08/25/2021

Chapter 3. Section 1 of the Sherman Act

Chris Marchese
Chris Marchese Counsel

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:

  1. 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. 
  2. 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:

  1. always hurts consumers;
  2. isn’t justified by legitimate business interests; and
  3. 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.
  • Chapter 3 Recap

    • 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.
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