How the Consumer-Welfare Standard Transformed Classical Antitrust Law

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PREFACE TO THE REVISED VERSION OF THIS ARTICLE (WRITTEN IN NOVEMBER, 2021)

I have been an antitrust attorney for the past thirty-three years and am intimately familiar with the modern doctrines used to interpret and apply American antitrust law. In this article, I explain the common-law origins of American antitrust law and its originally intended purposes, recount how this law has been understood and enforced since its enactment, and argue that in the modern era this excellent law has been undermined and betrayed by the absurdly misnamed “consumer-welfare standard,” whose only significant contribution to antitrust has been to permit monopolistic and exclusionary practices to proliferate with impunity in every part of our commerce. I then explain how this law could be easily reformed so that it again accomplishes its intended purpose — ensuring that American commerce is largely free of unlawful restraints of trade and monopolization — i.e., business practices that were deemed unlawful restraints of trade at common law and private efforts to seize or keep control of an entire line of commerce (monopolization).

Classical antitrust was enforced most vigorously from the late 1930s to the mid-1970s. That period largely coincides with the longest run of broad-based economic prosperity and progress that our country has ever enjoyed. Consumer-welfare jurisprudence was first conceived during the 1960s and was increasingly adopted by the federal courts from the mid-1970s onward, until it eventually became the unquestioned underpinning of American antitrust law: it is really a set of microeconomic principles applicable to markets for basic commodities that has been added to the common-law doctrines on restraint of trade and unauthorized monopoly in order to render those doctrines almost impossible to enforce. The result has been confusion about what antitrust law means and is supposed to do — and more than forty years of judicial tolerance of monopolistic practices and common-law restraints of trade. Our entire economy and society have been transformed for the worse in consequence.

The casual reader can read a summary of these matters in the introduction to this article. Their full statement is set forth in the remainder of the article, along with numerous citations to case law and various other sources. The citations to case law are accompanied by verbatim quotations or sometimes shorthand summaries of each ruling, along with specific page numbers where the quotation or ruling appears in each case. Even those who disagree with my arguments should find this article to be a useful reference source that organizes and explains the common-law doctrines, the principles of classical antitrust, and the principles of consumer-welfare jurisprudence, with exact citations to controlling authorities throughout.

This article was originally published in the Journal of the Antitrust and Competition Law Section of the California Lawyers Association (Fall Issue, 2021). I have since revised and supplemented it, and the revised version appears below. In the revised version, I have provided a further explanation of the common-law doctrines on monopoly, which were first established in England in the early part of the seventeenth century, and which directly led to the English Parliament’s promulgation of the Statute of Monopolies in 1624. I have also revised my proposed reforms of antitrust law and provided supplemental commentary and annotations throughout.

Antitrust law, as it was originally written, established a wise, prosperous organizing principle for our society, one that in the modern era we have largely abandoned at great cost to our economy and society in all the ways that deeply matter. Reviving classical antitrust law cannot alone resolve the many challenges that we must address during the twenty-first century, but without it I fear that we cannot successfully address any of them. Too many of our private markets are now controlled by monopolies, monopsonies, duopolies, and oligopolies. In direct consequence, we have gradually become accustomed to enduring the many ill effects of a monopolistic economy. The remedy lies in classical antitrust law.

Classical antitrust draws upon the accumulated wisdom of the common law to ensure that, wherever possible, our commerce and trade shall be open, free of private restraint, and governed by competition, which keeps everyone honest, hard-working, and useful. That way lies prosperity, innovation, opportunity, commercial honesty, and a society teeming with self-reliant business owners and close collaborators who all have a great stake in our society’s success. No privilege or pedigree is required to join such a society, but only a willingness to work in order to provide a good or service that is useful to others. Antitrust doesn’t try to direct or manage society. It only establishes and enforces an organizing principle — competition — which naturally brings out the best in each of us as a matter of practical necessity.

In contrast, monopolistic economies deliver monopoly rents to a tiny minority, but just about everyone else gets the short end of the stick. Among other things, monopolistic economies generally discourage innovation and independent business initiatives, and by their very nature they fail to deliver lasting prosperity or sufficient opportunity for most people. They also render too many of us overly dependent in some way or other on dominant firms, which as a general rule underpay their suppliers and employees, then overcharge and underserve their customers. It is not because these dominant firms are wicked, but only that they have the power to treat their counterparties in this manner and eventually use this power to their own advantage. Perhaps worst of all, monopolistic economies usually exert a corrosive, demoralizing influence on the societies where they exist. Monopoly is therefore a very poor and short-sighted organizing principle. Competition is the antidote, and antitrust provides it, if we will only enforce it in its classical sense once again.

Lastly, my work on this article has become a labor of love for me, and I mean to add more commentary and annotations to it as I find the time to do so.

William Markham, November 15, 2021.

INTRODUCTION

Since the late 1970s, antitrust law in the United States has been transformed out of recognition and rendered largely toothless by consumer-welfare jurisprudence, which was first developed in the 1960s by “neo-classical price theorists” at the University of Chicago, then embraced by Robert Bork and other conservative jurists, who believed that antitrust law imposed excessive, harmful burdens on successful companies. Their consumer-welfare standard and its related teachings were adopted by the Burger Supreme Court in the late 1970s, after which the leading treatise on antitrust law, Areeda and Hovenkamp’s Antitrust Law, reported these decisions, explained their underlying logic, and developed it further. That treatise, long regarded as the bible of modern American antitrust law, has been regularly consulted by federal judges seeking guidance in their antitrust cases, leading to innumerable published decisions that incorporated its consumer-welfare precepts. The treatise in turn has reported, explained and analyzed those court decisions, further confirming consumer-welfare’s primacy in the antitrust canon, and leading to yet more federal decisions premised on this view of antitrust law. It has been by this self-reinforcing feedback loop that consumer-welfare jurisprudence has swept the field in the modern era, transforming American antitrust law.

The federal courts have had the authority to develop this approach, since the principal antitrust law, the Sherman Act, confers on them the obligation to develop a federal common law of competition and commerce that is supposed to govern the interstate and foreign commerce of the United States. For all that, consumer-welfare jurisprudence in my view has badly overshot its mark and should be largely abandoned before it occasions even further harm. The courts can and should use their common-law authority to reform our antitrust law accordingly.

The change is needed because consumer-welfare jurisprudence has gone much too far, not only weeding out opportunistic and ill-conceived cases that never should have been brought, but also severely limiting the reach of antitrust law, so that it now prohibits only the most egregious instances of anticompetitive conduct, but little else. Some jurists might believe that this approach has been beneficial. I respectfully disagree and argue in this article that the best possible reform of our antitrust laws would be a simple, ringing restoration of the classical doctrines on restraint of trade and unauthorized monopoly. Those doctrines remain on the books and can be easily re-affirmed without doing violence to principles of stare decisis.

Thankfully, my call for antitrust reform is not merely that of an obscure litigator whose lonely voice remains unheard in the wilderness. Rather, the era of consumer-welfare jurisprudence finally seems to be nearing its end, or at least its unquestioned primacy in the antitrust canon: mainstream Democrats, moderate Republicans, progressive leftists, populist right-wingers, Economist-magazine liberals like me, and, far more important, many federal judges both conservative and liberal all seem to favor a revival of classical antitrust. The left-wing progressives and right-wing populists perhaps wish to push matters much further, while skeptical conservatives generally accept that some sort of reform of our antitrust law is now needed. Antitrust reform thus appears to be headed our way.

Indeed, Justice Kavanaugh has already written two forceful, eloquent antitrust decisions (one a concurrence), which remind me of President Theodore Roosevelt’s preferred approach to antitrust enforcement: announce strong antitrust principles, enforce them vigorously against the worst offenders, and aim in that manner to prod all others to restrain their anticompetitive inclinations. That is likely the best approach and the one most likely to elicit bipartisan support as well as a simpler, more sensible administration of our antitrust laws. I add that Congressional reform of the kind now being debated should afford further, highly welcome relief: at a minimum, it should clarify that the aim of antitrust law is to prevent and redress restraint of trade and monopolization, not promote maximal output in each market.

As I explain below, American antitrust law is supposed to enforce across all markets the common-law prohibitions of restraint of trade and unauthorized monopoly. These classical doctrines are codified in the Sherman Act and constitute a political and commercial judgment, discerned from centuries of experience, concerning what kinds of business practices are most likely to promote our broader prosperity, economic opportunity, honest dealings, low prices for consumers, and a healthy democracy. Regrettably, those doctrines sometimes seem to have become distant third cousins in modern antitrust jurisprudence, which for these past forty years has been largely guided by consumer-welfare jurisprudence.

According to the consumer-welfare theory, antitrust law exists solely to ensure that sellers “maximize” their output in all markets. When they do so, antitrust law offers no reproach or relief. That is the proper explanation of the misnamed consumer-welfare standard. It is premised on revisionist history, promises analytical clarity and simplicity, delivers the opposite, and serves in practice to absolve most restraints of trade and most kinds of monopolizing conduct, with catastrophic consequences for our commerce, national economy, polity, and society.

