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Monopolies and Antitrust Law

Further Readings

In the free market, competition is often ruthless. Antitrust law regulates this competition in order to prevent unfairness in the conduct of business. Theterm antitrust refers to the industrial giants of the nineteenth century, corporations which organized themselves into jointly managed units known as trusts. Through size and strength, the trusts single-handedly controlled the nation's most important markets, crushing all competitors, dictating prices, anderratically supplying goods and services to consumers. This led to the condition of overall dominance known as monopoly. Derived from the Greek for "right of exclusive sale," monopoly control over a market is illegal under antitrust law. The law also forbids several forms of anticompetitive behavior. Steepcriminal and civil penalties, backed by federal and state enforcement, helpto promote its underlying premise of fair competition. Open markets, it is believed, provide fertile ground for a healthy economy by encouraging new investment, job creation, stable prices, and a reliable marketplace.
Historical Background
Monopolies have existed in civilizations throughout history. English law, forinstance, granted the right of monopoly to the nation's guilds through parliamentary or royal decree during the middle ages. This practice diminished inthe seventeenth century, and tentative judicial action against unfair trade had begun by the early eighteenth century. It was the Industrial Revolution, beginning in the 1870s, with its expansion of commerce and new markets, that brought greater demand for action from the courts. Yet the English common lawonly gave American law a contradictory legacy. This was the notion that hindering competition was more or less bad, but that courts generally should onlytake limited roles in evaluating contracts for fairness. Some short-term restraints were considered "reasonable," other more general restraints "unreasonable". And there were always exceptions.
Inheriting this so-called "rule of reason," late nineteenth century America was thus unable to address its problems. With only a smattering of market-interference laws in twelve states, approaches varied widely. At best, courts sometimes refused to enforce business contracts because they prevented competitors from entering a market. Federal law was silent.
This lack of legal controls helped give rise to the trusts. Following the Civil War, an industrial boom had begun transforming the nation's economic basefrom agriculture to industry. This fundamental change brought headaches for industries, which were producing more goods than consumers needed. Initially,their incorporation into trusts was self-protective. Resources could be pooled and risks reduced through their merger into oil trusts, steel trusts, mining trusts, sugar trusts, and so on. Monopoly power also meant strength, and bythe end of the century, the trusts were flexing their muscles arrogantly. Companies such as Standard Oil and industry captains such as steel magnate J. P. Morgan fixed prices to suit themselves and to eliminate competitors. If rivals tried to enter a market, the monopolists would sell their goods at a lossuntil the competitors were destroyed, after which prices shot back up. Consumers were powerless, as were businesses whose livelihoods the trusts imperiled. Farmers, for instance, could not count upon the nation's railroad system to transport their goods affordably to market, since the railroads gave preferential treatment in the form of heavy discounts to larger-volume customers. Public outrage in the 1880s led to demand for reform to reign in the "fat cats" and "robber barons".
Federal Law
Feeling the push of populist pressure, Congress passed two landmark pieces offederal legislation. Utilizing its constitutional power to regulate interstate business, it first put in effect the Interstate Commerce Act of 1887, which required the railroads to maintain fair rates and to cease discrimination.Three years later came the passage of the Sherman Anti-Trust Act of 1890, a sweeping assault on the trusts that remains the basis of federal antitrust lawtoday. The Sherman Anti-Trust Act forbade the formation of trusts, monopolies, and, generally, the restraint of free trade. Allowing both criminal and civil prosecution of offenders, the law placed special emphasis on civil lawsuits by authorizing the award of triple the amount of damages suffered. Today,each criminal violation of the Sherman Anti-Trust Act is a felony carrying amaximum $350,000 fine and imprisonment of up to three years.
Although seeming to usher in a new era in business regulation, antitrust lawwas sluggishly enforced and quickly hit judicial roadblocks. In fact, the Supreme Court dealt a blow to the Sherman Anti-Trust Act in its first consideration of the law, United States v. E. C. Knight (1895), where the majority ruled that manufacturing was not a form of interstate business. The Courttherefore held that the law did not apply to a trust which refined over 98 percent of the nation's sugar. Only in the late 1890s did the Court uphold prosecutions, first against the railroads. Two major trusts were toppled in 1911,when the Supreme Court ordered the dissolution of the Standard Oil Company and the American Tobacco Company. Yet even in Standard Oil Co. of New Jersey v. United States (1911), the Court championed the Sherman Anti-Trust Act, holding that it did not ban all restraints upon trade, but only ones foundto be anticompetitive. Moreover, lower courts were still free to interpret cases subjectively according to the "rule of reason".
Antitrust Enforcements
Impatience with these rulings and the slow pace of enforcement led to furtherreforms in 1914. Congress clarified the law with an explicit new statute, the Clayton Act, which spelled out four illegal anticompetitive practices. It prohibited discriminating by selling the same product or service at differentprices to similar buyers, forcing buyers to enter exclusive contracts, dominating markets through corporate mergers, and sharing common board members between competing companies. Yet even the Clayton Act still left much uncertain,emphasizing that its forbidden practices were only illegal if the effect "maybe substantially to lessen competition" or "tend to create a monopoly." Additionally, in 1914, Congress created the Federal Trade Commission (FTC), the federal agency charged with enforcing antitrust law. The Federal Trade Commission Act also showed the unwillingness of Congress to be too specific about antitrust, aiming broadly at "unfair methods of competition."
