The purpose of the various antitrust acts and laws is to ensure that the U.S. economy can reach equilibrium without being restrained, hampered, or obstructed by the undue influence of large companies or groups of companies engaging in anticompetitive behavior. Specifically, to protect the economy, antitrust laws were written to prohibit "restraint of trade," a key phrase of the Sherman Antitrust Act of 1890. Down through the decades the courts have interpreted restraint of trade to include but not necessarily be restricted to monopolistic, conspiratorial, or exclusionary practices that restrict, restrain, or obstruct competition. Activities such as these tend to drive prices upward while reducing the supply and/or quality of goods and services. Unlike other types of economic regulation, antitrust laws do not directly dictate industry or corporate output, prices, rates, or services.
Federal antitrust law is composed not only of statutes but also of administrative regulations, court decisions, and enforcement actions, all designed to regulate business activity in relation to competition and restraint of trade. Furthermore, most states have their own antitrust laws, which vary in effectiveness but are largely designed to complement antitrust mechanisms established by the federal government.
Antitrust laws show a predilection for free, open markets where price and quantity are set by competition and where market conditions are not set by monopolistic practices or activities resulting in a restraint of trade. A monopoly occurs when a firm becomes dominant in a market and has the power to set prices and market conditions while excluding competition. There are four basic activities that fall under the purview of restraint of trade regulations: agreements between competitors, withholding patronage or refusing to do business with parties not participating in an agreement, the assignment of customers and/or markets, and price-setting. In theory, consumers served by an economy free of these constraints are able to maximize their satisfaction by choosing products and services in the open market.
Modern antitrust acts and laws have their origins in English and American common laws—laws largely based on court decisions—that were passed in response to activities restraining trade and furthering monopolies. Before the Sherman Antitrust Act was passed, these laws varied significantly between states and jurisdictions; in fact there was no uniform body of U.S. common law before the Sherman Antitrust Act. The early English and American laws generally rested on individual court precedents dealing with contracts and conspiracies attempting to restrain trade.
The post-Civil War era saw Americans moving west in greater and greater numbers. The economy boomed, and the Industrial Revolution enabled U.S. production to meet the rising demand for goods. U.S. technology expanded product development so drastically that, for the first time, supply often exceeded demand for many products. Facing new and intense competition for markets, many companies in the late 19th century sought ways to better their market position. Companies initially entered into loose cartel arrangements with their competitors. The purpose of these cartels was to exclude new or potential competitors from the market. Later, as competitive forces strengthened, many of these same companies took more extreme action to restrain trade, such as merging with other large competitors and forming trusts or holding companies. It must be noted that prior to the Sherman Antitrust Act of 1890 none of these activities were illegal.
The Sherman Antitrust Act was passed largely in response to the public outcry over these predatory practices. Public anger, fueled by crusading journalists, was especially directed toward railroads and their system of "abusive trusts" or "pools." The dividing up of markets by these trusts resulted in higher and sometimes outrageous prices. The 1890 legislation outlawed these activities and empowered the federal government to impose penalties and act against them. Unlike much Congressional legislation, the significant passages of the Sherman Antitrust Act are short and straightforward:
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 illegal.
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.
At the time, convicted parties had to pay fines up to $5,000 and/or face prison sentences of up to one year. No further significant antitrust legislation was passed until 1914.
It should be noted that the authors of the Sherman Antitrust Act (named after Senator John Sherman of Ohio but largely written by Senators George Edmund of Vermont and George Hoar of Massachusetts) were purposefully vague about what constituted restraint of trade. Nowhere in the act is there a laundry list enumerating such activities—a list that would include such terms as price-fixing, bid-rigging, or refusals to deal. The authors rather chose to write in generalities so as to leave precise determinations of restraint of trade up to the courts.
During the administrations of Presidents Grover Cleveland and William McKinley, however, the Sherman Antitrust Act was rarely used precisely because its broad language allowed for loose judicial interpretation. Subsequently, participants in many industries, notably those of steel and farm machinery, were involved in activities considered by many to be in conflict with free market ideals. As a result the need for more definitive antitrust legislation was a large issue in the presidential election of 1912. In 1914 two major pieces of antitrust legislation, the Clayton Antitrust Act and the Federal Trade Commission Act were passed into law under the newly elected president, Woodrow Wilson.
The Clayton Antitrust Act did not contain any new antitrust provisions per se. Rather, it added specificity to existing antitrust law by expressly forbidding such acts as price discrimination, exclusionary dealing practices, and certain types of mergers and acquisitions. The Federal Trade Commission Act established the Federal Trade Commission (FTC), an agency charged with policing "unfair methods of competition in commerce, and unfair or deceptive acts or practices in commerce." Preventing unfair methods of competition, and unfair acts and practices in commerce has been the task of the FTC since its inception; defining these actions, however, has been more elusive. Basically, this act seeks to prevent price-fixing, boycotts, and other restraints of trade, while bolstering the Sherman Antitrust Act. Interestingly, this act has also been used to prosecute companies found guilty of deceptive advertising.