Even so, the classical doctrines of antitrust law largely remain on the books and should be revived and enforced again with vigor, as they were most notably during the long, prosperous post-WWII era. Consumer-welfare jurisprudence has been used to abrogate a succession of per se rules, but not the classical precepts. Rather, consumer-welfare jurisprudence has imposed additional, largely impossible burdens of proof that antitrust plaintiffs must meet in addition to the classical requirements. It is past time to remove the consumer-welfare obstacles from antitrust prosecutions.

Targeting Naked Restraints and Exclusionary Practices That Undermine Competition. The north star of antitrust should cease to be the standard consumer-welfare tests – restricted marketwide output and unprovable supracompetitive prices. Rather, the lynchpins of antitrust should again be the doctrine of ancillary restraints in cases that concern non-compete covenants or collusion and the exclusionary-practices test in cases that concern a defendant’s exclusionary conduct.

The Doctrine of Ancillary Restraints: The First Principle of Antitrust Law. The doctrine of ancillary restraints is used to determine whether two independent defendants have practiced a “naked” restraint of trade whose primary purpose is to restrict or suppress competition between them, or whether they have observed an “ancillary” restraint of trade that reasonably and narrowly facilitates a legitimate transaction or collaboration. This test is used to identify (1) oppressive restrictions imposed by overreaching covenantees that use them to limit or suppress competition in their markets; and (2) conspiracies of competitors against suppliers or customers.

The Exclusionary-Practices Test, Restated. The exclusionary-practices test asks whether an antitrust defendant has used one or more business practices that meet the following criteria: (1) the defendant’s practices have the effect of undermining, burdening, or excluding one or more of the defendant’s competitors; (2) by so doing, they substantially lessen competition in the defendant’s market — i.e., they impair, prevent, or suppress competitive interplay in this market and thereby insulate the defendant from meaningful competitive discipline, or at least that is their clear and necessary tendency; and (3) the defendant does not use these practices to develop or improve its own products or services, or at most it uses the practices in a way that inflicts needless burdens or costs on competitors. In other words, the exclusionary-practices test identifies and condemns business practices that antitrust defendants use not to build a better mousetrap, but to hinder or prevent others from building their own.

If a business practice meets the above three criteria, it fails the exclusionary-practices test, is deemed “exclusionary,” and therefore constitutes predicate conduct for any antitrust claim that requires a showing of the defendant’s exclusionary conduct. Proof of a defendant’s exclusionary conduct never suffices to establish an antitrust violation, but is a necessary showing for many antitrust claims — namely, all claims made under Section 2 of the Sherman Act (15 U.S.C. § 2) (“Section 2”), as well as some claims made under Section 1 of the Sherman Act (15 U.S.C. § 1) (“Section 1”) and Section 3 of the Clayton Act (15 U.S.C. § 14).[2]A defendant might sometimes use a naked restraint of trade to exclude rivals and monopolize a market. The defendant’s practices in such a case would fail both the doctrine of ancillary … Continue reading

The doctrine of ancillary restraints and the exclusionary-practices test should again become the lynchpins of American antitrust law: they identify the very kinds of practices that antitrust law was established to prohibit and redress. By placing these standards at the very forefront of antitrust, and by narrowing or abrogating various consumer-welfare doctrines, the classical doctrines on restraint of trade and monopolization can be fully restored and guided by easily understood, easily applied rules against naked restraints of trade and exclusionary conduct. Judges and juries could readily understand and rule on these matters, and antitrust claims would cease to be obscured by often elusive microeconomic arguments about market output, efficient practices, and supracompetitive pricing put forth by competing experts. None of that was ever supposed to be central to antitrust.

Broadly speaking, restraint of trade as used in the common law and original antitrust cases prohibited the following commercial practices: (1) contracts and concerted business arrangements that, for the sake of hindering or suppressing competition, restrain or prevent counterparties or others from plying their trades or competing in a market; (2) business arrangements by which sellers or buyers in a market combine their operations in order to control the market; and (3) collusion between buyers or sellers to take advantage of their common sellers or customers (e.g., conspiracies to fix prices, allocate markets or rig ostensibly competitive bidding). Classical antitrust enforced these doctrines, holding offenders in violation of Section 1 of the Sherman Act. Classical antitrust also used these doctrines to explain the meaning of unlawful monopolization in violation of Section 2 of the Sherman Act. Namely, the offense of monopolization condemned a company’s deliberate efforts to gain control of a market by acquiring or sabotaging its rivals, but never reached a company that became a monopoly by its commercial excellence or because its market naturally admitted only one seller. Those doctrines should be revived and vigorously enforced. Lastly, Section 7 of the Clayton Act should prevent many more mergers and acquisitions than it has done these past forty years. I explain below an easy, simply administered approach that is faithful to the original Clayton Act and its amendment in 1950 by the Celler-Kefauver Act.

Crucially, all of these doctrines remain on the books and are sometimes enforced by courts disinclined to require the strict showings of consumer-welfare jurisprudence. If these doctrines were openly enforced in all cases and unburdened by consumer-welfare requirements, our antitrust law would be revived, fulfill its purpose, and lay a necessary foundation for our country’s long-term prosperity.

This is not an esoteric matter that matters only to antitrust practitioners and concerned companies. Under-enforcement of antitrust law has led to a profusion of economic, political, and social harms of the very kind that antitrust law was originally enacted to prevent and redress – the myriad, worsening evils of unfettered monopoly and oligopoly, which typically include lower overall productivity, diminished economic prosperity, a less innovative economy, higher consumer prices, fewer career and business opportunities, extreme and rising inequality of wealth, and the private capture of public governance. Restoring classical antitrust law by itself cannot answer all of the many challenges that our country faces, but without it we likely cannot enjoy long-term, broad-based economic prosperity that rests on sound fundamentals, nor expect social comity or reliably honest governance. Monopolistic economies do not nurture those outcomes and likely render them impossible for any extended duration. The common law was right on these points, and history proves the point. It is long past time to revive our antitrust law and enforce it according to its intended meaning.

THE COMMON LAW OF TRADE RESTRAINTS AND MONOPOLIES

The original antitrust laws of the United States were codifications of existing common-law doctrines that prohibited restraints of trade and the willful, unauthorized acquisition of monopoly power. At common law, offending contracts, combinations, and monopolies were unenforceable and subject to equitable decrees. The antitrust laws rendered them civil and even criminal offenses and gave private litigants strong incentives to bring claims against offenders.[3]See § III.C, infra.

The common-law doctrines were generally understood at the time and so were not explained in the antitrust statutes themselves.[4]See generally Albert H. Walker, History of the Sherman Law of the United States of America (1910) (digitized by Google) at 14 (“[W]hat is this bill? A remedial statute to enforce, by civil process … Continue readingIn modern times, the common-law doctrines have perhaps become unfamiliar to many jurists and the general public, so that a review of them seems vitally important to understanding why we have antitrust laws, what they are supposed to do, and why we have gone so badly astray in the modern era. I therefore offer the following review of the common-law doctrines that were codified in our antitrust laws.

Restraint of Trade

At common law, a contract in restraint of trade meant a covenant by which the covenantor promised to the covenantee not to practice a specified trade or profession, participate in a specified line of commerce, or compete in some way against the covenantee.[5]See United States v. Addyston Pipe & Steel Co., 85 F. 271, 279 (6th Cir. 1898), aff’d after modification on other ground 175 U.S. 211 (1899) (“From early times it was the policy of Englishmen … Continue readingSuch restraints were permitted only when they were “subordinate and ancillary” to legitimate transactions or collaborations (i.e., reasonably used to perform a legitimate transaction or collaboration, and narrowly drafted to restrain the covenantor only so far as this purpose required).[6]See Addyston Pipe & Steel, 85 F. at 280-282 (offering extended explanation of these points and concluding that “no conventional restraint of trade can be enforced unless the covenant embodying … Continue reading

For example, a producer of steel could not sign up rivals to agreements by which they all renounced their right to make steel forever in exchange for money; but the seller of a successful business might lawfully give a covenant to his buyer by which the seller became obliged not to open a competing business for a stated duration and within a stated distance of the business sold, so as to protect its goodwill. At common law, the restraint of trade in the first example (imposed on the steel producers) would have been deemed “general” and therefore unlawful, while the restraint described in the second example (imposed on the seller of a business) would have been deemed subordinate and ancillary to a legitimate transaction and therefore lawful. Even in the second example, the seller could not lawfully agree to foreswear all future work in the same line of business, or to do so for any duration if the prohibition absolutely barred him from performing this work anywhere in the country, since any ancillary restraint of trade could not be “general,” but only “partial,” and must therefore be limited in scope and duration.[7]See Addyston Pipe & Steel, 85 F. at 280-282.Any offending trade restraint in a contract was unenforceable and could be enjoined or declared null and void.[8]See id.

At common law, a combination or conspiracy in restraint of trade was an agreement between two or more rival sellers by which they established a monopoly, excluded others from competing in their market, fixed their prices, rigged bids, or allocated sales within their market.[9]See N. Sec. Co. v. United States, 193 U.S. 197, 404 (1904) (“Combinations or conspiracies in restraint of trade … were combinations to keep strangers to the agreement out of the business. The … Continue reading Restraints of this kind were always unenforceable and could be enjoined, dissolved or declared void ab initio.[10]See n. 9, supra.

