American Antitrust Explained
By Kir Nuthi and Chris Marchese
If you’re reading this then you’re probably already interested in American antitrust. And like many of us, you probably know that antitrust has something to do with monopolies. And it does. But it’s about way more than that too. Our series–Back to Basics–is meant to explain American antitrust law in plain English. Here, you’ll find everything you need to know about the current law and its history, a few “fun” anecdotes, and analysis of proposed reforms. We’ll be updating this blog regularly so it may be worth bookmarking. And if you’re looking for information on a topic that we haven’t covered, shoot us an email and we’ll be happy to get on it.
1.1 Antitrust law protects our market-based economy so that consumers get the best deal possible.
The United States has a market-based economy. That means competition between private businesses–not the government–largely determines the prices we pay.
Sometimes, however, a business or handful of businesses finds a way to distort the market and drive up prices.
Imagine if the only two gas stations in your town entered into a secret agreement to set gas prices at $20 per gallon. With no nearby gas stations to compete with them, you’d be stuck paying far more than you would had they not entered into that illegal agreement.
To address this type of anticompetitive behavior, we have antitrust. At its core, American antitrust is a series of laws that seek to protect competition in the market so that consumers get the benefits they are owed and are not taken advantage of by wrongdoers.
1.2 Consumers benefit from more than just low prices.
Antitrust law often focuses on prices, but it’s not limited to that. In fact, competition also affects things like quality and innovation. If your product is better than your competitors’, you are likely to attract more customers. Seeing that, your competitors will then try to catch up and make their products even better than yours.
This continuous cycle of improvement encourages innovation. To get a leg up, businesses will often try to improve their existing product while also inventing ones with new features or creating entirely new products. That’s good for us because it means we have more choices at lower prices. It’s also good for our economy because it promotes growth and productivity.
1.3 Antitrust law doesn’t protect businesses from competition.
Because we have a market economy, the United States lets businesses succeed or fail on their own merit.
For that reason, our antitrust laws don’t protect a business from competition. In fact, our antitrust laws seek to encourage it. In other words, if Carvel comes to town and puts Friendly’s out of business, we may weep at the loss of Friend-Zs, but we wouldn’t use the government to block Carvel from the market or to punish Carvel for competing.
If we did, we’d be using the government to help one business at another’s expense. And because that would hurt competition, it would also ultimately hurt consumers: Friendly’s would have little incentive to cut prices, improve its ice cream, or innovate with new flavors.
It would also lead many businesses to wonder why the government steps in in some cases but not others. If the government can protect Friendly’s from competition, why not save Blockbuster?
Instead, American antitrust exists to promote competition, interfering only when a business engages in behavior that would harm the competitive process. In other words, antitrust law exists to protect competition itself, not any particular competitor.
- The United States has a market-based economy that allows competition between businesses to determine the price we pay for goods and services.
- This competition encourages rival businesses to improve quality, lower prices, and innovate so that they attract more customers.
- When a business finds a way to rig or corrupt the market so that it can succeed without having to compete on price, quality, or innovation, antitrust law steps in to fix the problem, punish the wrongdoer, and restore the competitive process so that consumers once again benefit.
2.1 Setting the Scene
The United States was the first country to adopt nationwide antitrust laws. Because the United States was first, Congress had to write the country’s most important antitrust law—the Sherman Act—without the benefit of learning from another country’s experience or cribbing language from its laws.
Like other “firsts,” the Sherman Act’s text is broad and vague. Rather than fill in the details itself, Congress delegated the challenge to the courts. And just as it was a struggle for Congress to write the law, it was a struggle for the courts to interpret and apply the law.
As experience with the law grew, the Supreme Court found its footing. Since at least 1979, the Court has used the “consumer welfare standard” to judge when a defendant crosses the Sherman Act’s lines.
2.2 The Sherman Act Broadly Prohibits Unreasonable Restraints of Trade and Monopolies that Hurt Consumers.
Congress passed the country’s first antitrust law—the Sherman Act—in 1890. Designed to rein in trusts like Standard Oil, U.S. Steel, and Northern Securities Company (the railroads), the Sherman Act prohibits (1) businesses from restraining trade and (2) monopolizing, trying to monopolize, and conspiring or combining to monopolize markets.