Legislative changes peaked toward the middle of the twentieth century as Congress strengthened and refined aspects of the Clayton Act. In 1936, the Robinson-Patman Act tightened the earlier law's ban on price discrimination. The last major piece of federal legislation was the Celler-Kefauver Antimerger Actof 1950, which closed loopholes in the Clayton Act's restriction on mergers,preventing anticompetitive purchases of rival businesses' assets and deceitful transfers of stock purchases.
Throughout the twentieth century, Congress has done less to influence antitrust law than have the executive and the judicial branches. Federal enforcement, which belongs to the FTC and the Justice Department, depends entirely on the political mood of a given presidential administration. President Theodore Roosevelt, a self-declared "trustbuster," made vigorous enforcement a priorityat the turn of the century, as did his successor, William Howard Taft. The pendulum swung in the 1920s under the noninterventionist policies of PresidentCalvin Coolidge, and then back again in the 1930s when President Franklin D.Roosevelt hotly pursued monopolies. Even in recent decades, politics have governed enforcement. The deregulatory Reagan era had little taste for antitrust cases, but the Clinton years have shown a renewed appetite. At all times, the Supreme Court has had the most definitive influence. This reflects a kindof legislative design, as Congress intentionally crafted the outline rather than the details of antitrust law. Through a vast body of federal cases, the Court has filled in the blanks with a complex set of rules, exceptions and doctrines. And yet its approach has been in nearly constant flux.
Monopoly Cases
For monopoly cases, the Court has used vastly different yardsticks. Early on,the majority in United States v. U.S. Steel Corp. (1920) wrote "[T]helaw does not make mere size an offense, or the existence of unexerted poweran offense." Only abusive practices by a dominant business, the Court found,were evidence of illegal monopolization. This outlook changed in United States v. Aluminum Co. of America (2d Cir. 1945), where a federal appeals court shifted the focus of consideration from abuses to market share, holdingthat "immunity from competition is a narcotic." Justice Learned Hand's opinion led to the creation of a standard two-part test. Companies acted illegallywhen they possessed monopoly power in a relevant market, and when they excluded competitors to gain or protect that power. Still in use, the test has yielded somewhat in recent decades as lower courts have given dominant businessesmore room to legally increase their market share.
The legality of mergers, too, has varied from one period to another. Corporations merge for economic gain, and this is not always harmful to competition.Yet in the antitrust heyday of the late 1960s, the Court regarded with alarma merger between two companies that had only a combined five percent output in their market, ruling in Brown Shoe Co. v. United States (1967) thatsuch a merger violated the Celler-Kefauver Act. Little over a decade later, the popularity of deregulation and the Court's own relaxed views led to an explosion of corporate mergers that has continued through the late 1990s. Not all mergers are evaluated in the same way, however, since special circumstancespertain to certain industries. The federal Bank Merger Act and Bank HoldingCompany Act, for instance, provide for close scrutiny of mergers between banks.
Much antitrust case law emerges from the Sherman Anti-Trust Act's ban on "[e]very contract, combination . . . or conspiracy in restraint of trade . . . "Restraint of trade cases concern business contracts and agreements. Some of the century's most aggressive antitrust law evolved in this area, led by the Warren Court in the 1960s. By defining certain practices as illegal in all circumstances, the Court struck widely at cooperative business deals that limited productive output, restrictions placed by manufacturers upon dealers, and "tying" arrangements in which purchase of a given product was required in order to purchase another product. In the 1970s and 1980s, the Court, altering its stance under the influence of academic arguments, embraced the so-called doctrine of economic efficiency. Holding that some restraint of trade actuallywas beneficial to the economy, its rulings set higher standards for antitrustlitigation and made winning more difficult for those prosecuting antitrust cases. In Brunswick Corp. v. Pueblo Bowl-O-Mat (1977), the Court retreated from its long-held stand that the failure of individual companies was badfor competition, accepting instead that reduced competition would be offsetby reduced costs and increased output on the part of successful firms. By the1990s, the efficiency doctrine showed signs of waning.
While some anticompetitive practices are judged harshly, others receive moretolerance. Courts generally condemn price-fixing, for instance. But another questionable practice, the refusal of one business to deal with another, is evaluated according to a variety of factors. Antitrust law acknowledges that sellers may select their own customers. Thus some individual refusals to deal are legal. However, a refusal may be illegal if the seller has monopoly power,intends to monopolize, or uses the refusal as part of an otherwise illegal restraint of trade. Group boycotts are unlawful. Also sometimes illegal are agreements requiring a customer to deal exclusively with a seller, particularlyif they harm the chances of competitors in the market.
Several exceptions exist throughout all levels of antitrust law. Unions havebeen exempt from antitrust law since passage of the Clayton Act, which disregarded human labor as a commodity. Uniquely among professional sports, major league baseball also enjoys an exemption. The Supreme Court ruled early on that baseball is a sport and not a business in Federal Baseball Club of Baltimore v. National League of Professional Baseball Clubs (1922). The Newspaper Preservation Act of 1970, passed amid economic pressures which threatenedthe existence of multiple newspapers in communities, allows mergers and joint operation by publishers that otherwise would be illegal under antitrust law.
States have closely modeled their antitrust statutes on federal law. They prosecuted antitrust cases extensively before World War I, but were largely inactive in antitrust litigation until the 1970s. A period of resurgence saw thepassage of new state laws and the Supreme Court's recognition that states, under a doctrine called parens patriae, had the right to bring certain antitrust lawsuits under federal law, too. In response, state attorneys general pursued antitrust cases on a wide variety of fronts, notably banking. This reinvigoration was also evident in the most controversial antitrust action of the 1990s, when, in 1998, 20 states joined the federal government in its long-running case against computer software giant Microsoft.

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