involved with NSC were J. P. Morgan, James J. Hill, and E. H. Harriman. In 1904 the U.S. Supreme Court found in favor of the government and ordered the breakup of NSC. The decision in Northern Securities Company v. U.S reversed the Court's position on trusts taken in the E. C. Knight case. The combining of railroads halted, and Roosevelt's popular approval rating hit an all-time high. Despite his aggression towards trusts, Roosevelt wanted only to regulate not destroy big business.

The Sherman Act was again used successfully by President William H. Taft (1857–1930; served 1909–13), when he took on the powerful Standard Oil Trust of New Jersey in 1911. In the same year, American Tobacco was broken up into smaller companies after being taken court under provisions of the Sherman Act.

Congress strengthened U.S. antitrust legislation in 1914 by passing the Clayton Antitrust Act and the Federal Trade Commission (FTC) Act. The Clayton Act regulated mergers of companies to avoid the creation of monopolies. The act also required notification of any impending mergers, which had to be approved by the FTC. The second 1914 act created the FTC to enforce antitrust laws. In 1919 the Antitrust Division was formed within the Department of Justice.

For over eight decades the FTC and Antitrust Division worked together to enforce antitrust laws. The FTC is empowered to temporarily suspend anticompetitive activities of suspected companies while the Antitrust Division investigates and prosecutes. The division prosecutes serious and willful violations of antitrust laws but also, along with the FTC, gives guidance to the business community to help structure and organize operations in compliance with U.S. law.

The Sherman Act remained the cornerstone of U.S. antitrust law ensuring a competitive free market. Suits were brought under the act against offending corporations throughout the twentieth century. The Sherman Act has changed little over the last 110 years. The only major changes involved penalties. Individual offenders may be fined up to $350,000 and sentenced to three years in prison for each offense. Corporations can be fined up to $10 million, in some cases even more.

The Microsoft Settlement—The Twenty-First Century's First Major Antitrust Settlement

In 1998 the Department of Justice (DOJ), twenty states, and District of Columbia charged computer software giant Microsoft in federal court of violating federal antitrust laws with its monopoly on personal computer (PC) operating systems. Netscape Communication, another software giant on the West Coast, had pioneered the web browser—a system allowing individual Internet users to search for information by using a key word. Microsoft, however, had begun to package a free browser with its Windows operating system, which was installed in many PCs. At issue was whether Microsoft could piggyback a free browser and other software onto its Windows system. These packages made Windows very attractive and it had become the dominant operating system installed by various PC manufacturers. Other companies with similar software were left out.

In 2000 U.S. District Judge Thomas Penfield Jackson found Microsoft guilty of antitrust violations. He ordered the software giant to be broken apart. Microsoft appealed the decision to the U.S. Supreme Court but the Court refused to hear the case and sent it instead to the court of appeals. The appeals court upheld the Microsoft conviction. U.S. District Judge Colleen Kollar-Kotelly then received the case to consider Microsoft's punishment. The DOJ, states, and Microsoft entered negotiations on a settlement. Judge Kollar-Kotelly approved the settlement in November 2002. The settlement did not include the company's breakup. Instead Microsoft was required to treat all PC makers equally and to share technology so other products not made by Microsoft would work well within Windows. By June 2003 all states except Massachusetts had agreed to the settlement.

Contrary to other states, Massachusetts attorney general Tom Reilly refused to settle with Microsoft believing the agreement did not protect consumers and competitors from Microsoft's monopoly in the personal
computer software market. Massachusetts appealed further.

On June 30, 2004, the U.S. Court of Appeals for the District of Columbia upheld the entire settlement reached in November 2002 between the federal government, states, and Microsoft. Many believed the decision would have a major influence on U.S. antitrust law. Since the mid-1980s few companies found guilty of antitrust violations had been required to break apart. Prior to that time a common penalty was breaking up, the most infamous involved American Telephone and Telegraph (AT&T).

In 1983 AT&T was found guilty of being an illegal monopoly. It was broken up into one long distance company and seven "baby Bell" regional phone companies. The first ruling on Microsoft's antitrust case in 2000 called for Microsoft to be broken up into smaller companies but the final settlement did not require breakup, strengthening the trend away from forced corporate breakups. Further appeals appeared unlikely ending Microsoft's six years of litigation. A similar case against Microsoft in Europe, however, concerning its digital media players was working its way through the European court system in 2004.

If a company is found guilty of antitrust violations the U.S. government may choose, in addition to fines, among several consequences. Consequences include breaking up the monopoly into different smaller companies, or forcing offending businesses to inform customers about competitors' products and services.

Throughout the twentieth century many major U.S. corporations have been involved in antitrust cases—U.S. Steel, International Business Machines (IBM), American Telephone & Telegraph (AT&T), General Electric, Yellow Cab Company, drug company Parke Davis & Company, General Motors Corporation, Pan American World Airways, Texaco, Exxon Corporation, Eastman Kodak Company, cellular phone company Verizon, and computer software giant Microsoft. In some cases the businesses were found guilty of antitrust violations, in others no illegal trust activities were found.

At the beginning of the twenty-first century there are three kinds of antitrust violations the Antitrust Division prosecutes most frequently—price-fixing, bid-rigging, and allocation of customers. Price-fixing means several competitors agree to raise, lower, or maintain prices. These activities inhibit price competition.

Bid-rigging involves competitors who conspire together when bidding on a contract for work, often a government contract. Bid-rigging takes many forms but almost always ends in increased costs for goods or services. Customer allocation schemes involve a few competitors conspiring to divide up markets among themselves to control prices or contracts.

These practices are carried out in secret and are difficult to detect. They cost consumers hundreds of millions of dollars every year. The Antitrust Division receives most of its tips about such activities from the public—customers, employees, and employers. Any possible violation can be reported to the New Case Unit of the Antitrust Division at the email address of newcase.atr@usdoj.gov.

Did you know . . .

• Section 1 outlaws "every contract, combination . . . or conspiracy, in restraint of trade—any scheme, or agreement to inhibit competition." By the early 1900s, however, the Supreme Court decided the intent of Congress was to outlaw only those agreements that restrained competition unreasonably. It would be left up to the courts to decide what agreements were unreasonable.
• Even if competition is limited, reasonable business practices are not illegal under antitrust laws. For example, according to the FTC, if a group of manufacturers all decide to make certain products with specific fire resistant materials, the decision will have reasonable justification. Even though it limits what materials can be used, and limits consumer choice, courts would see it as a standard adopted to provide for consumer safety.
• Section 2 makes it illegal for a company or companies to form or attempt to form a monopoly. Courts have interpreted this section to mean that only a monopoly reached by unreasonable practices is illegal. U.S. antitrust laws do not outlaw monopolies that companies establish by creating a superior product, vigorous competition including setting lower prices, efficient business practices, and excellent customer service. This is considered the American competitive spirit working in a proper manner. Only when a monopoly has been formed by suppressing competition through various anticompetitive schemes is the monopoly illegal.

Consider the following . . .