Lastly, the common law condemned restraints of trade because of their tendency and likely effects. Contracts in restraint of trade subjected covenantors to idleness and penury in exchange for immediate gain; deprived society of their labor and skill; and allowed covenantees gradually to monopolize their markets.[11]see n. 5, supra Combinations and conspiracies in restraint of trade deprived the public of the protections afforded by vigorous competition between competing sellers and competing buyers.[12]See, e.g., Craft v. McConoughy, 79 Ill. 346, 350, 22 Am. Rep. 171, 174 (1875) (“So long as competition was free, the interest of the public was safe. The laws of trade, in connection with the rigor … Continue reading

Unauthorized Monopolies

At common law, sellers could not combine in order to end competition in their market and thereby gain a de facto monopoly: contracts intended to give effect to such arrangements could be declared ultra vires and void, and the offending combinations could be enjoined or dissolved. Technically, a monopoly was an official, public grant of an exclusive concession to practice a commercial activity in a stated place for a stated duration, but the term was also used to describe a seller or group of sellers that contrived to control a market. All private efforts to establish a monopoly were deemed inequitable and obnoxious to the law, and contracts and legal forms used for this purpose were unenforceable.[13]See N. Sec., 193 U.S. at 339–41 (listing numerous common-law decisions that condemned combinations that gave the combining parties control over a line of commerce); see also Proprietors of Charles … Continue reading

In contrast, authorized public authorities could properly bestow monopoly charters of limited duration to encourage useful, novel inventions (patent rights); authors’ works (copyrights); and private investment in public works and common carriers (franchise rights). Authorized public authorities could also protect the public by allowing professional guilds to regulate their respective professions and restrict entry to qualified practitioners. Otherwise, public authorities lacked any lawful power to limit entry or participation in any trade or commerce, except to impose general regulations applicable to everyone,[14]See Butchers’ Union Slaughter-House & Live-Stock Landing Co. v. Crescent City Live-Stock Landing & Slaughter-House Co., 111 U.S. 746, 763–64 (1884) (“I do not mean to say that there are … Continue readingand a public grant of a monopoly might be later deemed ultra vires and illegitimate, as happened at common law in England, where the common-law doctrines on monopoly were first developed.[15]See Coke, Against Monopolists, Propounders, and Projectors, Trin. 44 Eliz. lib. 11, f. 84, 85; le case de monopolies, 3 Inst. 181 (Subject to limited exceptions, “all grants of monopolies are … Continue reading

Lastly, an unauthorized monopolist could never defend its ill-gotten monopoly by arguing that it had not charged excessive prices or otherwise abused its control of an entire market: the danger lay in (1) a monopolist’s mere power to overcharge and underserve customers without losing much business; (2) the likelihood that sooner or later the monopolist would somehow use this power to its advantage and to the detriment of its counterparties (customers, suppliers, and other businesses); and (3) the usual tendency of monopolists to offer inferior wares at higher prices, as was often the case in England, where chartered monopolies and patents for basic commodities proliferated until Parliament outlawed them and the common-law courts declared them to be contrary to law and unenforceable.[16]See E. C. Knight, 156 U.S. at 25 (at common law, trade restraints were “illegal because of their necessary tendency to restrain trade.”) (Harlan, J., dissenting on other grounds); see, e.g., … Continue reading

ANTITRUST LAW WAS ORIGINALLY DIRECTED AGAINST THE GREAT INDUSTRIAL TRUSTS

American antitrust law codified and reinvigorated the common-law doctrines against restraint of trade and unauthorized monopoly. It was enacted to establish general, charter principles for American commerce and specifically to redress the problems that a broad consensus of Americans believed had been and would continue to be caused by the great industrial monopolies and business “trusts” that emerged during the Second Industrial Revolution (c., 1865 to 1914). A brief overview of this era provides an invaluable understanding of this key point.

The Rise of the Great Industrial Trusts During the Second Industrial Revolution

The Second Industrial Revolution was a remarkable period of extraordinary invention and progress in many parts of the world, especially in Europe and North America. During this period, Americans played a pioneering role in developing and harnessing industrial processes to grow food, make goods, construct buildings and structures, transport people and cargo, furnish utilities, and organize work and living arrangements.[17]Among the many striking advances of the era were the introduction and increasing use of mass-produced steel; the laying of steel railroads and use of greatly improved locomotives for regional and … Continue reading

To manage the new industrial work, American companies opened and operated mines, mills, foundries, factories, pipelines, and vast logistical operations, and they employed professional managers to direct and oversee hundreds of thousands of wage laborers, who performed increasingly specialized tasks, often doing so in increasingly large, busy cities. To fill these jobs, the United States began to receive legions of immigrants from all parts of Europe, Asia Minor, China, and elsewhere. All of these developments transformed the country: the largely agrarian, homogenous society of farmlands and trading centers that existed before the Civil War (1861–1865) swiftly evolved into a bustling, polyglot, increasingly urban, and highly industrialized society.[18]See generally Stearns, at 61–68; Brogan, at 377–406.By the outbreak of the First World War in 1914, the United States had already become the world’s greatest and most dynamic industrial power.[19]See generally Stearns, at 61–68; Brogan, at 377–406.

To succeed, the great commercial endeavors of the era required enormous funding and were largely undertaken by well-connected, sophisticated entrepreneurs who had close ties to the wealthiest investors.[20]See Brogan, at 381-91.The firms that became most successful in the new industrial economy quickly grew very large and sought to limit competition in their markets so as to avert strong competition on price, which they feared might ruin their costly investments.[21]See id.In one industrial market after another, the largest sellers combined and thereafter acquired all other substantial sellers.[22]See Stearns at 61–68; Brogan, at 377–406.

State prosecutors in some states challenged some of these combinations as ultra vires transactions, since the combining businesses were incorporated under corporate charters that did not authorize either the combinations themselves or the unregulated monopolies created by them, which rather constituted combinations in restraint of trade.[23]See, e.g., State v. Vanderbilt, 37 Ohio St. 590, 593–95 (1882) (“The attempted consolidation [of competing railroads] was ultra vires of the corporations joining therein…. The attempted … Continue readingBut state officials proved no match for the great industrialists of the late 1800s, and many likely accepted bribes to refrain from taking the ineffectual measures available to them.

In the meantime, sellers intent on combining found a more promising method: they began to use “business trusts” to combine their operations under the laws of New York and New Jersey, which permitted the practice. These trusts designated trustors (the combining sellers), properties held in trust (the sellers’ respective stock or their operations and assets), one or more trustees (to manage the sellers’ businesses), and beneficiaries (the sellers). Using these trusts, the largest sellers in one industrial market after another united their operations, enlarged them further by acquiring other competitors or their assets, and thereby gained control over their markets. The largest trusts also acquired their suppliers and commercial customers, foreclosing yet more competition at different levels of distribution, and they also began to combine with other large trusts to form immense industrial conglomerates.[24]See generally Brogan, at 381–391; Stearns, at 61–68.In this manner, the great industrial trusts quickly gained dominant positions in the great new markets of the era. Towards the end of the nineteenth century, they had become so dominant in their markets, and so large, wealthy and powerful, that they easily outmatched public authorities charged with regulating them and appeared poised to dominate not only the national economy, but American society.[25]See Brogan, at 381–391; Stearns, at 61–68.

The Standard Oil Trust offers an instructive example. Its head, the legendary John Rockefeller, formed the Standard Oil Company in Cleveland in 1863 while the Civil War was being waged on numerous fronts. He and a partner astutely managed the business and made shrewd acquisitions, and their company emerged as a leading concern by the end of that war. From 1870 onwards, Standard Oil steadily acquired some competitors and purposefully ruined others in order to avert meaningful competition. To this end, Standard Oil colluded with giant railroad carriers to obtain preferential shipping rates; purchased numerous competitors after threatening to ruin them if they did not accept its miserly purchase proposals; and impeded and ruined independent competitors by various means, such as (a) using its control of pipelines to cut off supplies of crude petroleum to rival refineries; (b) buying land along the pathways of rival pipeline projects and then using it to uphold or prevent the completion of these projects; (c) selling refined petroleum products at below-cost prices in places where any competing refiner made sales until the rival went out of business; and (d) bribing state legislators to deny competitors required regulatory approval. By 1880, Standard Oil had become the kingpin of the petroleum industry in the United States, controlling its extraction, transport, refinement into various petroleum products, and final delivery to customers for various industrial and household uses.[26]Matt Clayton, The Gilded Age: A Captivating Guide to an Era in American History at 48–51 (2021); Brogan, at 385, 389–90.

To avoid increasingly hostile state regulators and legal proceedings in Ohio, Standard Oil moved its operations to New York City in 1882 and there formed a “business trust,” which held the stock of Standard Oil as well as the stock of most other remaining refiners and distributors of petroleum in the country. At the time of its formation, this trust’s holdings included refiners that handled more than 90% of all petroleum in the country as well as an indispensable pipeline system (over 4,000 miles long) that alone could provide required crude petroleum to petroleum refiners. John Rockefeller became the principal “trustee” of this trust, and in that capacity he acted as the manager and director of nearly the entire petroleum industry of the United States from 1882 onward.[27]See Clayton, at 48–51 (2021); Brogan, at 385, 389–90.

