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Sherman Antitrust Act

What Happened Next . . .

The wording of the Sherman Antitrust Act was not specific. It failed to define such key terms as "trust," "conspiracy," "restraint of trade or commerce," "monopolize," or "combine." As a result the U.S. courts struggled through the 1890s to give precise legal meaning to the law.

The first important case to be brought under Sherman was U.S. v. E. C. Knight Company in 1895. About 1890 the American Sugar Refining Company began purchasing stock in four competitors including E. C. Knight Company. By 1892 the resulting American Sugar trust controlled 98 percent of sugar refining in the United States. President Grover Cleveland's (1837–1908; served 1885–89 and 1893–97) administration charged American Sugar for illegal restraints of trade under the Sherman Act.

In 1895 the U.S. Supreme Court ruled the manufacturing (refining) of sugar was an activity that took place in facilities in specific states and was not a restraint of interstate trade. At the time, the decision seemed to end any thought that the provisions of the Sherman Act would actually be used to regulate the formation of trusts.

Little progress was made against trusts until the election of "trust-busting" President Theodore "Teddy" Roosevelt (1858–1919; served 1901–09). Roosevelt, who became president in March 1901, was as concerned as the public over the continued growth of powerful trusts. In 1903 Roosevelt convinced Congress to establish the first new government cabinet-level department since the Civil War (1861–65), the Department of Commerce and Labor. The new department would oversee the actions of business and labor unions. Within the department Roosevelt established the Bureau of Corporations to uncover violations of the Sherman Act. The bureau began to look into various businesses such as oil, tobacco, steel, and meatpacking.

Philander C. Knox, Roosevelt's attorney general, initiated forty-four antitrust suits during the Roosevelt administration. One of the earliest suits was against the Northern Securities Company (NSC). NSC was formed in New Jersey as a holding company, the name given trusts in New Jersey to avoid the Sherman Act. Monopolizing rail traffic between Chicago and the Northwest, NSC controlled railroad stock of the Great Northern, Northern Pacific, and the Chicago, Burlington, and Quincy railroads.

Little progress was made against trusts until the election of "trust-busting" President Theodore "Teddy" Roosevelt. (© Corbis)


Wealthy businessmen involved with NSC were J. P. Morgan, James J. Hill, and E. H. Harriman. In 1904 the U.S. Supreme Court found in favor of the government and ordered the breakup of NSC. The decision in Northern Securities Company v. U.S reversed the Court's position on trusts taken in the E. C. Knight case. The combining of railroads halted, and Roosevelt's popular approval rating hit an all-time high. Despite his aggression towards trusts, Roosevelt wanted only to regulate not destroy big business.

The Sherman Act was again used successfully by President William H. Taft (1857–1930; served 1909–13), when he took on the powerful Standard Oil Trust of New Jersey in 1911. In the same year, American Tobacco was broken up into smaller companies after being taken court under provisions of the Sherman Act.

Congress strengthened U.S. antitrust legislation in 1914 by passing the Clayton Antitrust Act and the Federal Trade Commission (FTC) Act. The Clayton Act regulated mergers of companies to avoid the creation of monopolies. The act also required notification of any impending mergers, which had to be approved by the FTC. The second 1914 act created the FTC to enforce antitrust laws. In 1919 the Antitrust Division was formed within the Department of Justice.

For over eight decades the FTC and Antitrust Division worked together to enforce antitrust laws. The FTC is empowered to temporarily suspend anticompetitive activities of suspected companies while the Antitrust Division investigates and prosecutes. The division prosecutes serious and willful violations of antitrust laws but also, along with the FTC, gives guidance to the business community to help structure and organize operations in compliance with U.S. law.

The Sherman Act remained the cornerstone of U.S. antitrust law ensuring a competitive free market. Suits were brought under the act against offending corporations throughout the twentieth century. The Sherman Act has changed little over the last 110 years. The only major changes involved penalties. Individual offenders may be fined up to $350,000 and sentenced to three years in prison for each offense. Corporations can be fined up to $10 million, in some cases even more.

