Sherman Antitrust Act

Sherman Antitrust Act

Sherman Antitrust Act, 1890, first measure passed by the U.S. Congress to prohibit trusts; it was named for Senator John Sherman. Prior to its enactment, various states had passed similar laws, but they were limited to intrastate businesses. Finally opposition to the concentration of economic power in large corporations and in combinations of business concerns led Congress to pass the Sherman Act. The act, based on the constitutional power of Congress to regulate interstate commerce, declared illegal every contract, combination (in the form of trust or otherwise), or conspiracy in restraint of interstate and foreign trade. A fine of $5,000 and imprisonment for one year were set as the maximum penalties for violating the act.

The Sherman Act authorized the federal government to institute proceedings against trusts in order to dissolve them, but Supreme Court rulings prevented federal authorities from using the act for some years. As a result of President Theodore Roosevelt's "trust-busting" campaigns, the Sherman Act began to be invoked with some success, and in 1904 the Supreme Court upheld the government in its suit for dissolution of the Northern Securities Company. The act was further employed by President Taft in 1911 against the Standard Oil trust and the American Tobacco Company.

In the Wilson administration the Clayton Antitrust Act (1914) was enacted to supplement the Sherman Antitrust Act, and the Federal Trade Commission (FTC) was set up (1914). Antitrust action sharply declined in the 1920s, but under President Franklin Delano Roosevelt new acts supplementary to the Sherman Antitrust Act were passed (e.g., the Robinson-Patman Act), and antitrust action was vigorously resumed. As a result of a suit filed in 1974 under the Sherman Antitrust Act, the American Telephone and Telegraph (AT&T) monopoly was broken up in 1982.

The Hart-Scoss-Rodino Antitrust Improvement Act (1976) made it easier for regulators to investigate mergers for antitrust violations, but few mergers were blocked during the merger boom of the 1980s, when the FTC and Justice Dept. adopted a looser interpretation of antitrust legislation. By the 1990s, still a time of large corporate mergers, the FTC became more litigious in antitrust actions, and the Justice Dept. aggressively pursued the Microsoft Corp. (see Gates, Bill). Antitrust legislation is primarily regulated by the Antitrust Division of the Dept. of Justice and the FTC. U.S. corporations with international operations also face antitrust scrutiny from European Union regulators.

See R. Posner, Anti-Trust Law (1976); R. Bork, The Antitrust Paradox (1978).

The Sherman Antitrust Act (Sherman Act, July 2, 1890, ch. 647, , ) was the first United States Federal statute to limit cartels and monopolies. It falls under antitrust law.

The Act provides: "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 declared to be illegal". The Act also provides: "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 felony [. . . ] The Act put responsibility upon government attorneys and district courts to pursue and investigate trusts, companies and organizations suspected of violating the Act. The Clayton Act (1914) extended the right to sue under the antitrust laws to "any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws.. Under the Clayton Act, private parties may sue in U.S. district court and should they prevail, they may be awarded treble damages and the cost of suit, including reasonable attorney's fees.


The Sherman Act was signed by President Benjamin Harrison in 1890 and was named after its author, Senator John Sherman, an Ohio Republican, chairman of the Senate Finance Committee. After passing in the Senate on April 8, 1890 by a vote of 51-1, the legislation passed unanimously (242-0) in the House of Representatives on June 20, 1890.


In 1879, C. T. Dodd, an attorney for the Standard Oil Company of Ohio, devised a new type of trust agreement to overcome Ohio state prohibitions against corporations owning stock in other corporations. A trust is a centuries old form of a contract whereby one party entrusts their property to a second party. The property is then used to benefit the first party. In a corporate trust, the various corporations assign their stock to a board of trustees. The trust then issues trust certificates to the stockholders. They receive the financial benefits, while the board of trustees maintain operational control. By consolidating control of most companies in an industry under one controlling board, the industry is essentially monopolized.

Around the world, what U.S. lawmakers and attorneys call "Antitrust" is more commonly known as "competition law." The purpose of the act was to oppose the combination of entities that could potentially harm competition, such as monopolies or cartels. Its reference to trusts today is anachronism. At the time of its passage, the trust was synonymous with monopolistic practice, because the trust was a popular way for monopolists to hold their businesses, and a way for cartel participants to create enforceable agreements..