Rockefeller’s Standard Oil Trust treated its counterparties with brutal ruthlessness. Its distinguishing characteristic was that it drove mercilessly hard bargains with everyone. It underpaid suppliers and employees while taxing them with overbearing demands; it overcharged its customers, except when offering pockets of them below-cost goods for a short duration in order to destroy a local competitor; it bribed public officials; and it systematically co-opted or destroyed its competitors. Everyone who dealt with this trust resented but submitted to its demands.[28]See Clayton, at 48–51 (2021); Brogan, at 385, 389–90.

The Standard Oil Trust was one of many such trusts. Other trusts and giant industrial conglomerates accomplished comparable feats of monopolization in most of the other great industries of the era. These giant industrial trusts incited widespread fear and apprehension in the United States in the late 1800s.[29]See Brogan, at 381–391; Stearns, at 61–68.

As I explain below, antitrust law was established to prevent and redress this kind of business conduct and to ensure that, once curtailed, it would not arise again in some new form. As originally conceived, antitrust law was supposed to check the industrial trusts’ economic power and increasing control of entire industries. More broadly, it was also intended to establish a regime of competition that would underpin American commerce for the ages.

The American Antitrust Movement of the Late 1800s

In the United States, unlike Europe, the economic and social conditions of the Second Industrial Revolution never gave rise to a powerful socialist movement. Instead, the American public preferred and increasingly demanded vaguely defined “antitrust relief” – laws suitable to the American polity that would check and prevent the abuses of the great industrial trusts. The broad antitrust movement of the late 1800s was widespread and strong, having begun among farmers, traders, merchants, and displaced businesses, and having evolved into one of the great social movements of the era. By the late 1880s, public demands for antitrust relief were a highly popular rallying cause in every part of the country and perhaps the only issue on which there was bipartisan agreement among Democrats and Republicans (which at the time were very different formations from their current incarnations). Those who demanded antitrust relief did not belong to a single group or ascribe to a common platform, but at best constituted a diverse coalition, one whose constituents had differing aims and policy preferences. It was ever thus in America.[30]See Tim Wu, The Curse of Bigness: Antitrust in the New Gilded Age 29-32 (2018); Sandeep Vaheesan, Accommodating Capital and Policing Labor: Antitrust in the Two Gilded Ages, 78 Md. L. Rev. 766, … Continue reading

For all that, there was one animating fear that united the entire movement, infused the historic public debates, and informed the original antitrust laws of the various states and the United States: it was the fear and profound distrust of the giant trusts’ unchecked economic power. This matter is easily confirmed by even a casual review of the era’s Congressional debates, similar debates in various state legislatures, contemporary newspaper articles, politicians’ speeches, and court decisions.[31]See Walker, at 13–16.

Here is how Senator Sherman, a conservative Republican, characterized the matter in 1890 when addressing Congress to explain the antitrust law that would later bear his name:

This bill [a draft version of the Sherman Act] does not seek to cripple combinations of capital and labor; the formation of partnerships or corporations; but only to prevent and control combinations made with a view to prevent competition or for the restraint of trade, or to increase the profits of the producer at the cost of the consumer…. Associated enterprise and capital are not satisfied with partnerships and corporations competing with each other, and have invented a new form of combination, commonly called ‘trusts,’ that seeks to avoid competition by combining and controlling corporations, partnerships and individuals engaged in the same business, and placing the power and property of the combination under the government of a few individuals, and often under the control of a single man called a trustee, a chairman or a president. The sole object of such a combination is to make competition impossible…. It dictates terms to transportation companies. It commands the price of labor without fear of strikes, for in its field it allows no competitors. Such a combination is far more dangerous than any heretofore invented, and when it embraces the great body of all the corporations engaged in a particular industry in all the states of the Union, it tends to advance the price to the consumer of any article produced. It is a substantial monopoly injurious to the public, and by the rule of both the common law and the civil law is null and void and the just subject of restraint by the courts….

 

It is this kind of combination we have to deal with now. If the concentrated powers of this combination are entrusted to a single man, it is a kingly prerogative, inconsistent with our form of government, and should be subject to the strong resistance of the state and national authorities.

 

If we will not endure a king as a political power, we should not endure a king over the production, transportation and sale of any of the necessaries of life. If we would not submit to an emperor, we should not submit to an autocrat of trade with power to prevent competition and to fix the price of any commodity…. These trusts and combinations are great wrongs to the people. They have invaded many of the most important branches of business. They operate with a double-edged sword. They increase beyond reason the cost of the necessaries of life and business, and they decrease the cost of the raw material, the farm products of the country. They regulate prices at their will, depress the price of what they buy, and increase the price of what they sell. They aggregate to themselves great enormous wealth by extortion, which makes the people poor. Then making this extorted wealth the means of further extortion from their unfortunate victims, the people of the United States, they pursue unmolested, unrestrained by law, their ceaseless round of peculation under the law, till they are fast producing that condition of our people in which the great mass of them are servitors of those which have this aggregated wealth at their command.[32]See Walker, at 13-15 (quoting Senator Sherman’s speech in Congress in 1890 to explain the purposes of the Sherman Act of 1890).

 

Senator John Sherman, addressing Congress in 1890 to explain the purposes of American antitrust law.

The Original Meaning of American Antitrust Law

What was the antitrust remedy demanded by the public? After much debate, and with strong disagreement on emphasis, the consensus was that the best antidote to the power of the industrial trusts was to dust off and reinvigorate the common-law doctrines on restraint of trade and monopolies and treat them as actionable offenses when committed in the interstate or foreign commerce of the United States.[33]See  36 Cong. Rec. 522 (Jan. 6, 1903) (“We undertook by law to clothe the courts with the power and impose on them and the Department of Justice the duty of preventing all combinations in … Continue reading

The courts would be charged with applying and developing this law,[34]See George F. Edmunds, The Interstate Trust and Commerce Act of 1890, 194 No. Am. Rev. 801, 813 (1911) (“[A]fter most careful and earnest consideration by the Judiciary Committee of the Senate it … Continue readingand to this end they would proceed from the following general precepts: first, the law against restraint of trade would forbid competitors to conspire against their common sellers or customers and also forbid companies to use contracts or coordinated business arrangements in order to impose unreasonable restrictions on market participants that would prevent or hinder them from competing or plying their lawful trades; second, the law against unauthorized monopolies would prevent any company from using contracts, combinations or business practices to undermine or co-opt competitors and thereby gain or preserve control over an entire line of commerce; third, the courts would have broad authority to grant traditional common-law remedies, such as decrees of avoidance, dissolution, and divestiture, as well as a sweeping array of statutory remedies not available at common law: treble damages and attorney’s fees to a prevailing plaintiff in a private action, and civil fines and even criminal penalties in successful public prosecutions; and fourth, the federal version of this law would concern only the interstate and foreign commerce of the United States, and each state would bear responsibility for enacting and enforcing its own competition law for its intrastate commerce. That is American antitrust law in its original, essential conception.[35]See Apex Hosiery, 310 U.S. at 497–98 (“In seeking more effective protection of the public from the growing evils of restraints on the competitive system effected by the concentrated commercial … Continue reading

Thus conceived, antitrust law was enacted across the land: from the late 1880s onwards, numerous States enacted their own antitrust laws,[36]See Texaco, 46 Cal. 3d at 1154–62 (discussing state antitrust laws that were adopted around the same time as the Sherman Act, including antitrust laws adopted in Arkansas, California, Kansas, … Continue readingand in 1890 the U.S. Congress, acting almost unanimously,[37]The vote in the House was unanimous, and in the Senate all but one member voted for the bill. See Walker, at 34, 41-46.enacted the Sherman Act, which became the country’s first national antitrust law.[38]See 15 U.S.C. §§ 1-7 (original Sherman Act passed in 1890); 15 U.S.C. §§ 8-11 (supplemental statutes enacted in 1894).To redress perceived gaps in the law, Congress enacted the Clayton Act and the Federal Trade Commission Act in 1914.[39]These laws are now codified at 15 U.S.C. §§ 12 et seq.Congress further supplemented these laws by its passage of the Robinson-Patman Act (1936), which clarified and expanded the Clayton Act’s prohibition of commercial price discrimination,[40]See 15 U.S.C. § 13. The Clayton Act’s original prohibition of price discrimination was directed against predatory pricing schemes conducted by dominant sellers to undermine lesser rivals. The … Continue readingand by its passage of the Celler-Kefauver Act (1950), which closed a loophole and expanded the reach of the Clayton Act’s prohibition of anticompetitive mergers and acquisitions.[41]See Brown Shoe Co. v. United States, 370 U.S. 294, 315–18 (1962) (explaining that the Celler-Kefauver Act amended the Clayton Act’s prohibition of anticompetitive acquisitions so that it reached … Continue reading