Congress wrote the Sherman Act broadly and never defined key terms like “restraint of trade” or even “monopoly.” Instead, Congress left it to the courts to flesh out the Sherman Act’s terms and to create rules and standards for applying the law. By leaving it to the Courts, Congress ensured the Sherman Act would evolve as market realities evolved. In other words, rather than spell out specifics in law—and require Congress to pass new laws to amend it—Congress kept things brief so that the courts have flexibility.
2.3 The Supreme Court Struggled to Interpret and Apply Federal Antitrust Laws for Decades.
For nearly 80 years, the Supreme Court struggled to interpret and apply the Sherman Act because Justices disagreed about what the law prohibited and allowed.
Take an early 5-4 decision: a fractured Court held that § 1 of the Sherman Act prohibited all restraints of trade, even reasonable contracts between businesses. But the dissent strongly disagreed, arguing that the law prohibited only unreasonable restraints (a view the Court would officially adopt a decade later).
The justices also disagreed about the law’s purpose. Some justices found that the Sherman Act protected “small dealers and worthy men” from efficient competitors even if that meant consumers paid higher prices. Others argued it protected the public only from practices “tending to bring about the evils [of monopoly], such as enhancement of prices.”
Without a clear sense of the law’s purpose—does it protect competitors, consumers, or both?—or of the rules and standards meant to advance that purpose, the Court issued a dizzying array of contradictory opinions. By 1969, however, practitioners, scholars, and even federal enforcement agencies agreed that the Court’s scattershot approach to antitrust was a failure that provided neither clarity nor predictability.
To sum up, in Judge Douglas Ginsburg’s words: “Forty years ago, the U.S. Supreme Court simply did not know what it was doing in antitrust cases.”
Change was needed.
2.4 The Consumer Welfare Standard Guides Antitrust Enforcement Decisions by Focusing on American Consumers.
Antitrust scholars seized the opportunity to help the Supreme Court develop better antitrust doctrines. Lawyers at Harvard Law School, for example, emphasized the role of judges: They’re not equipped to substitute their judgment for that of the market’s, so an objective antitrust standard is necessary to keep judges from harming the economy. Scholars at the University of Chicago Law School and its most famous lawyer, Judge Robert Bork, argued that the Sherman Act is meant to protect the benefits competitive markets deliver to consumers—lower prices, higher-quality goods, and innovation.
These two principles transformed American antitrust.
First, both schools of thought agreed that judges cannot enforce the law well unless they understand the law’s purpose and have the right tools to sort unlawful from lawful business conduct.
Second, the Chicago School and Judge Bork gave judges the legal framework to do just that. According to Bork, Congress always meant for the Sherman Act to protect consumers, not other groups like “worthy men.” So with that in mind, judges must ask how a challenged business practice impacts consumers. If it helps, it’s likely legal. If it hurts, it’s likely illegal.
The Supreme Court unanimously adopted this approach—the “consumer welfare standard”—in 1979 and it continues to guide antitrust enforcement today.
- Congress passed the first antitrust law—the Sherman Act—in 1890 and left most of the law’s details for the courts to flesh out.
- The Supreme Court struggled for decades to figure out the law’s purpose and to create rules or standards that objectively determine when defendants violate the law.
- A broad, bipartisan group of scholars argued that the law protects only consumers, and prohibits only business actions that hurt consumers, creating the modern consumer welfare standard unanimously adopted by the Supreme Court in 1979.
Now that we’ve given a high-level overview of the Sherman Act, let’s dive separately into Section 1 of the law, which prohibits businesses from conspiring with competitors and entering into agreements that hurt American consumers. In Chapter 4, we’ll dive into Section 2.
3.1 Section 1 of the Sherman Act Bans Unreasonable Agreements Between Businesses.
Section 1 of the Sherman Act outlaws “every contract, combination, or conspiracy in restraint of trade” between two or more businesses. While that language may sound extremely broad, the Supreme Court long ago narrowed its scope and interpreted it to prohibit only unreasonable agreements that restrain trade. In the previous chapter, we noted that, under the consumer welfare standard, the Court interprets “unreasonable” to include only those agreements that actually harm consumers.
To determine whether an agreement hurts or helps consumers, courts generally (but not always) apply the “rule of reason.” This test is pretty intuitive. The court will evaluate a plaintiff’s claim by looking at all of the evidence and various considerations that could impact its effect on consumers. If the evidence suggests the procompetitive consumer benefits outweigh any anticompetitive harms, the agreement is presumptively reasonable and lawful.
If the benefits don’t outweigh the harms, then the agreement is presumptively unreasonable and thus unlawful under § 1.