• During the 1890s a number of citizens suggested that while Congress passed the Sherman Act to appease the public clamoring for action against trusts, it also knew the law would be difficult to enforce and hoped it would not anger big business. Legislatures in the twenty-first century must also balance the interests of the public and big business. Decide on some key questions lawmakers should ask when deliberating the passage of any legislation that regulates big business.
• Research the Clayton Antitrust Act of 1914. How did it strengthen antitrust legislation?
• Go to the library reference section or to your favorite Internet search engine and find books or Web sites with information on Supreme Court cases. Find antitrust cases involving one of the companies listed in the "What happened next" section of this chapter. Carefully read the issues and outcome of the case.

Trust: A company that controls other companies and unfairly limits competition.

Conspiracy: A scheme or agreement to work together.

Restraint: To reduce or inhibit.

Misdemeanor: A lesser or minor crime.

Discretion: Choice.

Territory of the United States: Countries such as Puerto Rico and Guam.

District of Columbia: Washington, DC.

Invested with jurisdiction: Provided the legal authority.

Institute proceedings: Begin legal action.

Petition: Legal document presented to the court starting legal action.

Enjoined: Stopped.

Temporary restraining order: A court order to stop the challenged activity until further legal decisions can be made.

Threefold: Three times the amount.

For More Information

Books

Hovenkamp, Herbert. Antitrust. St. Paul, MN: West Group, 1999.

Shenefield, John H., and Irwin M. Stelzer. Antitrust Laws: A Primer. Washington, DC: AEI Press, 2001.

The Statutes at Large and Proclamations of the United States of America from December 1889 to March 1891, Vol. XXVI. Washington, DC: U.S. Government Printing Office, 1891.

Web Sites

"An Antitrust Primer." Federal Trade Commission.http://www.ftc.gov/bc/compguide/antitrst.htm (accessed on August 19, 2004).

"Price Fixing, Bid Rigging, and Market Allocation Schemes: What They Are and What to Look For." U.S. Department of Justice.http://www.usdoj.gov/atr/public/guidelines/primer-ncu.htm (accessed on August 19, 2004).

"Report Possible Antitrust Violations." U.S. Department of Justice: Antitrust Division.http://www.usdoj.gov/atr/contact/newcase.htm (accessed on August 19, 2004).

"The Sherman Act." St. Olaf College.http://www.stolaf.edu/people/becker/antitrust/statutes/sherman.html (accessed on August 19, 2004).

Sherman Antitrust Act

United States 1890

Synopsis

The Sherman Antitrust Act of 1890 was Congress's first attempt to curb the monopolistic practices of large corporations, trusts, and other forms of business organization. In the following decades, however, the Sherman Act was often used as a tool against organized labor. Employers argued successfully before the courts that union activities were an illegal restraint of trade of the kind that the act was designed to curtail.

Timeline

• 1870: Beginning of Franco-Prussian War. German troops sweep over France, Napoleon III is dethroned, and France's Second Empire gives way to the Third Republic.
• 1876: Four-stroke cycle gas engine introduced.
• 1880: South Africa's Boers declare an independent republic, precipitating the short First Anglo-Boer War.
• 1883: Foundation of the League of Struggle for the Emancipation of Labor by Marxist political philosopher Georgi Valentinovich Plekhanov marks the formal start of Russia's labor movement. Change still lies far in the future for Russia, however: tellingly, Plekhanov launches the movement in Switzerland.
• 1886: Bombing at Haymarket Square, Chicago, kills seven policemen and injures numerous others. Eight anarchists are accused and tried; three are imprisoned, one commits suicide, and four are hanged.
• 1888: Serbian-born American electrical engineer Nikola Tesla develops a practical system for generating and transmitting alternating current (AC), which will ultimately—and after an extremely acrimonious battle—replace Thomas Edison's direct current (DC) in most homes and businesses.
• 1890: Police arrest and kill Sioux chief Sitting Bull, and two weeks later, federal troops kill over 200 Sioux at Wounded Knee.
• 1890: Alfred Thayer Mahan, a U.S. naval officer and historian, publishes The Influence of Sea Power Upon History, 1660-1783, which demonstrates the decisive role that maritime forces have played in past conflicts. The book will have an enormous impact on world events by encouraging the major powers to develop powerful navies.
• 1893: Henry Ford builds his first automobile.
• 1896: First modern Olympic Games held in Athens.
• 1900: Establishment of the Commonwealth of Australia.

Event and Its Context

Background: The Second Industrial Revolution

United States history from the end of the Civil War to the beginning of World War I (1865-1914) is largely the history of the second Industrial Revolution. The first Industrial Revolution, dating back to the late 1700s and extending roughly through the first half of the nineteenth century, was based on new technologies imported from Europe, such as large spinning and weaving mills and coal-fired furnaces for the production of iron.

Industrial development in the United States remained on hold during the Civil War, Reconstruction, and the harsh depression of the 1870s. Once these passed, however, the nation was poised for a second Industrial Revolution, one whose effects dwarfed those of the first. Three major developments made the second Industrial Revolution possible. First was the completion of communications and transportation networks—railroads, the telegraph system, and the steamship—making possible the movement of raw materials and finished goods in high volumes. The second was the development of electricity, which provided industry with a cheap, flexible source of power and revolutionized chemical and metallurgical processes. Finally, the application of science to manufacturing created an array of new consumer and industrial products from major corporations whose names remain familiar today: the Aluminum Company of America (Alcoa), Remington, Burroughs, McCormick Harvester (now International Harvester), Borden, Heinz, Campbell, Du Pont, Dow Chemical, Monsanto. These companies' products were transforming American life.

The Rise of the Capitalist

Science and technology provided the know-how. Equally important, though, were the business skills of a new class of entrepreneurs, whose names, too, remain familiar today: John D. Rockefeller in oil, Cornelius and William Vanderbilt in the railroad industry, Andrew Carnegie in steel, and Jay Gould and J. Pierpont Morgan in finance. These men and others amassed enormous fortunes investing in large, capital-intensive enterprises that churned out new or greatly improved products often at a fraction of the cost of similar products a generation earlier. In the early 1870s, for example, the cost of producing a gallon of kerosene was a nickel; by the mid-1880s the cost had fallen to half a cent. Over a 20-year period from 1880 to 1900, the cost to make a ton of steel fell from $65 to $17. The Aluminum Company of America produced what had previously been a precious metal for a mere 35 cents a pound. In 1865 freight rates on the railroads were about 2 cents per ton-mile; by 1900 that figure had fallen to about .75 cents per ton-mile.

Although many of the industrialists who built these mighty enterprises became prominent philanthropists, the public took a dim view of their efforts. This view was given a name in 1934 with the publication of Matthew Josephson's book Robber Barons. In the late nineteenth and early twentieth centuries, the public and legislators were observing with alarm the sheer, unbridled economic power of corporations, trusts, pools, trade associations, and similar business combinations. Business leaders in such industries as oil, sugar, whiskey, tobacco, and industrial machinery were learning that by cooperating rather than competing, they could eliminate smaller competitors, control output and the supply of products, establish market territories, raise prices to maximize profits, and impose penalties on members who violated the anticompetitive policies of the combination. Perhaps the most notable example was John D. Rockefeller's Standard Oil. Rockefeller believed that the American economic system was in disarray; to succeed, a modern corporation needed dependable supplies of raw materials, access to capital and credit, reliable transportation, and expansive markets. Accordingly, he ruthlessly bought out smaller competitors in the oil industry, and those he could not buy he forced out of business. Similar patterns emerged in the railroad and other industries. The result was an industrial system that denied freedom of entry to the smaller competitor, or that drove the competitor out of business. And, as William Vanderbilt famously exclaimed, "The public be damned!"