As originally conceived, antitrust laws were meant to ensure that, as a general rule, the interstate and foreign commerce of the United States would be conducted by private parties whose vigorous competition with one another would regulate and guide their behavior.[42]See N. Sec., 193 U.S. at 337 (1904). Wherever possible, markets would be generally competitive, and sellers and buyers in them would vie against one another and thus keep one another honest, even if this approach to commerce proved not to be the most efficient possible way to produce goods and provide services.[43]See Walker, at 47–62; see also United States v. Aluminum Co. of Am., 148 F.2d 416, 428–29 (2d Cir. 1945) (“Alcoa”) (“Throughout the history of these statutes it has been constantly assumed … Continue reading

The immediate aim of antitrust was to curtail and check the immense power of the giant industrial trusts, and the larger purpose was to prevent marketwide restraints of commerce, corrupt trading practices, and the purposeful monopolization of entire markets.[44]See Apex Hosiery, 310 U.S. at 497–98 (explaining these points, excerpt quoted at n. 3, supra); Standard Oil Co. of New Jersey v. United States, 221 U.S. 1, 50 (1911) (“The main cause which led to … Continue readingThe underlying rationale was that curtailing these practices would preserve the best traditions and potential of American society, protect society from the unchecked power and likely malign influence of dominant industrial combinations, and thereby afford better opportunities and greater prosperity for a larger number.[45]See Walker, at 16 (“[T]he general complaint against trusts is that they prevent competition”) (Senator Teller, explaining why he and his colleagues voted for the law); see also Alcoa, 148 F.2d at … Continue reading

CLASSICAL ANTITRUST LAW

The Charter Principles of Classical Antitrust Law

From the time the Sherman Act became law in 1890 until the mid-1970s, the federal courts expressly acknowledged or impliedly presumed that federal antitrust law, so far as it applied, existed to protect marketplace competition from (1) any contract, combination or conspiracy that was an actionable restraint of trade at common law, and (2) monopolization, as well as attempts and conspiracies to monopolize (seize control of an entire market). I refer to this period as the “classical era of antitrust.”

During this era, the federal courts construed the federal statutes to establish the charter principles of American commerce, which broadly stated were as follows: the interstate and foreign commerce of the United States must be free of undue restraints of trade, monopolization of any market, and any serious attempt or conspiracy to monopolize any market.[46]See N. Sec., 193 U.S. at 337 (the Sherman Act establishes “a rule for interstate and international commerce … that it should not be vexed by combinations, conspiracies, or monopolies which … Continue readingAccordingly, the following commercial practices shall not be tolerated in the interstate or foreign commerce of the United States: (1) undue restraints of trade – i.e., any contract, combination, or conspiracy that constitutes a restraint of trade at common law and is used to impose unreasonable restrictions on marketwide competition, including conspiracies of independent sellers against customers, conspiracies of independent buyers against suppliers, and all non-ancillary agreements and conspiracies to fix prices, rig bids, or allocate markets among sellers or among buyers;[47]See 15 U.S.C. § 1; see also Addyston Pipe & Steele, 85 F. at 279–284 (confirming the doctrine of ancillary restraints summarized above); United States v. Joint Traffic Assn., 171 U.S. 505, … Continue reading(2) monopolization – i.e., serious attempts, conspiracies, and successful efforts to control a market by suppressing or co-opting competitors;[48]See 15 U.S.C. § 2; see also United States v. Grinnell Corp., 384 U.S. 563, 570–71 (1966) (“The offense of monopoly under § 2 of the Sherman Act has two elements: (1) the possession of monopoly … Continue reading(3) unjustified price discrimination in sales of any commodity to commercial customers that harms either competition between the seller and its customers or downstream competition;[49]See 15 U.S.C. § 13(a)-(b), (d)-(f); see also Morton Salt, 334 U.S. at 43 (“The legislative history of the Robinson-Patman Act makes it abundantly clear that Congress considered it to be an evil … Continue reading(4) commercial bribery;[50]See 15 U.S.C. § 13(c).(5) exclusive-dealing or tie-in arrangements for the sale of commodities, when the likely result of any such arrangement would be a substantial lessening of competition in a distinct line of commerce (relevant market);[51]See 15 U.S.C. § 14; see also Tampa Elec. Co. v. Nashville Coal Co., 365 U.S. 320, 327 (1961) (Exclusive dealing contract violates Section 3 of the Clayton Act when “it [is] probable that … Continue reading(6) a firm’s acquisition of another firm or its assets, when the likely result would be a substantial lessening of competition in a distinct line of commerce (relevant market);[52]See 15 U.S.C. § 18; see also Brown Shoe, 370 U.S. at 315–18 (“The dominant theme pervading congressional consideration of the 1950 amendments [of the Clayton Act] was a fear of what was … Continue readingand (7) certain kinds of interlocking directorates.[53]See 15 U.S.C. § 19.

During the classical era, no case ever suggested that the Sherman Act’s prohibitions must be limited only to offending trade restraints and monopolization that, in addition, demonstrably reduce overall output in the markets where they are practiced. On the contrary, the decisions established that the Sherman Act reflected a political judgment, inspired by the common-law doctrines, that marketplace competition shall be the organizing principle of American commerce, even if it is not the most efficient way to produce goods and services, but in the expectation that it is the best way over time to promote long-term prosperity and protect not only the economy, but society at large from the corrupting influence and pernicious effects of cartels and ill-gotten monopolies. Markets must therefore be free of offending trade restraints and monopolization, regardless of their short-term effect on marketwide output.[54]See n. 43, supra.

Perhaps the most eloquent description of these points appears in the landmark Alcoa decision, which was written by a legendary appellate judge (Learned Hand) after the Supreme Court directed him to decide an antitrust appeal brought by federal antitrust authorities. In this decision, Judge Hand offered the following summary of the Sherman Act’s underlying premises and prohibitions after examining its legislative history, statutory language, other antitrust statutes, and the Supreme Court’s prior antitrust rulings:

[I]t is no excuse for ‘monopolizing’ a market that the monopoly has not been used to extract from the consumer more than a ‘fair’ profit. The [Sherman] Act has wider purposes…. Many people believe that possession of unchallenged economic power deadens initiative, discourages thrift and depresses energy; that immunity from competition is a narcotic, and rivalry is a stimulant, to industrial progress; that the spur of constant stress is necessary to counteract an inevitable disposition to let well enough alone. Such people believe that competitors, versed in the craft as no consumer can be, will be quick to detect opportunities for saving and new shifts in production, and be eager to profit by them. In any event the mere fact that a producer, having command of the domestic market, has not been able to make more than a ‘fair’ profit, is no evidence that a ‘fair’ profit could not have been made at lower prices…. [Congress] did not condone ‘good trusts’ and condemn ‘bad’ ones; it forbad all. Moreover, in so doing it was not necessarily actuated by economic motives alone. It is possible, because of its indirect social or moral effect, to prefer a system of small producers, each dependent for his success upon his own skill and character, to one in which the great mass of those engaged must accept the direction of a few. These considerations, which we have suggested only as possible purposes of the Act, we think the decisions prove to have been in fact its purposes.

 

(….)

 

[T]here can be no doubt that the vice of restrictive contracts and of monopoly is really one, it is the denial to commerce of the supposed protection of competition….

 

We have been speaking only of the economic reasons which forbid monopoly; but, as we have already implied, there are others, based upon the belief that great industrial consolidations are inherently undesirable, regardless of their economic results. In the debates in Congress Senator Sherman himself in the passage quoted in [a footnote] showed that among the purposes of Congress in 1890 was a desire to put an end to great aggregations of capital because of the helplessness of the individual before them…. Throughout the history of [federal antitrust statutes] it has been constantly assumed that one of their purposes was to perpetuate and preserve, for its own sake and in spite of possible cost, an organization of industry in small units which can effectively compete with each other.

 

United States v. Aluminum Co. of Am., 148 F.2d 416, 427–29 (2d Cir. 1945) (summarizing the premises and purposes of the Sherman Act). 

The Underlying Rationale for Classical Antitrust Law

The judicial policies that underpinned the charter principles of antitrust were explained in the common-law decisions and early antitrust cases. The statutory supplements and ringing court decisions in the post-WWII era merely reinforced the ancient common-law doctrines. These policies are simple to recite and necessary to a proper understanding of the original purpose of antitrust law.

First, every person is entitled to practice a lawful trade and to compete to make sales and purchases, and every business to offer its services or wares, subject only to properly exercised public authority and regulation, which in appropriate cases can be delegated to private actors.[55]See Section II, supra.

Second, private markets should be naturally regulated by uncorrupted commercial rivalry between rival sellers and between rival buyers at each stage of every supply chain. That is the best way to promote economic opportunity, commercial honesty, and good trading practices without repressive public regulation that itself leads to public corruption and a stultified, excessively bureaucratic economy.[56]See Walker, at 13–16; Alcoa, 148 F.2d at 429–32.

