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All You Need to Know About the Sherman Antitrust Act

The Sherman Antitrust Act

The Sherman Antitrust Act was written with the intent of promoting what was seen to be a growing lack of competitiveness within United States industry. Craft in large part by Senator John Sherman, he realized that after the Civil War there was not enough competitiveness within United States industry to sustain interstate commerce. In order to correct this problem the bill was designed to restrain actions taken on the part of companies that would hinder interstate commerce.

Many of the rules that governed interstate commerce were just written three years earlier with the creation and adoption of the Interstate Commerce Act.  Within the coming years, the Sherman Antitrust Act would be put to the test as the expansion of business within the United States was being fueled by new technology and a more integrated transportation system.

These developments would lead the court to adopt certain judicial methods in order to distinguish what was and was not considered restraining forces. Some violations would become fairly obvious while others would take the court into murky waters where their judgment would define laws to come.

Major Provisions

The Sherman Antitrust Act is divided into two main parts. Within these provisions, the guiding principles of proper interstate commerce are found. The first section of bill outlines certain elements of considered restraint that companies cannot practice. Many times the most common infractions became price fixing and bid rigging, which would be defined by the courts as per se violations. Other infractions were not so obvious and would compel the courts to create the rule of reason methodology concerning proper business practices.

Many times the rule of reason would be employed to consider the intent of individuals concerning their actions within their given sector in the economy. This would then lead to the second part of the Sherman Antitrust Act governing monopolistic actions within interstate commerce. The intent of an individual, or individuals, would become paramount in finding whether or not they had committed a crime pertaining to the Sherman Antitrust Act. Certain requirements are even found within Section 2 governing monopolies that outline what can be considered a monopoly by intent and the times when monopolies naturally occur within the market.

Jurisdictional Requirements

Written in 1890, the Sherman Antitrust Act has grown in scope and power. Today the Sherman Act can be applied to nearly every business within the country, as well as to foreign US citizens acting outside the country who constrain foreign trade and commerce. Originally the federal courts, under the Sherman Antitrust Act, only had jurisdiction over entities operating from state to state, while localities were more under the purview of State regulations. This kept with the long held tradition within United States Constitutional Law of a division of federal and state laws.

However, as time has progressed to the modern day business activities have become more and more complex. Now even companies located within a locality of a state can do business across the country or in different countries, no matter how small or large the operating company is. The courts would need to adjust their judgment on what could be considered restraining activities on the market. Therefore, the Sherman Act under the court’s guidance now can be applied to nearly every business practice in the United States.

Section 1 of the Sherman Antitrust Act

The Sherman Antitrust Act is broken into two parts. The first part deals with companies and the second part deals with individuals concerning monopolies. Section 1, therefore, governs business negations and agreements.

Many forms of business practices can be illegal and legal at the same time depending on the setting and conditions certain business arrangements cause. However, under Section 1 certain practices, such as two rival firms conspiring within their business sector to manipulate the market, is deemed illegal.

Market manipulation can occur in many fashions that restrain interstate commerce. Either through horizontal agreements or vertical arrangements, businesses can, overtly or covertly, create a market unto themselves, thereby limiting competition. Section 1 seeks to remedy these problems by listing certain obvious infractions that companies can make to restrain interstate commerce.

The most common infractions that Section 1 of the Sherman Act ends up targeting are price fixing or bid rigging. Both of these activities limit market competition and, with respect to their use by larger companies, can squeeze out smaller companies from their respective sectors.

Per Se Violations

Due to the wide ranging violations that can occur under the Sherman Antitrust Act the courts would need to develop ways to interpret the laws. It is the job of the legislature to write fair and balanced laws that can be enforced. However, it is usually not the job of the legislature to then interpret the laws they have just crafted. The job of interpretation falls on the courts.

Since the Sherman Act is a Federal and not State law, the federal courts are responsible for interpreting the law. The most obvious violations are considered ‘per se’ violations.  Per se violations include some of the most obvious actions where companies conspire between each other to create a market that solely benefits them while restraining interstate commerce. Some of these actions are price fixing and bid rigging.

Other actions that would violate the Sherman Antitrust Act would be when companies section off the market in order for multiple companies to control one regional area.  In these cases the courts usually have a very easy time handing down court decisions.

The Rule of Reason

Many violations that infringe upon the Sherman Antitrust Act at times under common business practices are not actual infringements. The courts had to develop the rule of reason in order to distinguish between what oversteps the bounds. As Supreme Court Justice Louis Brandies noted in 1918, all business practices in some way or another restrain interstate commerce.

