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Antitrust 05/20/2021

Chapter 2. What’s the Sherman Act & the Consumer Welfare Standard?

Chris Marchese
Chris Marchese Counsel

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.

  • Chapter 2 Recap

    Recap

    • 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.
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