Third, competitive rivalry in our markets, if vigorous, protects all market participants. If suppliers compete to make sales to competing dealers that in turn make sales to competing commercial customers, all of them will tend to act on their best behavior and to deal fairly with their counterparties in all dealings. A seller that overcharges its customers will lose them to another seller that offers better terms. A customer that drives an overly hard bargain will find that suppliers have sold their wares to other, more reasonable customers. At the very end of a supply chain, retail sellers will not abuse consumers for fear of losing their business. More generally, competitive rivalry at each stage of a supply chain keeps market participants honest and prevents them from taking advantage of their counterparties. Competitive markets thus encourage best practices, commercial honesty, innovation, and responsive dealings: laggards, swindlers, overly hard bargainers, and the hidebound will tend to lose business to rivals that are enterprising, honest, accommodating, and innovative.[57]Alcoa, 148 F.2d at 427 (L. Hand, J.) (The Sherman Act protects customers from price-gouging imposed by monopolists, and it also has “wider purposes” and therefore forbids the willful acquisition … Continue reading

Lastly, a business may lawfully become a monopoly or dominant firm in a highly concentrated market only if it does so by its superior skill, happenstance, or a market’s structural limitations, but it cannot acquire or maintain its dominance by any commercial practice that needlessly impedes or prevents any rival from competing against it.[58]See id., 148 F.2d at 429–30; United States v. Grinnell Corp., 384 U.S. 563, 570–71 (1966) (“The offense of monopoly under s 2 of the Sherman Act has two elements: (1) the possession of monopoly … Continue reading

Limitations and Required Clarifications During the Era of Classical Antitrust

During the classical era of antitrust (c. 1890 to 1975), the federal courts clarified how the Sherman Act’s general prohibitions would be applied in specific cases. Their early decisions confirmed that these prohibitions codified common-law doctrines, examined these doctrines closely, and applied them ad hoc. Later decisions during this period developed and refined administrable standards and rules by which all antitrust cases would be decided.[59]See Walker, at 295-96 (commenting on the “numerous judicial decisions” that interpreted and applied the Sherman Act during its first twenty years, and observing that these decisions, “with a … Continue readingDuring this period, the federal courts also examined the constitutionality of the Sherman Act (i.e., whether its provisions violated or must be reconciled with any provision of the United States Constitution) as well as possible conflicts between the Sherman Act and any other federal or state law.

This work entailed conflicting decisions and dissenting opinions and gave rise to important limitations on federal antitrust law, but until the mid-1970s no court decision openly challenged the universal understanding that the Sherman Act, so far as it applied, protected marketplace competition from all unreasonable restraints of trade and the monopolization offenses, not only those that demonstrably lessoned overall output in a market.

Below I offer commentary on certain limitations of antitrust law imposed during its classical era and review the federal courts’ gradual adoption of administrable standards and rules for use in all antitrust cases. I also refer my readers to my article on antitrust exemptions and immunities, including those used to reconcile federal antitrust law to other provisions of the U.S. Constitution and our federal system of government. These exemptions and immunities form part of classical antitrust jurisprudence: unlike consumer-welfare jurisprudence, they did not purport to recharacterize the law, but only to limit its applicability under specified circumstances.

1. The Commerce-Clause Limitation and Early Price-Fixing Cases Led to a Great Era of Industrial Consolidation

While the Sherman Act’s meaning seemed clear to its contemporaries, its reach occasioned strong disagreement. In its first antitrust ruling, given in 1895, the Supreme Court adopted an extraordinarily narrow reading of the Constitution’s Commerce Clause,[60]Congress’ power to regulate interstate commerce is conferred by the Constitution’s Commerce Clause. See U.S. Const., art. I, § 8 (“The Congress shall have Power … To regulate Commerce … Continue readingholding that the Sherman Act did not apply to manufacturing performed within a state, since Congress lacked authority to regulate intrastate activities; rather, the Sherman Act governed only the interstate transport and sale of commodities, but never their manufacture or production, which by definition could be done only in one place at a time.[61]See E. C. Knight, 156 U.S. at 16–17. This ruling permitted the infamous Sugar Trust to proceed with its challenged acquisitions of several large sugar refineries by which it gained ownership and … Continue readingShortly afterwards, the Supreme Court confirmed in a string of rulings that price-fixing by rival sellers of commodities was unlawful per se under the Sherman Act.[62]See Trans-Missouri Freight, 166 U.S. at 339 (holding that agreements among railroad operators to fix their respective rates were unlawful under Section 1 even if the rates are reasonable); Joint … Continue reading

By these early rulings, the Supreme Court established that (1) the Sherman Act prohibited rival sellers from fixing prices or enforcing other naked restraints of competition when dealing in the interstate transport and sale of commodities;[63]See Trans-Missouri Freight, 166 U.S. at 339; Joint Traffic Assn., 171 U.S. at 568-570 (1898) (agreement between railroad companies to set prices is an unlawful restraint of trade under Section 1 even … Continue readingbut (2) this law did not reach mining, agriculture, or manufacturing operations, so that producers of commodities could combine with impunity to dominate the production of any commodity.[64]See E. C. Knight, 156 U.S. at 16–17.Sellers that acted in interstate commerce could not allocate markets or fix prices to escape the pressures of competition, but producers could avert competition altogether by combining their operations under the laws of any state that permitted them to do so, which usually meant under New Jersey law.

Sellers were guided accordingly. The Supreme Court’s rulings on the Sherman Act directly led to an unprecedented wave of large-scale mergers and market consolidation from the mid-1890s to the early 1900s. These mergers were so significant that they lastingly reshaped American commerce, and their effects persist to the present day.[65]See Vaheesan, at 783-786.For example, the legendary financier J.P. Morgan oversaw the formation of the United States Steel Company in 1901 by combining the operations of steel producers that collectively produced nearly 70% of all steel made in the United States, and shortly afterwards US Steel enlarged itself even further by acquiring its largest remaining competitor.[66]See Charles R. Morris, The Tycoons: How Andrew Carnegie, John D. Rockefeller, Jay Gould, and J.P. Morgan invented the American supereconomy 255-58 (2005); Len Boselovic, Steel Standing: U.S. Steel … Continue reading

The Supreme Court’s severe limitation of the Sherman Act’s reach under the Commerce Clause was gradually lessened by a succession of decisions from the early 1900s onward,[67]See, e.g., Swift & Co. v. United States, 196 U.S. 375, 396-397 (1905) (ruling that several combinations to control production and sale of commodity within various states was part of overall plan … Continue readingbut it was abrogated only much later, in the landmark case of Wickard v. Filburn in 1942.[68]See Wickard v. Filburn, 317 U.S. 111, 124 (1942) (“The commerce power is not confined in its exercise to the regulation of commerce among the states. It extends to those activities intrastate which … Continue reading In the meantime, the many large mergers conducted at the turn of the century were largely left intact, but federal prosecutors obtained decrees of dissolution that “busted up” some of the most egregious monopolists, bringing a few major cases with great fanfare during Theodore Roosevelt’s Administration (1901-1909), and discretely bringing many more cases during William Howard Taft’s Administration (1909-1913) and Woodrow Wilson’s Administration (1913-1921).[69]See Walker, at 179-216, 270-284 (recounting the federal government’s prosecution of Sherman Act claims during the Administrations of Theodore Roosevelt and William Howard Taft); see also Vaheesan, … Continue reading

2. Developing Administrable Standards for Restraint of Trade

A second notable dispute concerned a disagreement over proper construction of Section 1. Did it bar all restraints of trade or only unreasonable ones? This disagreement, although it occasioned lengthy dissents in the earliest opinions, seems to have been more semantic than substantive: courts that viewed the prohibition as absolute defined restraints of trade narrowly, so that the term as defined included only practices that other courts would have characterized as unreasonable restraints.[70]Compare, e.g., N. Sec., 193 U.S. at 331–32 (all restraints of trade are outlawed, but the term refers only to a practice intended to “prevent [the] play of competition” and that “restrains … Continue readingThis debate was definitively resolved in Standard Oil and again in Chicago Board of Trade, both of which clarified that Section 1 prohibited only “undue” or “unreasonable” restraints of trade.[71]See Standard Oil, 221 U.S. at 58-69; Chicago Board of Trade, 246 U.S. at 238 (“Every agreement concerning trade, every regulation of trade, restrains. To bind, to restrain, is of their very … Continue reading

It was not until much later, however, that the courts adopted a “structured rule of reason” that set forth administrable standards for deciding whether a challenged trade restraint was unreasonable. The structured rule was adopted by federal courts long after they had adopted the consumer-welfare standard, and the test incorporates consumer-welfare principles and was never a part of classical antitrust jurisprudence.[72]See generally Areeda and Hovenkamp, Fundamentals of Antitrust Law (3rd ed. 2010) at §§16.09 et seq. (explaining the “structured rule of reason,” which entails a rigorous three-step analysis and … Continue reading

During the classical era, the federal courts established various per se rules against certain kinds of trade restraints, finding that they were unreasonable as a matter of law. The decisions from this era condemned many such restraints, but rarely condemned a practice under the so-called rule of reason, which was a famously (or infamously) open-ended standard offered by Justice Brandeis in Chicago Board of Trade that in essence constituted an expansive restatement of the doctrine of ancillary restraints:

[T]he legality of an agreement or regulation [under the Sherman Act] cannot be determined by so simple a test, as whether it restrains competition. Every agreement concerning trade, every regulation of trade, restrains. To bind, to restrain, is of their very essence. The true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition. To determine that question the court must ordinarily consider the facts peculiar to the business to which the restraint is applied; its condition before and after the restraint was imposed; the nature of the restraint and its effect, actual or probable. The history of the restraint, the evil believed to exist, the reason for adopting the particular remedy, the purpose or end sought to be attained, are all relevant facts. This is not because a good intention will save an otherwise objectionable regulation or the reverse; but because knowledge of intent may help the court to interpret facts and to predict consequences.