3.2 Unreasonable Agreements Are Unlawful Because They Hurt Consumers.
Most agreements between businesses are legal because most agreements facilitate commerce in ways that are good for consumers. That’s in part because agreements are necessary to stabilize markets and give businesses legal assurances that vendors, suppliers, and even landlords will honor their agreements and transactions.
For example, contracts give manufacturers confidence that if they order extra materials to increase output for a certain distributor, the distributor can’t later change its mind and stick the manufacturer with unsold products and unpaid bills.
Two types of unreasonable agreements that are often considered illegal are:
- Unreasonable agreements harm consumers by raising prices, eroding quality, or stifling innovation. In most of these cases, courts must apply the rule of reason to the unique facts of the case to determine whether the defendants violated § 1 of the Sherman Act.
- Per se (Latin meaning intrinsically) unlawful agreements are ones that courts believe are so obviously harmful to consumers in most circumstances in any industry. For these cases, in-depth proceedings and comprehensive analysis aren’t needed to show how these harm consumers. Courts can bypass analysis and find a § 1 violation because they do not need to show that an agreement is unreasonable, the agreement is unreasonable by its very nature.
3.3 Per Se Violations Are Rare.
Because per se violations require little to no legal analysis, the Supreme Court treads lightly in announcing new ones. In fact, an agreement is per se unlawful only when history has shown that it:
- always hurts consumers;
- isn’t justified by legitimate business interests; and
- lacks any redeeming qualities.
This is a high bar and rightly so: Rarely, especially in today’s diversified and innovative economy, will an agreement lack any benefits to consumers across all, or even most, industries and markets.
Classic examples of per se unlawful agreements include:
- Price Fixing: when two or more businesses agree to sell their products for a certain price above what the market would otherwise dictate;
- Bid Rigging: when two or more businesses agree in advance who should win a bid; and
- Market Allocation: when two or more businesses agree to divvy up geographic markets so that they don’t overlap and thus don’t compete against each other.
- Section 1 of the Sherman Act bans only unreasonable agreements between businesses.
Courts usually apply the rule of reason on a case-by-case basis to determine whether an agreement is reasonable and thus lawful.
- The rule of reason requires courts to weigh an agreement’s potential harm to consumers against its potential benefits; if the harms are outweighed by the benefits, the agreement is likely reasonable.
- Some agreements are always so harmful to consumers, however, that the court doesn’t feel the need to apply the rule of reason and may instead find that they are per se unlawful on their own.
- Section 1 of the Sherman Act bans only unreasonable agreements between businesses.
Kir Nuthi and Chris Marchese would like to add a special thank you to our former intern, Malena Dailey, for her research and help in this chapter.
This section focuses on Section 2 of the Sherman Act. While Section 1 of the Sherman Act addresses actions between businesses, Section 2 focuses on anticompetitive behavior of a single business.
4.1 Section 2 Of The Sherman Act Bans Anticompetitive Monopolization
Section 2 of the Sherman Act makes it illegal to “monopolize, 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.”
In simple terms, this boils down to a two-part test:
- Did the business exercise monopoly power in its relevant market?
- Did the business act anticompetitively to monopolize its relevant market?
If the answers to both are yes, then the business violated Section 2 of the Sherman Act.
4.2 To “Monopolize” Means To Have An Iron Fist Over Prices And Profits
Section 2 of the Sherman Act focuses on the definition of “monopoly” and “monopolization.” But what does it mean to monopolize a market?
A business has monopoly power only if it has enough control over an industry to meaningfully raise prices or reduce quality without losing profits. If it can do this successfully, the business is a monopoly.
That means being big isn’t enough. Take any large business like Ford—even if it controls over ¾ of the pickup truck market, it’s not automatically an unlawful monopoly unless it uses that control to harm consumers through higher prices, reduced quality, or stifled innovation.
4.3 Monopoly Power Isn’t Enough To Violate The Sherman Act
To be clear, it is not unlawful to be a monopoly; it is unlawful only to be a monopoly that acts anticompetitively. Anticompetitive conduct is found whenever a business harms consumers—for example, through higher prices, reduced quality, or stifled innovation.
As held in the important Supreme Court case United States v. Grinnell Corp. (1966), monopolies can form from “the willful acquisition or maintenance of that power” or as the “consequence of a superior product, business acumen, or historic accident.” Whereas the former is unlawful, the latter is lawful.