The interpretation and enforcement of these antitrust laws has varied significantly over the decades reflecting the strength of the economy, changing U.S. political attitudes, and shifting public sentiment. The underlying ideology of these laws has also been under debate. Some are of the opinion that the laws were written so as to protect the economy and maximize social wealth. Others disagree and believe that these laws, by freeing consumers from the consequences of concentrated private economic powers, were passed to promote equitable wealth distribution and more equal business opportunities.
Because the interpretation of antitrust legislation often changes with the economy and public opinion, certain mechanisms have arisen that give judges the ability to interpret applications of antitrust law more narrowly, according to the specifics of a particular case. For example, the concept of restraint of trade has been modified by a "rule of reason." Under the rule of reason a company could try to exempt itself from antitrust actions, and a judge could concur, by claiming that given the circumstances of the industry, or the market, or economic conditions, the company's actions were in fact reasonable. Use of the rule of reason tends to increase whenever government and public opinion are permissive of business consolidations. The result of this rule has also increased power in the lower federal courts, which typically are sympathetic to local businesses.
The opposite of the rule of reason is the per se rule. Under the per se rule, agreements between competitors that restrain trade are wrong per se. These are offensives that cannot be justified by any evidence attempting to show that the action is reasonable. The most basic per se rule is price-fixing. The per se rule is used more frequently when public sentiment is in favor of more restrictions on business practices.
The majority of antitrust cases are settled by consent decrees, where a private aggrieved party or the government receives an often substantial sum of money in damages from a company or companies found guilty of violating the antitrust laws. Furthermore, the U.S. Department of Justice can uphold antitrust laws through criminal prosecution and by supporting civil suits attempting to get a court-ordered damage settlement. The FTC has similar enforcement capabilities through administrative "cease and desist" that are often accompanied by civil penalties. Private citizens can also seek damages in federal court and since 1976 states, acting on behalf of their citizens, have been permitted to bring antitrust actions before federal courts. Since no single agency has complete control of antitrust policy, antitrust cases are often not considered settled until they have been reviewed by the Supreme Court.
Mergers and acquisitions are particularly inviting to antitrust review and intervention because of their anticompetitive potential. Companies planning on acquiring some or all of the stock or assets of another competing company should carefully research the possible applicability of antitrust law. If found guilty of violating antitrust laws under these circumstances, possible punishments include divestiture of the purchased securities or assets, restoration of the purchased company as a going concern, a court order against future mergers, and criminal penalties.
There are four basic types of mergers: horizontal, market extension, vertical, and conglomerate. A horizontal merger involves one company gaining control of another company that sells the same goods and services in the same market. Following such an action there would be only one company where there were previously two and competition would thus be lessened. A market extension merger is similar except the acquisition involves two companies offering the same goods or services but in different markets. The effect on competition is not as severe as in horizontal mergers. Vertical mergers occur when a company acquires control of a customer (forward vertical integration) or a supplier (backward vertical integration). A conglomerate merger involves one company acquiring another company operating in an entirely different business. Most acquisitions and mergers are reviewed under the Clayton Act which asserts that when a corporation involved in interstate commerce purchases another corporation also engaged in interstate commerce, the merger is illegal whenever the potential for substantially reduced competition exists.
During the last 25 years intense competition from foreign companies has led to a general feeling that government should not regulate business as stringently as in the past. It is believed that strident regulation reduces the ability of U.S. firms to compete with foreign companies in the American market. Recent interpretation of antitrust law has thus most often fallen on the side of business. In fact, certain activities that were previously viewed with great suspicion, such as horizontal and vertical arrangements, are now seen as positive activities enhancing business efficiency. The courts and the Justice Department have likewise become more lenient when reviewing mergers under antitrust law.
Nonetheless the government does initiate major antitrust cases, including the 1982 suit against IBM that was ultimately dismissed and another against AT&T that resulted in a settlement. The big antitrust case of the late 1990s, which began in November 1998, involved software giant Microsoft which stood accused by the Justice Department and various states of acting in major violation of antitrust law. Microsoft was charged with anticompetitive behavior mainly in regard to Internet browsers. The suit accused Microsoft of: threatening to withhold its industry-dominant Windows operating system from major personal computer maker Compaq when Compaq considered loading Netscape's browser instead of Microsoft's browser on its machines; supplying free browser technology to customers of its one-time partner and competitor Spyglass Inc., thus causing that company to lose most of its revenue overnight; compromising the development of competing browser technology by Intel Corporation; and collaborating in an anticompetitive manner with America Online Inc., which agreed to use the Microsoft browser in its online service in return for Microsoft giving the America Online icon prominent placement on the desktop screen of all personal computers using the Windows operating system.
[ Michael Knes ]
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