 

Bd. of Trade of City of Chicago v. United States, 246 U.S. 231, 238 (1918)[73]This statement of the law was used not so much to try claims under a distinct rule-of-reason standard as it was to decide whether a challenged restraint should be condemned per se. Detractors have … Continue reading

3. Developing Administrable Standards for Monopolization

Another matter that remained unsettled was the development of administrable standards for adjudicating claims under Section 2 (monopolization, attempted monopolization and conspiracy to monopolize).

In several early cases, the Supreme Court held that direct competitors, by combining their operations, had restrained and monopolized a “part” of interstate commerce in violation of Sections 1 and 2.[74]See Standard Oil , 221 U.S. at 72–77 (holding that defendants, which were numerous companies and several individuals engaged in the petroleum industry, unlawfully restrained trade and committed … Continue reading

But the Supreme Court reached the contrary conclusion in a strikingly similar case brought during the same period, absolving a holding company and 180 steel producers that had combined their operations under its auspices and had thereby become by far the largest steel company in the country and the producer of one-half of its steel (other evidence placed its share of overall production at 70-90%, but the court adopted the lesser figure).[75]See United States v. U.S. Steel Corp., 251 U.S. 417, 444–445 (1920) (absolving defendants of attempted monopolization or monopolization, where defendants were a holding company and 180 steel … Continue reading

In the first series of cases, the court emphasized how the defendants had purposefully acquired or aimed to acquire a monopoly, which it deemed to be control over a distinct “part” of interstate commerce, and which was unlawful if purposefully acquired and was not excused even if the defendants had not abused their control by overcharging customers. In the outlier case, the court did not consider whether the defendants controlled any “part” of interstate commerce and concluded from ambiguous evidence that they had combined operations to improve their production methods and attain economies of scale, not to eliminate competition and control prices. These cases provided extensive, important commentary on the purposes of the Sherman Act, its common-law origins, and the general meaning of its prohibitions, but they did not develop required showings or a definition of monopoly that could be used to review all Section 2 claims. Their differing outcomes underscored the need for improved guidelines for adjudicating Section 2 claims.

Subsequent decisions cured this gap, establishing administrable standards and a corresponding nomenclature (e.g., relevant markets, monopoly power, anticompetitive conduct, etc.) as well as the necessary elements to prove each kind of Section 2 claim. For monopolization, the Supreme Court adopted a two-part test: namely, the offense is proven upon a sufficient showing that (1) the defendant possesses monopoly power in a properly defined relevant market (i.e., within a specified region, the defendant dominates or controls the sale of a distinct category of products that lack reasonable substitutes; and thus situated the defendant sets its prices without regard to the prices of any rival seller and can profitably charge a monopoly price); and (2) the defendant “willfully” acquired or maintained its monopoly power by using anticompetitive practices, which are practices that primarily serve to eliminate competition, not improve the defendant’s own offerings.[76]See United States v. E. I. du Pont de Nemours & Co., 351 U.S. 377, 380-400 (1956) (“Market delimitation is necessary … to determine whether an alleged monopolist violates s 2. The … Continue reading

These standards remain on the books, have been further refined in the modern era (see n. 70) and have also been modified and supplemented by the requirements of the consumer-welfare standard.

4.  Public Industrial Policy and Managed Trade During the Great Depression

The core premise of federal antitrust law was incompatible with the federal government’s efforts to supervise and coordinate the production and distribution of commodities and other goods during the nadir of the Great Depression. In a desperate bid to revive a moribund economy, Congress enacted industrial-policy legislation in 1933 that suspended federal antitrust law and authorized producers of commodities to coordinate sales, establish production quotas, and set prices and wages under the supervision of federal authorities.[77]See The National Recovery Act of 1933, Pub. L. 73–67, 48 Stat. 195 (to encourage growth and full employment at higher wages, this law suspended federal antitrust law, authorized federal supervision … Continue readingThe Supreme Court rejected an antitrust challenge to one such arrangement,[78]See Appalachian Coals v. United States, 288 U.S. 344, 359-378 (1933), overruled on unrelated ground by Copperweld Corp. v. Indep. Tube Corp., 467 U.S. 752 (1984). In Appalachian Coals, the Supreme … Continue readingbut in 1935 it invoked constitutional grounds to strike down key provisions of Congress’ industrial-policy legislation.[79]See A.L.A. Schechter Poultry Corp. v. United States, 295 U.S. 495, 551 (1935) (“On both the grounds we have discussed, the attempted delegation of legislative power and the attempted regulation of … Continue readingIn a similar vein, Congress passed another law in 1937 that authorized individual States to permit vertical price-setting schemes undertaken by a producer and its sellers. This law remained in effect until Congress repealed it in 1975 after finding that it had led to increased retail prices.[80]See Leegin Creative Leather Prod., Inc. v. PSKS, Inc., 551 U.S. 877, 904–05 (2007) (“In 1937, Congress passed the Miller–Tydings Fair Trade Act, 50 Stat. 693, which made vertical price … Continue reading

The federal policy of managed industry not only suspended antitrust law and raised constitutional concerns, but also failed to accomplish its purposes – which were to spur economic activity, increase employment, and restore general prosperity. Franklin D. Roosevelt’s Administration therefore pivoted away from this policy from the late 1930s onward, when it chose instead to favor expansive, aggressive enforcement of the Sherman Act to prevent market concentration. Strong antitrust enforcement thus became a hallmark of American governance from the late 1930s onwards. This approach was continued by ensuing Administrations until the election of Richard Nixon in 1968, and it was generally embraced by the federal courts until the late 1970s, when Nixon’s judicial appointees began to develop a common-law of consumer-welfare jurisprudence.[81]Wu, at 78-83; Vaheesan, at 792–93.

5. During Its Classical Era, Antitrust Existed to Protect Marketwide Competition.

The above limitations and gaps in the law never led to a fundamental revision or re-interpretation of the Sherman Act. During the classical era of antitrust, the federal courts largely agreed on the meaning and purpose of the its prohibitions, which are summarized above. The principal limitation, the Supreme Court’s narrow reading of the Commerce Clause, faded from view and was whittled away shortly after it was announced, and then was abrogated in 1942. A second cross-current, the industrial policy of the 1930s, vanished even more quickly because it did not work. By the late 1930s, the Roosevelt Administration had definitively abandoned its efforts at managing industry and looked instead to aggressive antitrust enforcement to underpin a competitive economy sustained not only by its large industries, but also by a profusion of new, small, independent businesses, which would create work, provide pay, and furnish goods and services to a languishing economy.

The Roosevelt Administration’s heightened antitrust enforcement proved remarkably successful. To manage the effort, Roosevelt hired a renowned antitrust attorney, Thurmond Arnold, who in turn assembled a large, distinguished team of attorneys and microeconomists. They collaborated to write a new playbook for enforcing federal antitrust law and established a tradition of strong public antitrust enforcement that continued until the late 1960s. They studied markets to look for suspected violations and anticompetitive tendencies, conducted disciplined, careful investigations, used cease-and-desist correspondence to stop some anticompetitive practices, brought cases to stop or prevent others, and by their excellent briefing of issues in their cases helped to establish very good antitrust jurisprudence. These efforts also encouraged private plaintiffs and state prosecutors to bring their own actions against antitrust offenders.

Cumulatively, heightened antitrust enforcement in the postwar era had a profound, enduring effect on American commerce. American businesses increasingly took care to avert antitrust complications by eschewing obviously anticompetitive practices that implicated any of the per se rules under Section 1, and by remaining focused on the quality of their own offerings rather than seeking to undermine and exclude rivals or collude with them. Market concentration was also halted in many instances by merger challenges. Those are the very outcomes that antitrust is intended to promote.

In an economy where antitrust is enforced in this manner, many companies might grow very large and operate in concentrated markets that naturally can accommodate only a few efficient sellers that produce at scale to meet the demands of all customers, and some companies might even become monopolies because of the excellence of their offerings or the structure of their markets. But few or none will deliberately undermine rivals to gain and keep control of a market and thereafter seek monopoly rents (because of heightened enforcement of Section 2); gratuitous market concentration will gradually become less pronounced, alleviating non-cooperative oligopolistic conduct (because of heightened enforcement of Section 7 of the Clayton Act); and in concentrated markets firms will be less likely to collude secretly to set prices or restrict output (because of heightened enforcement of Section 1).  Antitrust, if properly enforced, eventually leads to these outcomes and largely deters the most brazen kinds of exclusionary and collusive conduct. Instead, companies must compete by the quality of their offerings and are kept honest and innovative by their competition with one another in most markets. Those circumstances in turn encourage the best kinds of commercial practices and formation of new businesses across the entire economy.