The Supreme Court reaffirmed that 1966 ruling as recently as 2004, holding that “an element of anticompetitive conduct” is necessary to find “the possession of monopoly power” unlawful.
- Section 2 of the Sherman Act bans a company’s ability to use anticompetitive business practices to maintain or develop a monopoly.
- A business has monopoly power if it can raise prices or reduce quality without losing profits.
- Having monopoly power isn’t illegal unless the company has acted anticompetitively in ways that have harmed consumers.
Kir Nuthi and Chris Marchese would like to add a special thank you to our former intern, Malena Dailey, for her research and help in this chapter.
Now that we’ve covered the basics of the Sherman Act, Chapter 5 will address the Clayton Act—a law that supplements the Sherman Act by addressing specific anticompetitive practices that focus mainly on dealings between firms as well as mergers and acquisitions.
5.1 The Clayton Act was passed to address anticompetitive business practices not covered by the Sherman Act.
After the Sherman Act was passed in 1890, it was found to be too broad in practice. Congress wanted additional antitrust legislation to narrowly target specific anticompetitive practices like collusive mergers and harmful pricing schemes designed to kill off competitors.
5.2 The Clayton Act prohibits price discrimination, exclusive dealings, and harmful mergers between companies.
To address these new concerns, Congress passed the Clayton Act in 1914 to prohibit:
- anticompetitive mergers;
- discriminatory pricing practiceas; and
- other behavior that could harm competition.
While the Clayton Act has 27 sections, these are the most critical for antitrust:
- Section 2 prevents price discrimination by companies.
- Different prices can’t be arbitrarily charged to different customers.
- Section 3 prevents excluding dealing contracts that pose a threat to competition.
- Exclusive dealing contracts is a fancy term that describes when companies limit where they and their competitors can buy or sell their products. When exploited, this can shut other businesses out of marketplaces, create supply chain issues, and more.
- Section 7 prohibits harmful mergers.
- Harmful mergers and acquisitions are those that if completed would pose a substantial risk to consumer welfare.
5.3 The Clayton Act has been amended twice to cover more anticompetitive practices.
The Robinson-Patman Act of 1936 made sure the Clayton Act covers discriminatory prices and addresses anticompetitive behaviors.
The Hart-Scott-Rodino Act of 1976 ensures that businesses planning to merge have to tell the government in advance for mergers of a certain significance. After telling the Federal Trade Commission and Department of Justice, they have to wait and see if their merger is allowed or if it substantially hurts competitors.
- Congress passed the Clayton Act in 1914 to supplement the Sherman Act and address different types of anticompetitive behavior.
- The Clayton Act prohibits price discrimination, exclusive dealing between companies, and anticompetitive mergers.
- The Clayton Act was amended twice by the Robinson-Patman Act of 1936 and the Hart-Scott-Rodino Act of 1976.
- The Robinson-Patman Act amended the Clayton Act to include discriminatory prices and deals in anti-competitive behaviors.
- The Hart-Scott-Rodino Act made businesses planning to merge seek approval from the government in advance for mergers of a certain significance.
Moving forward, we’ll be diving into the antitrust enforcement agencies and the laws that created them. This chapter will focus on the Federal Trade Commission and the Federal Trade Commission Act.
6.1 The Federal Trade Commission Act (1914) created the Federal Trade Commission.
The Federal Trade Commission Act, signed into law in 1914, created the Federal Trade Commission to prohibit “unfair methods of competition” and “unfair or deceptive acts or practices.”
While that language differs from the Sherman Act’s, the Supreme Court has interpreted this to mean that anything that violates the Sherman Act automatically violates the FTC Act. But the reverse is not true: the FTC Act extends to conduct outside the Sherman Act’s reach.
In other words, both the FTC and DOJ can enforce the Sherman Act, but only the FTC can enforce the FTC Act.
6.2 The Federal Trade Commission was designed to be an independent agency of experts who enforce antitrust regulation.
When created, the FTC was an agency designed to be a neutral and apolitical council, or almost “court,” for antitrust action.
Its format is simple:
- 5 commissioners will be at the FTC at a time, with no more than 3 of the same party.
- Each commissioner serves for 7 years, with staggered start dates.
- No commissioner will be removed without cause.
6.3 The Federal Trade Commission overlaps with DOJ and has limited enforcement mechanisms.
We’ll get into DOJ enforcement later on, but know this—for many Sherman and Clayton antitrust cases, the FTC and DOJ have overlapping enforcement power. Because they get to pick and choose what cases to take, this can mean that sometimes one agency, both agencies, or none have taken on a case.