The Sherman Antitrust Act

To curb the predatory monopolistic practices of corporations and trusts, Congress passed the Sherman Antitrust Act in 1890. Section 1 of the act made illegal "Every contract, combination, . . . or conspiracy, in restraint of trade or commerce among the several States." Section 2 specified that "every person who shall monopolize, or attempt to monopolize . . . any part of the trade or commerce among the several States, or with foreign nations," shall be guilty of a misdemeanor.

The Sherman Act was a noble failure. By not defining what constituted a "trust" or a "monopoly," it gave the courts little guidance, so early suits against the sugar and whiskey trusts were thrown out of court, although the courts did order the dissolution of Rockefeller's Standard Oil trust. The administration of Theodore Roosevelt (1901-1909) had somewhat more success, and Roosevelt won a reputation as a "trust-buster" by breaking up the Northern Securities railroad trust and others. The reaction of big business, predictably, was one of outrage that its liberties had been infringed. And in the generally conservative, pro-business climate that prevailed at the time, the courts tended to agree. To close some of the Sherman Act's loopholes, President Woodrow Wilson asked for new legislation. The result was the 1914 Clayton Act, which among other practices prohibited pricing agreements that restrained trade. Again, though, the courts' enforcement of the act was at best tepid.

The Sherman Act and Organized Labor

The Sherman Act failed specifically to mention labor unions. Thus, it remained an open question whether Congress intended unions to be subject to the act and whether their activities in some circumstances could be construed as "combinations . . . in restraint of trade or commerce." A federal court in Louisiana offered an early answer to this question in 1893, when, in United States v. Workingmen's Amalgamated Council, it issued an injunction against a group of unions—a tool employers frequently sought and won in their efforts to thwart organized labor during these years—and declared that Congress's intent was to "include combinations of labor, as well as capital; in fact, all combinations in restraint of commerce, without reference to the character of the persons who entered into them." Similarly, a federal court in United States v. Agler (1897), ruling on a suit brought in the wake of the Pullman railroad strike of 1894, asserted its authority under the Sherman Act to "apply the restraining power of the law for the purpose of checking and arresting all lawless interference with . . . the peaceful and orderly conduct of railroad business between the States."

The irony is apparent. The purpose of the Sherman Act was to restrain big business. It failed to do so. But it did stifle organized labor in the early decades of the twentieth century, when employers repeatedly argued in court that certain union activities, in particular the secondary boycott, violated the Sherman Act because they restrained interstate commerce. When some of these cases finally made their way to the Supreme Court, the High Court agreed. In a series of landmark cases, including Danbury Hatters (1908), Gompers v. Bucks Stove and Range Co. (1911), the Coronado Coal Company cases (1922 and 1925), and Bedford Cut Stone Company v. Journeymen Stone Cutters Association (1927), the Court turned the Sherman Act and, later, the Clayton Act against union activities.

Two of these cases in particular stand out. The first was Danbury Hatters; officially, the case was Loewe v. Lawlor, but it took on the name of the location of the Loewe and Company hat factory in Danbury, Connecticut. The case arose in 1902 when the United Hatters of North America attempted to organize workers at the Loewe plant and ultimately called about 250 workers out on strike. When the strike did not have its desired effect, the union adopted a different tactic: it called for a nationwide boycott. The union pressured retailers and wholesalers to stop carrying Loewe hats, and it urged the public not to buy from any store that sold the company's products. So successful was the boycott that the company claimed that in one year it lost $85,000.

Accordingly, the company sued the union and its members in 1903, alleging a violation of the Sherman Act. Five years later, the Supreme Court overturned a court of appeals ruling in the union's favor and said that the union's activities, particularly its use of a secondary boycott, were in fact a restraint of trade within the meaning of the Sherman Act. Thus, the Danbury Hatters case removed from labor's hands one of its most effective tools, the "secondary boycott," or pressure on one firm to persuade it to stop doing business with another firm.

If the Danbury Hatters decision was a sharp blow to labor, the Bucks Stove decision three years later was nearly a knockout punch. The Bucks Stove and Range Company refused to recognize the Molders and Foundry Workers Union of North America, an affiliate of the American Federation of Labor (AFL), as the bargaining agent for its workers. Accordingly, the AFL placed the company's name on its newspaper's "unfair" and "We Don't Patronize" lists, pressured retailers not to carry the company's products, and threatened to boycott those that did. It also urged the public not to buy Bucks Stove products. The union's actions were successful, and sales at the company dropped.

In response, the company filed suit against the officers of the AFL, including its president, Samuel Gompers. The court of appeals granted an injunction against the AFL, but Gompers and the other officers violated the injunction and continued to include the company's name on its "unfair" and "We Don't Patronize" lists and to publicize the boycott in speeches, editorials, and other publications. After the court found the union officials guilty of contempt, they appealed to the Supreme Court. In its decision, the Court addressed the question of whether the Sherman Act was applicable to the case. Citing Loewe v. Lawlor, the Court declared that Sherman was applicable and that any boycott or blacklist promoted by printed matter or by words violated the act. In reaching its decision, the Court pointed to the "vast power" of labor unions, with their "multitudes of members." It distinguished between the "right of speech" of a single individual and the "verbal acts" of a multitude that can come under court scrutiny as much as "the use of any other force whereby property is unlawfully damaged." Any "property" that faced "irreparable damage" such as lost profits because of labor union activities could appropriately be protected by the courts through the issuance of an injunction.

It was not until 1940, in Apex Hosiery Co. v. Leader, that the Supreme Court nullified these earlier decisions by ruling that a labor strike carried out to further the interests of the union conducting it, even if the effect of the strike is to reduce the amount of goods in interstate commerce, is not a violation of the Sherman Antitrust Act.

Key Players

Gompers, Samuel (1850-1924): Gompers was born to Dutch-Jewish immigrants in London, where he began his working life at age ten as a cigar maker. He immigrated to the United States in 1863 and in 1886 was elected vice president of the Cigarmakers' International Union. That year he was a founder of the American Federation of Labor and served as its president from 1886 to 1895, then from 1896 to 1924. In 1919 Gompers was appointed to the American delegation at the Paris Peace Conference following World War I. His autobiography, Seventy Years of Life and Labor, was published in 1925.

Rockefeller, John D. (1839-1937): A high school dropout who eventually gave away $550 million of his fortune, Rockefeller was born in Richford, New York, and began his career as a bookkeeper in Cleveland. He entered the oil business in 1863, and by 1870 his business had expanded to include the Standard Oil Company of Ohio. By the end of the decade Standard Oil dominated the refining, transportation, and sales of petroleum.

Roosevelt, Theodore (1858-1919): Roosevelt, the twenty-sixth president of the United States, was a Harvard graduate who enjoyed an active career in public service. He was a member of the state assembly, head of the U.S. Civil Service Commission, president of the New York City police commission, assistant secretary of the navy, and governor of New York. As vice president, he assumed the presidency when William McKinley was assassinated in 1901. He was known for his aggressive foreign policy and for championing progressive reform at home. He ran again for the presidency against his successor, William Howard Taft, under the banner of the Progressive, or Bull Moose Party in the 1912 election won by Woodrow Wilson.

