Antitrust Law - Origins

Antitrust law originated in reaction to a public outcry over trusts, which were late-nineteenth-century corporate monopolies that dominated U.S. manufacturing and mining. Trusts took their name from the legal device of business incorporation called trusteeship, which consolidated control of industries by transferring stock in exchange for trust certificates. The practice grew out of necessity. Twenty-five years after the Civil War, rapid industrialization had blessed and cursed business. Markets expanded and productivity grew, but output exceeded demand, and competition sharpened. Rivals sought greater security and profits in cartels (mutual agreements to fix prices and control output). Out of these arrangements sprang the trusts. From sugar to whiskey to beef to tobacco, the process of merger and consolidation brought entire industries under the control of just a few powerful people. Oil and steel, the backbone of the nation's heavy industries, lay in the hands of the corporate giants John D. Rockefeller and J.P. Morgan. The trusts could fix prices at any level. If a competitor entered the market, the trusts would sell their goods at a loss until the competitor went out of business, and then they wold raise prices again. By the 1880s, abuses by the trusts brought demands for reform.

History gave only contradictory direction to the reformers. Before the eighteenth century, COMMON LAW concerned itself with contracts, combinations, and conspiracies that resulted in restraint of free trade, but it did little about them. English courts generally let restrictive contracts stand because they did not consider themselves to be suited to judging adequacy or fairness. Over time, courts looked more closely into both the purpose and the effect of any restraint of trade. The turning point came in 1711 with the establishment of the basic standard for judging close cases, "the rule of reason." Courts asked whether the goal of a contract was a general restraint of competition (a naked restraint) or particularly limited in time and geography (an ancillary restraint). Naked restraints were unreasonable, but ancillary restraints were often acceptable. Exceptions to the rule grew as the economic philosophy of laissez-faire economics (meaning "let the people do what they please") spread its doctrine of non-interference in business. As rival businesses formed cartels to fix prices and to control output, the late-eighteenth-century English courts often nodded in approval.

By the time the U.S. public was complaining about the trusts, common law in U.S. courts was somewhat tougher on restraint of trade. Yet it was still contradictory. The courts took two basic views of cartels: tolerant and condemning. The first view accepted cartels as long as they did not stop other merchants from entering the market. It used the rule of reason to determine this, and it put a high premium on the freedom to enter into contracts. Businesses and contracts mattered. Consumers, who suffered from price-fixing, were irrelevant; the wisdom of the market would protect them from exploitation. The second view was that cartels are thoroughly bad. It reserved the rule of reason only for judging more limited ancillary restrictions. Given these competing views, which varied from state to state, no comprehensive common law could be said to exist. But one approach was destined to win.