What Is Antitrust Law?



Broadly speaking, antitrust laws seek to promote fair competition on the merits and to protect consumers and businesses from anti-competitive business practices. The antitrust laws therefore forbid the wrongful acquisition of monopoly power, the abuse of monopoly power even if it was properly acquired in the first place, and other business practices that improperly stifle or suppress free competition.

The Antitrust Statutes

The antitrust laws are codified into various statutes, the most important of which is the Sherman Act, which is a federal law that provides civil remedies and criminal penalties for the principal antitrust violations -- improper monopolization, abuse of monopoly power, and conspiracies to restrain trade. The Sherman Act is worded in broad, open-ended language so that clever competitors cannot elude its provisions by lawyerly evasions and obfuscation.

The Clayton Act is another federal statute, which imposes restrictions on proposed mergers, acquisitions, and other fusions, and which also serves as a supplement to the Sherman Act, providing an enumeration of specific practices that are anticompetitive and therefore forbidden. It usefully allows the courts to enjoin anti-competitive conduct before it actually causes harm. The Robinson-Patman Act, which is also a federal statute, prohibits specific business practices such as price-fixing, and does so in technical, specific language that makes it the very reverse of the Sherman Act. It serves as a supplement to both the Sherman and Clayton Acts and is sometimes invoked by civil litigants who have also brought claims under the other two Acts.

The Robinson-Patman Act was enacted during the Great Depression to offer protection to struggling small businesses. It is increasingly viewed by experts as anachronistic and problematic because of its overly technical requirements. Its prohibition against price-fixing, however, remains useful to private litigants.

The Federal Trade Commission Act, yet another federal statute, established the Federal Trade Commission ("FTC"), which has regulatory authority to enforce the Sherman Act, the Clayton Act, and the Robinson-Patman Act. The FTC arguably has authority that exceeds the foregoing Acts and allows it to test the limits of antitrust policy (Section 5 of the FTC Act gives it enormous discretion).

In addition to these federal statutes, each state in the Union has its own antitrust statutes that forbid unfair competition in intrastate commerce. The state statutes tend to be modeled after the Sherman Act, which is the foremost and premier article of antitrust legislation.

The Courts and Antitrust Theory

Since the antitrust statutes are couched in general language (e.g. "it is an offense to conspire to restrain trade"), they have no practical meaning until the courts actually enforce them against the businesses accused of violating them. It is therefore impossible to understand antitrust law merely by reading the applicable statutes. It is necessary to know the cases as well as their underlying reasoning, and it is helpful to understand antitrust theory, which is elaborated and debated by economists and law professors across the country, and which is often referred to expressly in the cases.

Why Antitrust Law Matters

Antitrust law matters to consumers and businesses that have been either harmed by anti-competitive abuses or accused of employing them.

An antitrust offender sued in civil court risks paying treble damages (three times the value of proven harm caused by its offense), as well attorney's fees and costs, which include high fees for expensive experts. The alleged offender might also be ordered to curtail certain business practices during the lawsuit, then ordered to do so permanently if the suspended practices are deemed at trial to be antitrust violations. This is usually costly to the alleged offender, who must abruptly change its way of doing business while forfeiting a profitable commercial practice, and at the same time it suffers hurtful bad press (e.g., "Microsoft was today ordered to stop bundling its internet browser with its Windows operating system, since this practice will likely be shown to be harmful and unfair to purchasers of computing equipment").

In really egregious cases, the alleged offender might find itself the subject of a criminal prosecution, and its officers and directors may be personally indicted, tried, and convicted. Criminal prosecutions of antitrust law are done by the Antitrust Division of the United States Department of Justice ("DOJ"), as well as by state prosecutors. The FTC, as noted above, has strong regulatory powers and can readily refer matters to the DOJ or act in concert with it.

If a criminal conviction is obtained, jail is possible for directors and officers, steep fines are certain, and a ruinous succession of civil cases from competitors and customers becomes inevitable. In most but not all cases, a criminal conviction for antitrust violations foretells the demise of the company that receives it. Criminal prosecutions tend to be undertaken only where the wrongdoing is either brazen or outrageous, or where the harm caused by the wrongdoing is exceptional. Much depends also on the political climate (e.g., during the Reagan-Bush years there were far fewer criminal prosecutions than there have been since President Clinton took office).

Antitrust Offenses

What exactly are antitrust offenses? It might be said that an antitrust offense is a tort committed against a market rather than against a particular business or person in the market. The classic antitrust offenses are (1) the obtaining of monopoly power by improper means, (2) the preservation or enlargement of monopoly power by improper means, (3) the abuse of monopoly power in one market to obtain a competitive advantage in another market, and (4) conspiring to suppress or stifle competition by unfair practices (restraints of trade).

A monopoly is not necessarily evil, nor by its mere existence does it violate antitrust laws. Monopolies are deemed necessary or even useful in some markets: For example, it was thought until recently that electrical power could be best furnished by local monopolies, none of whom ever competed against the others (this circumstance finally might change because of recent developments in the relevant technologies).

Nevertheless, it is always a violation of antitrust law to use unfair means to acquire monopoly power in a particular market, or to use unfair methods to preserve or enlarge monopoly power, and or to abuse monopoly power in one market to obtain a competitive advantage in another market. This is the bread and butter of antitrust law.

Moreover, two competitors in a particular marketplace cannot usually merge together or otherwise have a fusion of their businesses if by the fusion they acquire either monopoly power or an overly dominant position that is deemed harmful to consumers. The question is typically decided by the FTC, to which the would-be business couple applies for approval in advance of the merger or acquisition.