See also: American Federation of Labor; Clayton Antitrust Act; Coronado Coal v. UMWA; Gompers v. Bucks Stove; Pullman Strike.

Bibliography

Books

Koretz, Robert F. Statutory History of the United States:Labor Organization. New York: Chelsea House, 1970.

Northrup, Herbert R., and Gordon F. Bloom. Government and Labor. Homewood, IL: Richard D. Irwin, 1963.

Taylor, Benjamin J., and Fred Witney. Labor Relations Law,3rd ed. Englewood Cliffs, NJ: Prentice-Hall, 1979.

Articles

Jones, Edgar A., Jr. "The Right to Picket—Twilight Zone of the Constitution." University of Pennsylvania Law Review (June 1954): 997+.

"Labor Picketing and Commercial Speech: Free Enterprise Values in the Doctrine of Free Speech." Yale Law Journal (April 1982): 960+.

McNatt, E. B. "Labor Again Menaced by the Sherman Act."Southern Economic Journal 6, no. 2 (1939).

Pope, James Gray. "The Thirteenth Amendment versus the Commerce Clause: Labor and the Shaping of American Constitutional Law, 1921-1957." Columbia Law Review (January 2002): 112+.

Timbers, Edwin. "The Problems of Union Power and Antitrust Legislation." Labor Law Journal 16, no. 9 (1965).

—Michael J. O'Neal

SHERMAN ANTI-TRUST ACT

The Sherman Anti-Trust Act of 1890 (15 U.S.C.A. §§ 1 et seq.), the first and most significant of the U.S. antitrust laws, was signed into law by President benjamin harrison and is named after its primary supporter, Ohio Senator john sherman.

The prevailing economic theory supporting antitrust laws in the United States is that the public is best served by free competition in trade and industry. When businesses fairly compete for the consumer's dollar, the quality of products and services increases while the prices decrease. However, many businesses would rather dictate the price, quantity, and quality of the goods that they produce, without having to compete for consumers. Some businesses have tried to eliminate competition through illegal means, such as fixing prices and assigning exclusive territories to different competitors within an industry. Antitrust laws seek to eliminate such illegal behavior and promote free and fair marketplace competition.

Until the late 1800s the federal government encouraged the growth of big business. By the end of the century, however, the emergence of powerful trusts began to threaten the U.S. business climate. Trusts were corporate holding companies that, by 1888, had consolidated a very large share of U.S. manufacturing and mining industries into nationwide monopolies. The trusts found that through consolidation they could charge monopoly prices and thus make excessive profits and large financial gains. Access to greater political power at state and national levels led to further economic benefits for the trusts, such as tariffs or discriminatory railroad rates or rebates. The most notorious of the trusts were the Sugar Trust, the Whisky Trust, the Cordage Trust, the Beef Trust, the Tobacco Trust, John D. Rockefeller's Oil Trust (Standard Oil of New Jersey), and J. P. Morgan's Steel Trust (U.S. Steel Corporation).

Consumers, workers, farmers, and other suppliers were directly hurt monetarily as a result of the monopolizations. Even more important, perhaps, was that the trusts fanned into renewed flame a traditional U.S. fear and hatred of unchecked power, whether political or economic, and particularly of monopolies that ended or threatened equal opportunity for all businesses. The public demanded legislative action, which prompted Congress, in 1890, to pass the Sherman Act. The act was followed by several other antitrust acts, including the clayton act of 1914 (15 U.S.C.A. §§ 12 et seq.), the Federal Trade Commission Act of 1914 (15 U.S.C.A. §§ 41 et seq.), and the robinson-patman act of 1936 (15 U.S.C.A. §§ 13a, 13b, 21a). All of these acts attempt to prohibit anticompetitive practices and prevent unreasonable concentrations of economic power that stifle or weaken competition.

The Sherman Act made agreements "in restraint of trade" illegal. It also made it a crime to "monopolize, or attempt to monopolize … any part of the trade or commerce." The purpose of the act was to maintain competition in business. However, enforcement of the act proved to be difficult. Congress had enacted the Sherman Act pursuant to its constitutional power to regulate interstate commerce, but this was only the second time that Congress relied on that power. Because Congress was somewhat uncertain of the reach of its legislative power, it framed the law in broad common-law concepts that lacked detail. For example, such key terms as monopoly and trust were not defined. In effect, Congress passed the problem of enforcing the law to the executive branch, and to the judicial branch, it gave the responsibility of interpreting the law. Still, the act was a far-reaching legislative departure from the predominant laissez-faire philosophy of the era.

Initial enforcement of the Sherman Act was halting, set back in part by the decision of the Supreme Court in United States v. E. C. Knight Co., 156 U.S. 1, 15 S. Ct. 249, 39 L. Ed. 325 (1895), that manufacturing was not interstate commerce. This problem was soon circumvented, and President theodore roosevelt promoted the antitrust cause, calling himself a "trustbuster." In 1914, Congress established the Federal Trade Commission (FTC) to formalize rules for fair trade and to investigate and curtail unfair trade practices. As a result, a number of major cases were successfully brought in the first decade of the century, largely terminating trusts and basically transforming the face of U.S. industrial organization.

During the 1920s, enforcement efforts were more modest, and during much of the 1930s, the national recovery program of the new deal encouraged industrial collaboration rather than competition. During the late 1930s, an intensive enforcement of antitrust laws was undertaken. Since world war ii, antitrust enforcement has become increasingly institutionalized in the Antitrust Division of the justice department and in the Federal Trade Commission, which over time, was granted greater authority by Congress. Justice Department enforcement activities against cartels are particularly vigorous, and criminal sanctions are increasingly sought. In 1992, the Justice Department expanded its enforcement policy to cover foreign company conduct that harms U.S. exports.

Restraint of Trade

Section one of the Sherman Act provides that "[e]very 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 hereby declared to be illegal." The broad language of this section has been slowly defined and narrowed through judicial decisions.

The courts have interpreted the act to forbid only unreasonable restraints of trade. The Supreme Court promulgated this flexible rule, called the Rule of Reason, in Standard Oil Co. of New Jersey v. United States, 221 U.S. 1, 31 S. Ct. 502, 55 L. Ed. 619 (1911). Under the Rule of Reason, the courts will look to a number of factors in deciding whether the particular restraint of trade unreasonably restricts competition. Specifically, the court considers the makeup of the relevant industry, the defendants' positions within that industry, the ability of the defendants' competitors to respond to the challenged practice, and the defendants' purpose in adopting the restraint. This analysis forces courts to consider the pro-competitive effects of the restraint as well as its anticompetitive effects.

The Supreme Court has also declared certain categories of restraints to be illegal per se: that is, they are conclusively presumed to be unreasonable and therefore illegal. For those types of restraints, the court does not have to go any further in its analysis than to recognize the type of restraint, and the plaintiff does not have to show anything other than that the restraint occurred.

