02/08/1996

Restraint of Trade

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NetChoice Staff Written Glossary

Section 1 of the Sherman Act outlaws “every contract, combination, or conspiracy in restraint of trade.” The Supreme Court interpreted this clause to prohibit only unreasonable restraints of trade—those that hurt consumers by raising prices, degrading quality, or stifling innovation. For example, Coca Cola and Pepsi can’t agree to fix prices at $4 per can. 

 

At first, the Court interpreted the clause literally and held that it prohibited all restraints. But that interpretation did not last long because it would upended markets and made competition nearly impossible. Imagine, for instance, a partnership agreement between two entrepreneurs who want to launch a new firm: Under a literal interpretation of the Sherman Act, that partnership would be illegal. Under the Supreme Court’s “rule of reason,” however, that partnership would be legal unless it somehow hurt consumers. 


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