What then becomes centrally important to the rule of reason is whether or not the companies entering into an agreement could have achieved their goals by another means and whether or not their agreement will have a substantial impact on restraining the market.

The rule of reason can also be applied to business practices concerning the development of monopolies. In some cases, while a monopoly may develop it does not necessarily meet the requirements to violate the Sherman Antitrust laws. In all of these cases it is up to the courts to decide by the rule of reason whether a monopoly is considered to violate the Sherman Act.

Horizontal Restraints

There are different forms of business practices that constrain interstate commerce. Some of these restraints under the Sherman Antitrust Act are considered horizontal restraints. In these cases, rival businesses conspires to work together to create a market that benefits their own interest. While many businesses do this, what comes under question is whether or not the business agreement substantially limits interstate commerce.

If the action does not restrict business practices within their sector of the market, then whatever contract the two companies entered into would not be in violation of the Sherman Antitrust Act. However, some of the business agreements restrain and force out smaller competitors, and in those instances it would be found to violate the Sherman Antitrust Act.

In many ways, if these agreements are found to not create a price fixing setting within the market, they can only be resolved, or viewed at, through the rule of reason judicial logic. Here the court acknowledges all business agreements inherently constrain the market, but examine to what extent the constraint is detrimental to interstate commerce.

Vertical Restraints

Under the Sherman Antitrust Act a particularly watchful eye is used to examine what harm is done to the market of interstate commerce through vertical restraints. In these cases, businesses seek to integrate the manufacturing process from a top to bottom perspective. This allows companies to form monopolies and, in many instances, severely limit their operational costs allowing the company to generate greater revenue.  

Vertical restraints can easily lead to monopolies which are also deemed illegal in many cases under the Sherman Antitrust Act. Monopolies have the ability to control the price of a good or service within their given sector. This then limits competitiveness within the sector and runs contrary to the free market ethos found within American business culture.

Senator John Sherman, who authored the bill, was acutely aware that monopolies were beginning to form at the turn of the 20th century by using methods of vertical arrangement. This is one reason why vertical restraints to interstate commerce were targeted by the Sherman Antitrust Act.

Section 2 of the Sherman Antitrust Act

The Sherman Antitrust Act is broken down into two parts. The first section addresses company roles in negations while the second section addresses individual roles in forming monopolies. In a free market system, upon which the United States interstate commerce is based, the rise of monopolies threatens system integrity.

By threatening system integrity the monopolistic power a monopolistic company employs could severely limit the competitive nature of businesses within their give market sector. However, in some cases monopolies naturally occur, and this is where the second section of the Sherman Antitrust Act takes focus on an individual’s intent.

If an individual or individuals are presiding over a company that has turned into a monopoly within their sector but does not exercise its inherent monopolistic power, there is not an infraction against the Sherman Antitrust Act. However, if there is intent to either form a monopoly or exercise monopolistic power, then there would be a clear infringement of the Sherman Antitrust Laws.

Monopolization

There are different forms of economic systems that benefit different parties depending on the system that a country legally allows present. In the United States, we imply the free market system of economic trade which allows for buyers and sellers to enter into the market freely, creating an equilibrium price based on supply and demand. When monopolization occurs within the free market system in a sector of the economy, there is an inherent threat to the fair price of a good or service.

A monopoly by definition can control the price of a good or service thereby limiting competition. The Sherman Antitrust Act seeks to limit the presence of monopolies as much as possible within the scope of interstate commerce. By limiting monopolies it promotes free trade within interstate commerce and limits the impact of market restraints to competitiveness within US industry. However, since monopolies can occur naturally, the chief worry becomes the intent of individuals to create monopolies and exercise monopolistic power on the market.

Attempts to Monopolize

There have been many attempts to monopolize markets for the personal gain of individuals and companies. In all such cases there is a level of intent that is present in order to monopolize a market in a given business sector. This intent forms the basis for judicial recourse against the individual or individuals to be taken because under Section 2 of the Sherman Antitrust Act, individual intent is extremely important with concern to monopolies. If there is no intent in the attempt to monopolize the market, as with some companies that just offer a superior product, then there are no legal ramifications as they have not broken the law.

The intent in these cases is to create a superior product and the byproduct may be the creation of a sector monopoly. This is perfectly legal because in many cases the company producing the superior product will also not move to unleash their monopolistic power on the market. As with all crimes, intent is the main deciding factor whether or not the action involves an attempt to monopolize the market is in fact a crime.

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