Restraints of trade can be classified as horizontal or vertical. A horizontal agreement is one involving direct competitors at the same level in a particular industry, and a vertical agreement involves participants who are not direct competitors because they are at different levels. Thus, a horizontal agreement can be among manufacturers or retailers or wholesalers, but it does not involve participants from across the different groups. A vertical agreement involves participants from one or more of the groups—for example, a manufacturer, a wholesaler, and a retailer. These distinctions become difficult to make in certain fact situations, but they can be significant in determining whether to apply a per se rule of illegality or the Rule of Reason. For example, horizontal market allocations are per se illegal, but vertical market allocations are subject to the rule-of-reason test.

Concerted Action

Section one of the Sherman Act prohibits concerted action, which requires more than a unilateral act by a person or business alone. The Supreme Court has stated that an organization may deal or refuse to deal with whomever it wants, as long as that organization is acting independently. But if a manufacturer and certain retailers agree that a manufacturer will only provide products to those retailers and not to others, then that is a concerted action that may violate the Sherman Act. A company and its employees are considered an individual entity for the purposes of this act. Likewise, a parent company and its wholly owned subsidiaries are considered an individual entity.

Evidence of a concerted action may be shown by an express or written agreement, or it may be inferred from circumstantial evidence. Conscious parallelism (similar patterns of conduct among competitors) is not sufficient in and of itself to imply a conspiracy. The courts have held that conspiracy requires an additional element such as complex actions that would benefit each competitor only if all of them acted in the same way.

Joint ventures, which are a form of business association among competitors designed to further a business purpose, such as sharing cost or reducing redundancy, are generally scrutinized under the Rule of Reason. But courts first look at the reason that the joint venture was established to determine whether its purpose was to fix prices or engage in some other unlawful activity. Congress passed the National Cooperative Research Act of 1984 (15 U.S.C.A. §§ 4301-06) to permit and encourage competitors to engage in joint ventures that promote research and development of new technologies. The Rule of Reason will apply to those types of joint ventures.

Price Fixing

The agreement to inhibit price competition by raising, depressing, fixing, or stabilizing prices is the most serious example of a per se violation under the Sherman Act. Under the act, it is immaterial whether the fixed prices are set at a maximum price, a minimum price, the actual cost, or the fair market price. It is also immaterial under the law whether the fixed price is reasonable.

All horizontal and vertical price-fixing agreements are illegal per se. Horizontal price-fixing agreements include agreements among sellers to establish maximum or minimum prices on certain goods or services. This can also include competitors' changing their prices simultaneously in some circumstances. Also significant is the fact that horizontal price-fixing agreements may be direct or indirect and still be illegal. Thus, a promotion or discount that is tied closely to price cannot be raised, depressed, fixed, or stabilized, without a Sherman Act violation. Vertical price-fixing agreements include situations where a wholesaler mandates the minimum or maximum price at which retailers may sell certain products.

Market Allocations

Market allocations are situations where competitors agree to not compete with each other in specific markets, by dividing up geographic areas, types of products, or types of customers. Market allocations are another form of price fixing. All horizontal market allocations are illegal per se. If there are only two computer manufacturers in the country and they enter into a market allocation agreement whereby manufacturer A will only sell to retailers east of the Mississippi and manufacturer B will only sell to retailers west of the Mississippi, they have created monopolies for themselves, a violation of the Sherman Act. Likewise, it is an illegal agreement that manufacturer A will only sell to retailers C and D and manufacturer B will only sell to retailers E and F.

Territorial and customer vertical market allocations are not per se illegal but are judged by the Rule of Reason. In 1985, the Justice Department announced that it would not challenge any restraints by a company that has less than 10 percent of the relevant market or whose vertical price index, a measure of the relevant market share, indicates that collusion and exclusion are not possible for that company in that market.

Boycotts

A boycott, or a concerted refusal to deal, occurs when two or more companies agree not to deal with a third party. These agreements may be clearly anticompetitive and may violate the Sherman Act because they can result in the elimination of competition or the reduction in the number of participants entering the market to compete with existing participants. Boycotts that are created by groups with market power and that are designed to eliminate a competitor or to force that competitor to agree to a group standard are per se illegal. Boycotts that are more cooperative in nature, designed to increase economic efficiency or make markets more competitive, are subject to the Rule of Reason. Generally, most courts have found that horizontal boycotts, but not vertical boycotts, are per se illegal.

Tying Arrangements

When a seller conditions the sale of one product on the purchase of another product, the seller has set up a tying arrangement, which calls for close legal scrutiny. This situation generally occurs with related products, such as a printer and paper. In that example, the seller only sells a certain printer (the tying product) to consumers if they agree to buy all their printer paper (the tied product) from that seller.

Tying arrangements are closely scrutinized because they exploit market power in one product to expand market power in another product. The result of tying arrangements is to reduce the choices for the buyer and exclude competitors. Such arrangements are per se illegal if the seller has considerable economic power in the tying product and affects a substantial amount of interstate commerce in the tied product. If the seller does not have economic power in the tying product market, the tying arrangement is judged by the Rule of Reason. A seller is considered to have economic power if it occupies a dominant position in the market, its product is advantaged over other competing products as a result of the tying, or a substantial number of consumers has accepted the tying arrangement (evidencing the seller's economic power in the market).

Monopolies

Section two of the Sherman Act prohibits monopolies, attempts to monopolize, or conspiracies to monopolize. A monopoly is a form of market structure where only one or very few companies dominate the total sales of a particular product or service. Economic theories show that monopolists will use their power to restrict production of goods and raise prices. The public suffers under a monopolistic market because it does not have the quantity of goods or the low prices that a competitive market could offer.

Although the language of the Sherman Act forbids all monopolies, the courts have held that the act only applies to those monopolies attained through abused or unfair power. Monopolies that have been created through efficient, competitive behavior are not illegal under the Sherman Act, as long as honest methods have been employed. In determining whether a particular situation that involves more than one company is a monopoly, the courts must determine whether the presence of monopoly power exists in the market. Monopoly power is defined as the ability to control price or to exclude competitors from the marketplace. The courts look to several criteria in determining market power but primarily focus on market share (the company's fractional share of the total relevant product and geographic market). A market share greater than 75 percent indicates monopoly power, a share less than 50 percent does not, and shares between 50 and 75 percent are inconclusive in and of themselves.

In focusing on market shares, courts will include not only products that are exactly the same but also those that may be substituted for the company's product based on price, quality, and adaptability for other purposes. For example, an oat-based, round-shaped breakfast cereal may be considered a substitutable product for a rice-based, square-shaped breakfast cereal, or possibly even a granola breakfast bar.

In addition to the product market, the geographic market is also important in determining market share. The relevant geographic market, the territory in which the firm sells its products or services, may be national, regional, or local in nature. Geographic market may be limited by transportation costs, the types of product or service, and the location of competitors.

Once sufficient monopoly power has been proved, the Sherman Act requires a showing that the company in question engaged in unfair conduct. The courts have differing opinions as to what constitutes unfair conduct. Some courts require the company to prove that it acquired its monopoly power passively or that the power was thrust upon them. Other courts consider it an unfair power if the monopoly power is used in conjunction with conduct designed to exclude competitors. Still other courts find an unfair power if the monopoly power is combined with some predatory practice, such as pricing below marginal costs.