The Sherman Act was not specifically intended to prevent the dominance of an industry by a specific company, despite misconceptions to the contrary. According to Senator George Hoar, an author of the bill, any company that "got the whole business because nobody could do it as well as he could" would not be in violation of the act. The law attempts to prevent the artificial raising of prices by restriction of trade or supply. In other words, innocent monopoly, or monopoly achieved solely by merit, is perfectly legal, but acts by a monopolist to artificially preserve his status, or nefarious dealings to create a monopoly, are not.

Legal Effects

The Act is brief and not highly specific. This meant that responsibility for the development of Antitrust law was entrusted to the U.S. courts, particularly the Supreme Court, which have the power to interpret federal statutes.

One of the earliest invocations of the Act was in 1894, against the American Railway Union led by Eugene V. Debs, with the intent to settle the Pullman Strike. Several years would pass before the Act was used against its intended target, corporate monopolies. President Theodore Roosevelt used the Act against extensively in his antitrust campaign, including to divide the Northern Securities Company. President William Howard Taft used the Act to split the American Tobacco Company.

Cartels and Agreements "in restraint of trade"

"Per se" Illegality versus the Rule of Reason

Section 1 of the Act prohibits "agreements, conspiracies or trusts in restraint of trade," making them a crime. Not every alleged agreement is treated alike. The Court has interpreted this section to prohibit arrangements that unreasonably manipulate trade, differentiating between two kinds of conduct: agreements which are very likely to raise costs to consumers, and those which might, but were not highly likely to be harmful.

The court gave this distinction legal meaning by characterizing conduct that is overwhelmingly likely to be harmful as illegal per se. Per se illegal conduct has always been limited, consisting chiefly of horizontal price-fixing or territorial division agreements. Other kinds of agreements that might be harmful to consumers but aren't necessarily, can only be won if the plaintiff satisfies the Rule of Reason. This requires the plaintiff to prove that the agreement caused economic harm, in addition to proving that the defendant acted as charged.

Bias against large business interests

Most of the Section 1 cases coming before The Supreme Court between the turn of the century and the 1980s were dealt with under the per se rule. Later cases, including all of the Sherman Act cases before the court in the 21st century have been dealt with mainly under the rule of reason, if not dismissed outright. It must be noted first that it has remained well-settled that plain vanilla price fixing is per se illegal, as much now as ever. The modern cases have been appealed because they involve new kinds of conduct that were not settled in early appeals from Sherman Act suits. These cases tend to involve conduct in a grey area, where it is not literal price fixing or territorial division, but something allegedly tantamount.

What has changed since the Burger court transitioned to the Rehnquist court and with the Roberts court, is that courts are unwilling to expand per se illegality to encompass new forms of conduct, even if they are allegedly tantamount to price fixing. Earlier cases were conflciting, but generally willing to treat as per se illegal, conduct that bore any resemblance to price fixing.

Modern Trends

The "Quick Look" Rule of Reason
A modern trend in Section 1 cases has been the "quick-look" rule of reason. Where conduct is not clearly per se illegal, but is arguably tantamount to price fixing, territorial division, or otherwise lacks the appearance of legitimacy, the court may apply a modified rule of reason. Taking a "quick look," economic harm is presumed from the questionable nature of the conduct, and the burden is shifted to the defendant to prove harmlessness or justification. The quick-look became a popular way of disposing of cases where the conduct was in a grey area between per se illegality, and demonstrable harmfulness under the rule of reason.
Inference of Conspiracy
Two modern trends have increased the difficulty for antitrust plaintiffs. First, courts have come to hold plaintiffs to increasing burdens of pleading. Under older Section 1 precedent, it was not settled how much evidence was required of the conspiracy. It could be inferred. Since the 1970s, courts have held plaintiffs to higher standards, giving antitrust defendants an opportunity to resolve cases in their favor, before much, if any discovery is done. This protects defendants from bearing the costs of an antitrust "fishing expeditions." However, it deprives plaintiffs of perhaps their only tool to acquire evidence.
Manipulating Market Definitions
Second, courts have employed more sophisticated and principled definitions of markets. Market definition is necessary in rule of reason cases, for the plaintiff to prove a conspiracy is harmful. It is also necessary for the plaintiff to establish the market relationship between conspirators to prove their conduct is within the per se rule.