Antitrust laws also forbid commercial conspiracies whose purpose is to impose improper restraints on trade. For example, competitors may not agree to fix the prices that they charge for their goods or service, nor may they pre-arrange a bidding process for a particular contract, nor may they gerrymander the market for their wares. There are many other such practices which, if undertaken by two or more entities, are deemed to be unacceptable restraints upon trade, for which civil and sometimes criminal penalties are deemed appropriate.

The Origins of Antitrust Law, Briefly Stated

Antitrust law makes more sense if you have some understanding of its origins. What, for example, does "antitrust" mean? As with everything else, it all makes much more sense if you understand the first principles.

Although many people are broadly familiar with "antitrust law" and "antitrust lawsuits", few understand the origins of the law or even of the term "antitrust".

It all goes back to the so-called robber barons of the late 1800s, who amassed staggering wealth and business power in the related industries of petroleum production, steel production, banking, and railroad transport. We speak here of the Rockefellers, the Harrimans, Andrew Carnegie, the Mellon family, the Pierponts, the DuPonts, the financier Morgan, and a handful of others, who came to dominate the great industries that were transforming the United States from a remote post-colonial economy to the leading industrial and commercial power. Whether they attained their success by luck, or by superior talent, or by unfair predatory machinations, is a matter that remains debated to this day.

If these robber barons, as they came to be called, helped to transform and greatly improve our economy, they also acquired so much wealth and power that millions of their countrymen became envious, resentful, and distrustful of them. The robber barons owned too much, consumed too conspicuously, and wielded too much influence.

There arose a populist movement against the robber barons, while respectable thinkers opined that the extreme and increasing concentration of wealth and power would transform us not only from a remote backwater into a world-class power, but also from a nation of farmer-merchants to one of magnates, underlings, and indefensible inequalities.

The robber barons had cleverly shielded their fortunes and business empires in carefully arranged "trusts", or at least they tried to do so. Those who decried their undue power became known as "trustbusters", who advocated the elaboration of "antitrust laws". William Jennings Bryan was one such person. President Benjamin Harrison was another, but he was replaced by William McKinley at the turn of the century.

The most successful proponent of antitrust laws was an affluent blueblood himself, Mr. Teddy Roosevelt, who became President when McKinley was shot in 1901 at Buffalo. Roosevelt was re-elected in his own right thereafter, and was nearly elected again when he formed his own party, the Bull Moose Party, to challenge the pro-big business faction in his Republican Party, which he quit in protest before the elections of 1912.

When Roosevelt became President, the Sherman Act had already been enacted, but was moribund and largely or entirely ignored by businesses and regulatory authorities. Roosevelt breathed life into the statute, which during his tenure was finally used to break up the old trusts and prevent their further encroachment on the commerce and public life of the country.

Roosevelt was not a "liberal" as the term is used in today's politics, but he was a "radical" who advocated abrupt, deep change to the way business and politics were done: Ever the champion of fair play, he resolved to bring down the trusts and restore equity in the markets. He became the de facto champion of the antitrust movement, which enjoyed broad support until the outbreak of the Great War in Europe, when all the sudden Americans found that they actually wanted all-powerful industrialists who could protect us from our old-world rivals.

But antitrust fervor has come and gone in cycles ever since and has been part of our political and business landscape ever since Teddy Roosevelt took up the cause of fair play in the marketplace.

Fair play and a level playing field -- these were the aims of antitrust law, though not always the result. This is all Roosevelt wanted -- that every business have a fair chance at succeeding, without being trampled upon by a dominant competitor who could ruin its chances before it had a shot at success.

The great antitrust statutes set out to promote this purpose, and they were therefore worded in remarkably open-ended language, so as to anticipate the sophistication and cunning of the trustmasters, who, if given the tiniest loophole, would exploit it perfectly.

The Inescapable Injustice of Antitrust Law

The courts have tried for nearly a century to give meaning to the broad standards enunciated in the principal antitrust statutes, and not surprisingly they have often contradicted one another in their rulings: Some courts have been disposed to find antitrust violations in every corner, while others have refused to see it in even the most brazen instances of commercial impropriety. It sometimes seems as though the many decisions, if considered as a whole, appear to be an unwieldy, incoherent hodge-podge of ad hoc improvisations that hopelessly contradict one another, if not in specific outcomes then in their underlying reasoning.

If laws should be generally understood in advance by the population whom they are supposed to govern, then the antitrust laws have largely been a failure, since their meaning and practical effect become clear only after the courts develop specific applications of the broad standards given in the underlying statutes -- which they do only when called upon by an aggrieved private litigant or a government prosecutor.

Thus one competitor might object to the business practices of its more successful rival. It then brings an antitrust suit, or complains about the matter to the DOJ. A civil antitrust case is brought, or, in some instances, a criminal proceeding is initiated. The court, having been thus summoned, now decides whether or not there has been an antitrust violation -- and this it does by applying the general formulas of the statutes to the specific business practices under challenge. Whether or not the practice is improper becomes known only after the court has ruled. This is inevitably followed by appeals made by the losing party, and then by further appeal. The entire process can last for years. This is a very curious brand of law, and one that appears to fail the first test of all laws: Is it generally understood to forbid certain conduct in advance of the fact, or is its application unpredictable, unknowable, seemingly arbitrary, and therefore disruptive?

The Injustice Is Necessary

But it is impossible to foresee every sort of business arrangement that might constitute an unfair practice that impedes the marketplace, and it is therefore impossible to enumerate the forbidden practices. Thus the antitrust laws limit themselves to the statement of general principles, and leave to the courts and regulatory authorities the difficult task of applying these principles to contested business practices. In effect, the antitrust statutes are a "constitution of the marketplace", setting forth the broad principles of how markets should operate. The civil and criminal penalties, including the onerous burden of treble damages, seem necessary because they deter anticompetitive behavior, and also because they give strong incentive to victims to come forward to complain of antitrust misconduct.