Attempts to Monopolize Section two of the Sherman Act also prohibits attempts to monopolize. As with other behavior prohibited under the Sherman Act, courts have had a difficult time developing a standard that distinguishes unlawful attempts to monopolize from normal competitive behavior. The standard that the courts have developed requires a showing of specific intent to monopolize along with a dangerous probability of success. However, the courts have no uniform definition for the terms intent or success. Cases suggest that the more market power a company has acquired, the less flagrant its attempt to monopolize must be.

Conspiracies to Monopolize Conspiracies to monopolize are unlawful under section two of the Sherman Act. This offense is rarely charged alone, because a conspiracy to monopolize is also a combination in restraint of trade, which violates section one of the Sherman Act.

In accordance with traditional conspiracy law, conspirators to monopolize are liable for the acts of each co-conspirator, even their superiors and employees, if they are aware of and participate in the overall mission of the conspiracy. Conspirators who join in the conspiracy after it has already started are liable for every act during the course of the conspiracy, even those events that occurred before they joined.

further readings

Hylton, Keith N. 2003. Antitrust Law: Economic Theory and Common Law Evolution. New York: Cambridge Univ. Press.

Mann, Richard A., and Barry S. Roberts. 2004. Essentials of Business Law. 8th ed. Mason, Ohio: Thomson/South-Western West.

Posner, Richard A. 2002. Antitrust Law. 2d ed. Chicago: Univ. of Chicago Press.

cross-references

Antitrust Law; Mergers and Acquisitions; Unfair Competition; Vertical Merger.

SHERMAN ANTITRUST ACT

SHERMAN ANTITRUST ACT was passed by Congress and signed into law by President Benjamin Harrison on 2 July 1890. Introduced and vigorously promoted by Senator John Sherman (R–Ohio), the law was designed to discourage "trusts," broadly understood as large industrial combinations that curtail competition. Its first section declares "every contract, combination in the form of trust or otherwise, or conspiracy in restraint of trade" to be illegal. The second section makes monopolistic behavior a felony subject to imprisonment ("not exceeding three years") and/or fines (not exceeding $10 million for corporations and $350,000 for private individuals). Civil actions may be brought by both the government and private parties. The act vests federal district courts with primary jurisdiction, and assigns the U.S. attorney general and "the several United States attorneys" chief enforcement authority.

Trusts were seemingly ubiquitous in the 1880s: thousands of businesses combined to control product pricing, distribution, and production. These associations were formed, among other reasons, to counter uncertainty created by rapid market change, such as uncoordinated advancements in transportation, manufacturing, and production. While many of these trusts were small in scale and managerially thin, the most notorious were controlled by industry giants such as Standard Oil, American Tobacco, and United States Steel. These large-scale, long-term trusts were seen as coercive and rapacious, dominating markets and eliminating competition.

The trust "problem" varied in the late nineteenth century, depending on who was describing it. For some, trusts perverted market forces and posed a threat to the nation's consumers—only big business gained from restricting free commerce and manipulating prices. (Some proponents of this view admitted, however, that the rise of the trusts corresponded with a general lowering of prices.) Popular journalists such as Henry Demarest Lloyd and Ida Tarbell stoked this distrust, arguing that trusts held back needed goods in order to make a profit under the ruse of overproduction. Others stressed the threat trusts posed to individual liberty by constricting citizens' ability to freely enter into trades and contracts. Many considered the threat to small businesses an assault on American values. Trusts were also seen as the cause of profound political problems. The money of men like Jay Gould and John D. Rockefeller was thought to corrupt politicians and democratic institutions, a view growing out of an American tradition equating concentrated power with tyranny and despotism. Fighting the trusts offered a way to combat new and pernicious versions of prerogative and corruption.

Prior to 1890, trusts were regulated exclusively at the state level, part of the general police power held by municipalities and states. States tackled the trust problem in various ways. Some attempted to eliminate collusion through the use of regulation; fifteen antitrust laws were passed between 1888 and 1891. More frequently they tried to limit business behavior without enacting legislation. State judges were receptive to arguments, raised by state attorneys general, that trusts violated long-standing legal principles; the common law provided a useful tool in battling "unreasonable" restraints of trade. However, several states, like New Jersey, Delaware, and New York, passed incorporation statutes allowing trusts and holding companies within their jurisdictions with the goal of attracting businesses.

Pressure to enact a federal antitrust law came from many quarters. Farmers and wage laborers, for example, saw industrialists as the major threat to their political and economic power; national control of trusts, under the banner of social justice, promised to increase their bargaining position. Small companies lobbied heavily for a federal antitrust law because they welcomed the chance to limit the power of their large competitors—competitors who disproportionately benefited from revolutions in distribution and production. Many were simply dissatisfied with state regulation, arguing that only the federal government could effectively control unfair business practices. Interestingly, evidence suggests that the trusts themselves were in favor of central regulation. They may have hoped a national law would discourage state antitrust activity, or, more cynically, serve as a useful distraction while they pursued more important goals. The New York Times of October 1890 called the Sherman Act a "humbug and a sham" that was "passed to deceive the people and to clear the way" for other laws, like a high protective tariff, that clearly benefited businesses.

When it was introduced, the Sherman Act raised serious objections in Congress. Like the Interstate Commerce Act of 1887, it was one of the first national laws designed to control private business behavior, and its legitimacy was uncertain. Concerns were allayed by three arguments. First, the law was needed: states were unable to fight trusts that operated outside their borders. Second, it was constitutional: antitrust activity was a legitimate exercise of Congress's authority to regulate interstate commerce. Finally, defenders argued that it did not threaten state sovereignty. The act, instead of preempting state antitrust activity, merely supplemented it.

Although the act passed by overwhelming margins in both the House (242–0) and Senate (52–1), many battles were fought between its introduction and final passage. The Senate Finance and Judiciary committees heavily revised the original bill, and both chambers added and withdrew numerous amendments. Senator Sherman, for example, supported an amendment exempting farm groups and labor unions from the law's reach, and Senator Nelson W. Aldrich (R–Rhode Island) proposed that the law not be applied to combinations that "lessen the cost of production" or reduce the price of the life's "necessaries." Some historians argue that the debate leading up to the Sherman Act reflected an ideological split between proponents of the traditional economic order and a new one. Congressmen divided sharply over the value of free competition in a rapidly industrializing society and, more generally, over the value of laissez-faire approaches to social and economic problems. Not surprisingly, the final language of the Sherman Act was broad, allowing a good deal of enforcement discretion.

The Sherman Act's effects on trusts were minimal for the first fifteen years after enactment. Indeed, large-scale monopolies grew rapidly during this period. There was no concerted drive to prosecute trusts, nor was there an agency charged to oversee industry behavior until a special division in the Justice Department was created in 1903 under President Theodore Roosevelt. (The Bureau of Corporations was formed the same year within the Department of Commerce and Labor to gather industry information.) "Trust busting," however, was not neglected during this period. States continued to pass antitrust laws after 1890, many far more aggressive than the federal version. More importantly, federal courts assumed a leader-ship role in interpreting the act's broad provisions, a role that they have never abandoned.