You see this with the current disputes around cases involving tech companies. The case against Meta is being brought by the FTC while the case against Google is being brought by the DOJ. Enforcement can get even more complicated when you bring state attorneys and private parties into the mix, too.
When the FTC chooses to take enforcement action, it can seek relief in two courts—its own administrative “court” or in federal court. The FTC may ask for injunctive and civil (monetary) relief.
Generally speaking, injunctive relief stops a business from continuing or starting a practice that the FTC believes is unlawful.
In this sense, injunctive relief is meant to stop current or future wrongs, while civil relief is meant to remedy a past wrong. So while the FTC may seek an injunction to prevent two businesses from merging, it might instead choose civil remedies in enforcing against “deceptive trade practices” that have already harmed consumers.
- The Federal Trade Commission Act of 1914 created the Federal Trade Commission to ban “unfair methods of competition” and “unfair or deceptive acts or practices.”
- Anything that violates the Sherman Act automatically violates the FTC Act, but the FTC Act also includes violations that don’t fit neatly into the categories of the Sherman Act.
- The FTC consists of 5 commissioners from both parties who serve for staggered 7-year terms.
- The FTC and DOJ have overlapping enforcement power.
- The FTC may ask for injunctive relief to stop current or future harm to consumers or civil relief to remedy a past harm.
Having discussed the Federal Trade Commission and how it came to be, we’re now going to focus on the other major agency that does antitrust enforcement: the Department of Justice (DOJ).
7.1 The Department of Justice PursuesBoth Criminal and Civil Enforcement Under The Sherman Act
Under the Sherman Act, the DOJ can prosecute individuals and businesses that violate antitrust law, civilly or criminally. That can mean seeking criminal sanctions and convictions or like the FTC choosing to pursue civil penalties stemming from violations.
The DOJ has the unique ability to seek criminal penalties for violations of antitrust law. Such prosecutions stem from per se violations of antitrust laws including price fixing, bid rigging, and market allocation. As we discussed in Chapter 3, per se violations are ones that are legally understood to always harm consumers and cannot be justified by legitimate business interests as they lack any redeeming qualities. For criminal antitrust enforcement, the DOJ can impose penalties of twice the amount gained by the anticompetitive business or twice the money consumers lost because of said business—up to $100 million for corporations and $1 million and/or up to 10 years in prison for individuals.
The DOJ can seek civil penalties in cases outside of per se violations through Sections 1 and 2 of the Sherman Act (covered in Chapter 3 and 4). Like the FTC, these civil actions typically result in fines as well as other potential remedies but are not criminal prosecutions.
7.2 The Department of Justice and Federal Trade Commission Can Choose Which Agency Enforces the Clayton Act
As we learned in Chapter 5, both the Federal Trade Commission and the DOJ both enforce the Clayton Act.
In practice, both agencies have chosen to devote their resources to different sectors of our economy. The Federal Trade Commission can even refer criminal antitrust enforcement to the DOJ. However, in recent years both have worked on antitrust enforcement against America’s tech industry.
Before investigations and enforcement, both the Federal Trade Commission and DOJ consult with another to avoid duplicating efforts. For example, we see this in how the FTC has in recent years overseen investigations and concerns related to Meta while the DOJ has done similarly against Google. As discussed below, however, there are some exceptions where the DOJ has exclusive authority.
7.3 The Department of Justice Has Sole Jurisdiction Over Certain Industries
Unlike the Federal Trade Commission, the DOJ can solely enforce specific industries exempt from the Federal Trade Commission Act. This includes the airline, banking, and telecommunications sectors.
It’s also important to note that under the Airline Deregulation Act (1988), Congress gave the DOJ authority to review airline mergers and acquisitions—something the Department of Transportation originally did and now can still grant antitrust immunity for in agreements between American and foreign airlines.
- Under the Sherman Act, the DOJ can prosecute individuals and businesses that violate antitrust law, civilly or criminally.
- The DOJ can seek criminal penalties when it is a per se violation like price fixing, bid rigging, and market allocation.
- Before investigations and enforcement, both the Federal Trade Commission and DOJ consult with another to avoid duplicating efforts.
- Unlike the Federal Trade Commission, the DOJ can solely enforce specific industries exempt from the Federal Trade Commission Act including the airline, banking, and telecommunications sectors.