The Microsoft Settlement—The Twenty-First Century's First Major Antitrust Settlement

In 1998 the Department of Justice (DOJ), twenty states, and District of Columbia charged computer software giant Microsoft in federal court of violating federal antitrust laws with its monopoly on personal computer (PC) operating systems. Netscape Communication, another software giant on the West Coast, had pioneered the web browser—a system allowing individual Internet users to search for information by using a key word. Microsoft, however, had begun to package a free browser with its Windows operating system, which was installed in many PCs. At issue was whether Microsoft could piggyback a free browser and other software onto its Windows system. These packages made Windows very attractive and it had become the dominant operating system installed by various PC manufacturers. Other companies with similar software were left out.

In 2000 U.S. District Judge Thomas Penfield Jackson found Microsoft guilty of antitrust violations. He ordered the software giant to be broken apart. Microsoft appealed the decision to the U.S. Supreme Court but the Court refused to hear the case and sent it instead to the court of appeals. The appeals court upheld the Microsoft conviction. U.S. District Judge Colleen Kollar-Kotelly then received the case to consider Microsoft's punishment. The DOJ, states, and Microsoft entered negotiations on a settlement. Judge Kollar-Kotelly approved the settlement in November 2002. The settlement did not include the company's breakup. Instead Microsoft was required to treat all PC makers equally and to share technology so other products not made by Microsoft would work well within Windows. By June 2003 all states except Massachusetts had agreed to the settlement.

Contrary to other states, Massachusetts attorney general Tom Reilly refused to settle with Microsoft believing the agreement did not protect consumers and competitors from Microsoft's monopoly in the personal Microsoft founder and CEO Bill Gates. In 1998 computer software giant Microsoft was charged in federal court of violating federal antitrust laws. (AP/Wide World Photos)
computer software market. Massachusetts appealed further.

On June 30, 2004, the U.S. Court of Appeals for the District of Columbia upheld the entire settlement reached in November 2002 between the federal government, states, and Microsoft. Many believed the decision would have a major influence on U.S. antitrust law. Since the mid-1980s few companies found guilty of antitrust violations had been required to break apart. Prior to that time a common penalty was breaking up, the most infamous involved American Telephone and Telegraph (AT&T).

In 1983 AT&T was found guilty of being an illegal monopoly. It was broken up into one long distance company and seven "baby Bell" regional phone companies. The first ruling on Microsoft's antitrust case in 2000 called for Microsoft to be broken up into smaller companies but the final settlement did not require breakup, strengthening the trend away from forced corporate breakups. Further appeals appeared unlikely ending Microsoft's six years of litigation. A similar case against Microsoft in Europe, however, concerning its digital media players was working its way through the European court system in 2004.

If a company is found guilty of antitrust violations the U.S. government may choose, in addition to fines, among several consequences. Consequences include breaking up the monopoly into different smaller companies, or forcing offending businesses to inform customers about competitors' products and services.

Throughout the twentieth century many major U.S. corporations have been involved in antitrust cases—U.S. Steel, International Business Machines (IBM), American Telephone & Telegraph (AT&T), General Electric, Yellow Cab Company, drug company Parke Davis & Company, General Motors Corporation, Pan American World Airways, Texaco, Exxon Corporation, Eastman Kodak Company, cellular phone company Verizon, and computer software giant Microsoft. In some cases the businesses were found guilty of antitrust violations, in others no illegal trust activities were found.

At the beginning of the twenty-first century there are three kinds of antitrust violations the Antitrust Division prosecutes most frequently—price-fixing, bid-rigging, and allocation of customers. Price-fixing means several competitors agree to raise, lower, or maintain prices. These activities inhibit price competition.

Bid-rigging involves competitors who conspire together when bidding on a contract for work, often a government contract. Bid-rigging takes many forms but almost always ends in increased costs for goods or services. Customer allocation schemes involve a few competitors conspiring to divide up markets among themselves to control prices or contracts.

These practices are carried out in secret and are difficult to detect. They cost consumers hundreds of millions of dollars every year. The Antitrust Division receives most of its tips about such activities from the public—customers, employees, and employers. Any possible violation can be reported to the New Case Unit of the Antitrust Division at the email address of newcase.atr@usdoj.gov.


Additional topics

Law Library - American Law and Legal InformationCrime and Criminal LawSherman Antitrust Act - Growth Of A Trust In The Late Nineteenth Century, What Is A Trust?, Congress Passes The Sherman Antitrust Act Of 1890