Supreme Court justices openly debated the act's meaning from 1890 to 1911, an era now known as the law's formative period. Two prominent justices, John Marshall Harlan and Chief Justice Melville W. Fuller, differed over the scope of federal power granted under the act, specifically, how much authority Congress has to regulate in-state business behavior. Fuller's insistence on clear lines of distinction between state power and federal power (or police powers and the commerce power) re-flected his strong attachment to dual federalism and informed decisions such as United States v. E. C. Knight Company (1895). For Fuller, manufacture itself is not a commercial activity and thus cannot be regulated under Congress's commerce power. According to this view, the federal government has no authority over things that have merely an "indirect" effect on commerce. Harlan's alternative position—that monopolistic behavior is pervasive, blurring distinctions between in-state and interstate activities—held sway in cases like Northern Securities Company v. United States (1904) and Swift and Company v. United States (1905). This understanding significantly broadened Congress's commerce power and was accepted conclusively by the Court in the 1920s under the stewardship of Chief Justice William Howard Taft in Stafford v. Wallace (1922) and Board of Trade of City of Chicago v. Olsen (1923).

In addition to disagreements over the reach of federal power, the justices differed over the intent of the act itself, namely what types of trade restraints were forbidden. The Court concluded that the section 1 prohibition against "every" contract and combination in restraint of trade was a rule that must admit of exceptions. Justices advocated prohibitions by type (the per se rule) and a more flexible, case-by-case analysis. A compromise was reached in Standard Oil Company of New Jersey v. United States (1911) known as the "rule of reason": the Sherman Act only prohibits trade restraints that the judges deem unreasonable. Some anticompetitive activity is acceptable, according to the rule. The harm of collusion may be outweighed by its pro-competitive ramifications.

The rule of reason may have solved an internal debate among the justices, but it did little to eliminate the ambiguity of federal antitrust enforcement. Indeed, internal Court debate before 1912 convinced many observers that the act invited too much judicial discretion. Proposals to toughen the law were prevalent during the Progressive Era and were a central feature of the presidential contest of 1912. The Clayton Antitrust Act of 1914 clarified the ambiguities of the law by specifically enumerating prohibited practices (such as the interlinking of companies and price fixing). The Federal Trade Commission Act, passed the same year, created a body to act, as President Woodrow Wilson explained, as a "clearing-house for the facts … and as an instrumentality for doing justice to business" (see Federal Trade Commission). Antitrust law from that point on was to be developed by administrators as well as by federal judges.

The reach of the Sherman Act has varied with time, paralleling judicial and political developments. Sections have been added and repealed, but it continues to be the main source of American antitrust law. Civil and criminal provisions have been extended to activity occurring out-side of the United States, and indications suggest its international reach may become as important as its domestic application.

BIBLIOGRAPHY

Bork, Robert. The Antitrust Paradox: A Policy at War with Itself. New York: Basic Books, 1978.

Hovenkamp, Herbert. Enterprise and American Law, 1836–1937. Cambridge, Mass.: Harvard University Press, 1991.

McCraw, Thomas K. Prophets of Regulation. Cambridge, Mass.: Harvard University Press, 1984.

Peritz, Rudolph J. R. Competition Policy in America, 1888–1992: History, Rhetoric, Law. New York: Oxford University Press, 1996.

Thorelli, Hans B. The Federal Antitrust Policy: Origination of an American Tradition. Baltimore: Johns Hopkins Press, 1954.

Troesken, Werner. "Did the Trusts Want a Federal Antitrust Law? An Event Study of State Antitrust Enforcement and Passage of the Sherman Act." In Public Choice Interpretations of American Economic History. Edited by Jac C. Heckelman et al. Boston: Kluwer Academic Press, 2000.

Wiebe, Robert H. The Search for Order, 1877–1920. New York: Hill and Wang, 1967. Reprint, Westport, Conn: Greenwood Press, 1980.

KimberlyHendrickson

See alsoBusiness, Big ; Corporations ; Monopoly ; Trusts .

The general government is not placed by the Constitution in such a condition of helplessness that it must fold its arms and remain inactive while capital combines, under the name of a corporation, to destroy competition. … The doctrine of the autonomy of the states cannot properly be invoked to justify a denial of power in the national government to meet such an emergency, involving, as it does, that freedom of commercial intercourse among the states which the Constitution sought to attain.

source: From United States v. E. C. Knight Company (1895), Justice Harlan dissenting.

That which belongs to commerce is within the jurisdiction of the United States, but that which does not belong to commerce is within the jurisdiction of the police power of the state.…Itis vital that the inde pendence of the commercial power and of the police power, and the delimitation between them, however sometimes perplexing, should always be recognized and observed, for, while the one furnishes the strongest bond of union, the other is essential to the preservation of the autonomy of the states as required by our dual form of government; and acknowledged evils, however grave and urgent they may appear to be, had better be borne, than the risk be run, in the effort to suppress them, of more serious consequences by resort to expedients of even doubtful constitutionality.

source: From United States v. E. C. Knight Company (1895), Chief Justice Fuller, majority opinion.

Sherman Antitrust Act (1890)

Herbert Hovenkamp

In 1890 public hostility toward the monopoly actions of large corporations was at a feverish pitch. The Sherman Antitrust Act (26 Stat 209) was designed to limit monopolistic and other anticompetitive practices by large American corporations such as Standard Oil Company. The act, immensely popular when it was passed, was named after Senator John Sherman of Ohio, one of the senators who originally proposed such a law. Congress's main concern was that individual states were unable to deal effectively with large multistate corporations because state courts could control actions only within their own state. The control of corporations that did business in many states required a federal statute because federal power could reach across the entire United States.

The theory of the Sherman Act is grounded in the basic capitalist idea that prices are lowest when multiple firms in a market are forced to compete with each other. Further, such competition is believed to produce the most innovation and to maximize the quality and variety of goods and services. Although the Sherman Act was not controversial when it was passed, there have always been disputes about its meaning. Its explicit goal was to protect the public from monopolies, but many critics have charged that more often it ended up protecting small, inefficient businesses from larger and more efficient firms. That debate has never fully been resolved.

The Sherman Act contains two main provisions. The act makes it unlawful (1) for a group of firms to enter into contracts or conspiracies "in restraint of trade" and (2) for a single firm to "monopolize" a particular market.

AGREEMENTS IN RESTRAINT OF TRADE

As section 1 of the act puts it, "Every contract, combination, ... or conspiracy in restraint of trade or commerce among the several States, or with foreign nations, is hereby declared to be illegal." The term "restraint of trade" is a very old one that had been used by British courts since before the seventeenth century. Today it describes actions that are unreasonably anticompetitive. The words "contract," "combination," and "conspiracy" all refer to types of agreements involving two or more persons or firms. A firm acting by itself cannot violate section 1 of the Sherman Act.

Horizontal Agreements Unlawful agreements in restraint of trade can be roughly grouped into two classifications, horizontal and vertical. An agreement is said to be horizontal if it involves two or more firms in competition with each other. The most common horizontal agreement in restraint of trade is price fixing, which occurs when two or more firms stop competing on price and agree that they will charge a specific price. In United States v. Trans-Missouri Freight Association (1897), the Supreme Court first held that price fixing was automatically unlawful under section 1 of the Sherman Act and a criminal violation. Price fixers could be sent to prison and also be fined.