In early cases, it was easier for plaintiffs to show market relationship, or dominance, by tailoring market definition, even if it ignored fundamental principles of economics. In U.S. v. Grinnell, 384 U.S. 563 (1966), the trial judge, Charles Wyzanski composed the market only of alarm companies with services in every state, tailoring out any local competitors; the defendant stood alone in this market, but had the court added up the entire national market, it would have had a much smaller share of the national market for alarm services that the court purportedly used. The appellate courts affirmed this finding, however, today, an appellate court would likely find this definition to be flawed. Modern courts use a more sophisticated market definition that does not permit as manipulative a definition.


Section 2 of the act forbade monopoly. In section 2 cases, the court has, again on its own initiative, drawn a distinction between coercive and innocent monopoly. The act is not meant to punish businesses that come to dominate their market passively or on their own merit, only those that intentionally dominate the market through misconduct, which generally consists of conspiratorial conduct of the kind forbidden by section 1 of the Sherman Act, or Section 3 of the Clayton Act.

Application of the act outside of pure commerce

The Act was aimed at regulating businesses. However, its application was not limited to the commerce side of business. Its prohibition of the cartel was also interpreted to make illegal many labor union activities. This is because unions were characterized as cartels as well (cartels of laborers). This persisted until 1914, when the Clayton Act created exceptions for certain union activities.


The Sherman act has been a magnet for controversy. One branch of the criticism focuses on whether the Act improves competition and benefits consumers, or merely aids inefficient businesses at the expense of larger, more innovative ones. Alan Greenspan, in his essay entitled Antitrust condemns the Sherman Act as stifling innovation and harming society. "No one will ever know what new products, processes, machines, and cost-saving mergers failed to come into existence, killed by the Sherman Act before they were born. No one can ever compute the price that all of us have paid for that Act which, by inducing less effective use of capital, has kept our standard of living lower than would otherwise have been possible.

Another aspect of the debate over antitrust policy is normative. That is, assuming that some kind of competition law is inevitable, critics will argue as to what its central policy should be, and whether it is accomplishing its goal. A common tactic is to choose a one goal, and then cite evidence that it supports the opposite. For example, during a debate over the act in 1890, Representative William Mason said "trusts have made products cheaper, have reduced prices; but if the price of oil, for instance, were reduced to one cent a barrel, it would not right the wrong done to people of this country by the trusts which have destroyed legitimate competition and driven honest men from legitimate business enterprise. Consequently, if the primary goal of the act is to protect consumers, and consumers are protected by lower prices, the act may be harmful if it reduces economy of scale, a price-lowering mechanism, by breaking up big businesses.

The converse argument is that if lowering prices alone is not the goal, and instead protecting competitions and markets as well as consumers is the goal, the law again arguably has the opposite effect - it could be protectionist. Economist Thomas DiLorenzo notes that Senator Sherman sponsored the 1890 William McKinley tariff just three months after the Sherman Act, and agrees with The New York Times which wrote on October 1, 1890: "That so-called Anti-Trust law was passed to deceive the people and to clear the way for the enactment of this Pro-Trust law relating to the tariff." The Times goes on to assert that Sherman merely supported this "humbug" of a law "in order that party organs might say...'Behold! We have attacked the trusts. The Republican Party is the enemy of all such rings.' "

Dilorenzo writes: "Protectionists did not want prices paid by consumers to fall. But they also understood that to gain political support for high tariffs they would have to assure the public that industries would not combine to increase prices to politically prohibitive levels. Support for both an antitrust law and tariff hikes would maintain high prices while avoiding the more obvious bilking of consumers.

The criticism of antitrust law is often associated with conservative politics. For example, conservative legal scholar, judge, and failed Supreme Court nominee Robert Bork is well known for his outspoken criticism of the antitrust regime. Another conservative legal scholar and judge, Richard Posner of the Seventh Circuit does not condem the entire regime, but expresses concern with the potential that it could be applied to create inefficiency, rather than to avoid inefficiency.. Posner further believes, along with a number of others, including Bork, that genuinely inefficient cartels and coercive monopolies, the target of the act, would be self-corrected by market forces, making the strict penalties of antirust legislation unnecessary.

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