The other horizontal agreements most frequently condemned as unreasonably anticompetitive are market division agreements and boycotts. A market division agreement occurs when competing firms "divide" the market by agreeing they will not sell in the same territory or to the same customers, or that they will not make products that can compete with each other. For example, two makers of a highly desired commercial cleanser might agree that one will sell only to retailers while the other will sell only to hospitals and professional offices. As a result, the two firms will not compete with each other for the same sales, and each can charge monopoly prices.

A boycott, or concerted refusal to deal, occurs when two or more actors agree with each other to keep some other set of actors out of the market. A common rationale for boycotts is exclusion of firms that might charge lower prices or offer more innovative products. A group of firms that are fixing prices might pressure a supplier to stop selling to a competitor who is charging lower prices. Many claimed boycotts resulted from activities such as efforts within a profession to set standards. Courts must then decide whether the exclusion is reasonable under the circumstances or unreasonably anticompetitive. For example, in Wilk v. American Medical Association (1990), a federal court concluded that it was anticompetitive for the AMA to pass an "accreditation rule" that forced hospitals to exclude chiropractors from access to medical facilities. The AMA claimed the exclusion was necessary because the chiropractors were not using proven methods of health care. However, the court decided that this choice should be made by consumers themselves and not through coerced exclusion of chiropractors from the market.

Vertical Agreements. A vertical agreement is one between a seller and a buyer. For example, if Goodyear sells tires to Ford, the tire-selling agreement between them would be described as vertical. Nearly all vertical agreements are lawful under the antitrust laws, but there are two exceptions. First, "resale price maintenance," or "vertical price fixing," occurs when a seller forces a buyer to charge a certain retail price. For example, Colgate might sell toothpaste to Osco Drugs with a contract requiring Osco to retail the toothpaste for $2.00 per tube. Such a practice is unlawful. Second, vertical "nonprice" restraints are agreements under which a manufacturer limits the locations or territories in which a retailer may sell or some other significant aspect of the retailer's business. In Continental TV v. GTE Sylvania (1977), however, the Supreme Court held that very few agreements of this nature are competitively harmful. Since then, almost none have been declared illegal.

MONOPOLIZATION

Section 2 of the Sherman Act provides that "every person who shall monopolize, or attempt to monopolize ... any part of the trade or commerce among the several States, or with foreign nations shall be deemed guilty...." This section of the Sherman Act reaches "unilateral" practices by "dominant" firms—in other words, anticompetitive conduct by monopolists that increases their power. Typically a firm must control at least 70 percent of the market in which it operates to be considered a monopoly. Even then, the firm is not behaving unlawfully. To be considered guilty of monopolization, the firm must also engage in one or more "exclusionary practices."

An exclusionary practice is something that is "unreasonably anticompetitive," which generally means it causes more harm to rivals than by ordinary competitive processes. Monopolists generally use such practices to strengthen or prolong their monopoly positions, because a monopoly is usually very profitable. In United States v. Standard Oil Co. (1911), the Supreme Court held that Standard violated section 2 by using "predatory pricing" to drive rivals out of business. Standard allegedly charged very low prices in a town until competitors were forced to declare bankruptcy or to sell their plants to Standard at very low prices.

Other exclusionary practices involve misuse of patents or other intellectual property rights. For example, in Walker Process Equip. v. Food Machinery Corp. (1965), the Supreme Court held that it was unlawful for a monopoly firm to obtain a patent fraudulently (by lying on its patent application) and then use the patent to exclude other firms from making its product.

In United States v. Microsoft Corp. (2002), a federal court in Washington, D.C., held that it was unlawful for Microsoft to engage in a number of practices that tended to prolong Microsoft's monopoly of personal computeroperating systems. The practices generally limited the ability of rivals to produce competing operating systems that would have forced Microsoft to cut its prices. For example, the Netscape Internet browser and the Java programming language threatened to create an avenue through which computer users could run their programs on several different operating systems. Microsoft responded to the threat by "bundling" its own browser, Internet Explorer, into its Windows program and by developing an alternative version of Java that was incompatible with other operating systems. The result made it much more difficult for users of programs running on Windows to run them on other operating systems as well.

See also: Clayton Act of 1914; Federal Trade Commission Act.

BIBLIOGRAPHY

Chamberlain, John. The Enterprising Americans: A Business History of the United States. New York: Harper and Row, 1974.

Faulkner, Harold U. American Economic History. New York: Harper, 1960.

Hovenkamp, Herbert. Federal Antitrust Policy: The Law of Competition and Its Practice, 2d ed. St. Paul, MN: West Group, 1999.

Sklar, Martin J. The Corporate Reconstruction of American Capitalism, 1890–1916. Cambridge, U.K.: Cambridge University Press, 1988.

Thorelli, Hans B. The Federal Antitrust Policy: Origination of an American Tradition. Baltimore: Johns Hopkins University Press, 1955.

Standard Oil Company

The Standard Oil Company was incorporated by John D. Rockefeller in Ohio in 1870. At the time, the refining business was highly competitive, and Standard Oil had more than 250 competitors. Rockefeller negotiated with the railroads to secure low shipping rates in return for regular business, and reduced costs still further through vertical integration, purchasing oil wells, pipelines, and retail outlets. With these advantages he began to drive competitors out of business, particularly as deteriorating market conditions increased competitive pressure on smaller firms. Rockefeller was then able to buy out independent refineries in Pennsylvania, New York, and New Jersey at very low prices. In 1882 Rockefeller formed the Standard Oil Trust as a holding agency for forty companies. This corporate structure, which was the first of its kind, gave authority to a board of trustees which governed on behalf of the member companies' shareholders, centralizing control while allowing Rockefeller to maneuver around state laws that might restrict his operations. The power wielded by Standard Oil and other monopolies engendered public opposition that led to the passage of the Sherman Antitrust Act in 1890. By the turn of the century, Standard Oil controlled more than 90 percent of the market for petroleum refining. Critics alleged that the company engaged in unfair practices, such as charging excessively high prices for products with no competition and using the profits to subsidize artificially low prices in contested markets, thereby driving competitors out of business. In 1906 Standard Oil was charged with violating the Sherman Act by conspiring "to restrain the trade and commerce in petroleum ... in refined oil, and in other products of petroleum," and was found guilty in 1909. The company appealed, and two years later the Supreme Court upheld the decision and ordered Standard Oil dismantled. The companies created in the dissolution included the future Exxon, Chevron, and Mobil.

The Robinson-Patman Act of 1936

The Robinson-Patman Act—also known as the Federal Anti–Price Discrimination Act—was created to ensure that suppliers to independent businesses offered them the same prices they gave to chain stores. The legislation strengthened the provisions of the Clayton Act that prohibited price discrimination specifically when it lessened competition or created a monopoly. Robinson-Patman made discrimination illegal if its effect was "to injure, destroy, or prevent competition with any person who either grants or knowingly receives the benefit of such discrimination, or with customers of either of them." In other words, price discrimination would be illegal if it merely harmed a competitor, even without lessening competition or creating a monopoly. Discounts for bulk purchases were only allowed if they were directly attributable to cost savings resulting from the larger purchases.