That at least is the theory of classical antitrust. It seems to have been vindicated by history: the era of heightened antitrust enforcement in the United States (the late 1930s to the late 1960s) largely coincided with the post-WWII era (c. 1945-1973), which is when the American economy enjoyed its longest run of widespread prosperity and world-class commercial excellence. Robust antitrust enforcement alone cannot account for this extraordinary economic performance, but it likely provided a necessary underpinning by obliging companies to compete to prosper and by largely foreclosing exclusionary tactics and collusion as viable commercial strategies.

During the post-WWII era, vigorous antitrust enforcement was also associated with good governance and uncorrupted democracy, just as it had been when it was first enacted to check the original industrial trusts.[82]See Wu, at 78–81; Vaheesan, at 779.During the interwar, and the during the frenzy of WWII itself, powerful monopolies supported and funded nationalist-authoritarian movements in Nazi Germany, Mussolini’s Italy, and Imperial Japan in exchange for immense franchises, contracts, and commercial advantages. These authoritarian movements in turn were impelled by their own internal dynamics to launch unprovoked wars of naked aggression (later called the Second World War) and to commit unspeakable atrocities against vulnerable minorities in the lands that they controlled.[83]See id.After the war, many scholars and prominent political leaders opined that the nationalist-authoritarian movements could not have gained power anywhere without monopolists’ support, and that monopolistic economies had corrosive effects on society that create fertile grounds for these kinds of movements.[84]See id.

On this telling, the distinguishing characteristics of monopolistic economies are winner-take-all-markets; a sur-abundance of people who lack any apparent means of independently succeeding in their own ventures; a chronic lack of meaningful commercial innovation; regulatory capture; extreme disparities in wealth and income; and a pervasive, economy-wide dependence on dominant firms (suppliers require their orders and customers their products, and many employees find their best or only opportunities at dominant firms or at companies that supply a dominant firm). Cumulatively, those circumstances are propitious for unscrupulous demagogues and deranged true-believers in extremist movements, which gain popular favor, momentum, and consequential political and social force.[85]See id.During the postwar era, many American politicians and commentators seemed attentive to these issues and credited antitrust not only for nurturing a prosperous, innovative economy, but also for helping to protect American society from the vices and failings of monopolistic economies.[86]See id.In earlier times, the same kinds of concerns had informed the common-law doctrines and original antitrust debates, and they were revived amid new circumstances after the Second World War.[87]See id.

THE CONSUMER-WELFARE STANDARD HAS CONTORTED AND EMASCULATED FEDERAL ANTITRUST LAW

It all changed with President Nixon’s overhaul of the Supreme Court, which ever since has been a largely conservative court dominated by jurists who often have been skeptical of the merits of federal antitrust law, and who have narrowed its reach and meaning while completely redefining its intended purpose. From the late 1970s onward, the Supreme Court and lower federal courts have adopted one restrictive or unworkable antitrust doctrine after another, all of them premised on the absurdly misnamed consumer-welfare standard, which has harmed consumers by permitting every species of monopoly and trade restraint to hinder and suppress competition with impunity, so long as the offenders take care not to charge prices that are demonstrably and provably supracompetitive.[88]Wu, at 102-109; Vaheesan, at 792–800; see also Lino A. Graglia, The Antitrust Revolution, 9 Engage 3, 38 (2008) (“In what is surely one of the most amazing reversals of direction ever in a … Continue reading

The Consumer-Welfare Standard, Explained

The consumer-welfare standard was originally formulated by a legendary conservative jurist, Robert Bork, who was famously hostile to federal antitrust law, believing that it did more harm than good and imposed indefensible burdens on American businesses. To develop this standard, Judge Bork relied heavily on the antitrust teachings of the so-called “Chicago School,” which purported to apply neo-classical price theory to antitrust issues, an exercise that almost invariably entailed making a complicated, counter-intuitive showing as to why the defendant’s conduct should not be condemned as an antitrust violation. Once the Supreme Court adopted this approach to antitrust, it was more fully developed and explained with more nuance and moderation in a widely respected treatise on antitrust law compiled by two highly regarded law professors, the late Philip Areeda of Harvard Law School and his protegé, Herbert Hovenkamp, who now teaches law and economics at the University of Pennsylvania. That treatise in turn has long served as the authoritative guide to federal antitrust law that is routinely consulted by federal judges in antitrust cases.[89]See Wu, at 102–109.

According to the consumer-welfare standard, the only proper purpose of federal antitrust law is to promote maximum productive efficiency, which is usually if not always best accomplished by permitting sellers and other market participants to make commercial agreements among themselves and to conduct commerce and allocate resources as they deem fit to do without any hindrance imposed by federal antitrust law.[90]See Robert H. Bork, The Antitrust Paradox: A Policy at War With Itself locs. 634, 696, 733 (Digital Ed. 2021).Antitrust law should therefore condemn conduct only when (1) it constitutes an antitrust offense under classical antitrust jurisprudence; and (2) its effect or necessary tendency is to reduce overall output of a good or service in a properly defined market. Under this standard, an antitrust plaintiff must prove the traditional elements of its claim and further prove that the defendant’s conduct has diminished or inevitably must diminish overall output in a given line of commerce.[91]See id.; see also Robert H. Bork, “Legislative Intent and the Policy of the Sherman Act,” 9 Journal of Law and Economics, at 7 (1966), reprinted in The Political Economy of the Sherman Act: The … Continue reading

That is the consumer-welfare standard. Its title is a misnomer, since it is solely concerned with conduct that lessens overall output in a given market: an alleged antitrust violation might severely harm customers, but if it does not reduce or promise to reduce marketwide output, it is absolved.[92]See generally Hovenkamp, at 63-64 (according to consumer-welfare jurisprudence, “[a]ntitrust enforcement should be designed in such a way as to penalize conduct precisely to the point that it is … Continue readingUnder the consumer-welfare standard, the apprehended evil is economic inefficiency, not harm to consumers, much less the unchecked power of giant industrial monopolies and combinations. A business commits an antitrust violation only when it charges captive customers so much for its goods that the customers end up purchasing fewer of them, thus ensuring that resources that otherwise would have been used to make these goods are instead diverted to another, less efficient use in another market.[93]See id.

Consumer-welfare jurists describe this diversion of resources as the “social cost” of monopoly pricing. This theory depends on the following economic precepts. A monopolist or cartel, if it chooses, can raises the price of its product, or reduce marketwide output of it and thereby force customers to bid up its price. In direct consequence, customers overall will purchase and receive less of the product, while paying more for it; the monopolist or cartel will generate higher profits from lesser overall output; and the national economy will be deprived of the additional output of the product that would have been produced in a competitive market. In contrast, sellers in a competitive market can survive only by charging prices as low as those charged by their competitors. This circumstance usually means that over time the price for a product sold in a competitive market will be the lowest price that an efficient seller can charge to cover its marginal cost to supply the product, including a competitive profit (return on investment). When a product is sold at such prices, customers buy more of it, and sellers therefore produce more of it to meet customers’ increased demand.[94]See generally Hovenkamp, at 17-26.

It is that deprivation of output alone that bothers proponents of the consumer-welfare standard. They refer to it as the “dead weight of monopoly.”[95]See generally Hovenkamp, at 18-20Related harms entailed by the same conduct are monopoly rents, id. at 20-23, and lost competitor investment, id. at 23-26. All of these harms result in less output and less efficient economic production, which in turn are the only proper concerns of antitrust law, according to consumer-welfare jurisprudence. A monopolist that can practice perfect price-discrimination should be permitted to do so if the practice allows it to maintain the same level of output that sellers would provide in a competitive market, which is possible if the seller’s price discrimination is calibrated to its customers’ different reservation prices and not too costly to administer.[96]See id. at 575 (“Perfect price discrimination has two important results. First, the [amount] of traditional monopoly profits, or producers’ surplus, is increased. Everything that would be … Continue reading

Under the consumer-welfare standard, the telltale signal of a cognizable antitrust offense is “supracompetitive prices” – prices higher than those that a seller could profitably charge in a competitive market.[97]See Rebel Oil Co. v. Atl. Richfield Co., 51 F.3d 1421, 1433 (9th Cir. 1995) (“[A]n act is deemed anticompetitive under the Sherman Act only when it harms both allocative efficiency and raises the … Continue reading According to the theory, supracompetitive prices can be profitably charged for an extended duration only by a monopolist or cartel whose customers are largely beholden to it for want of a viable alternative.[98]See William M. Landes & Richard A. Posner, “Market Power in Antitrust Cases,” 94 Harv. L. Rev. 937, 937 (1981) (“The term ‘market power’ refers to the ability of a firm (or a group of … Continue readingEven then, supracompetitive prices are unobjectionable when they do not result in lesser output – an outcome that is possible when a monopolist can implement “perfectly calibrated” price discrimination.[99]See Hovenkamp, at 575.

It is only when a monopolist or cartel successfully imposes supracompetitive prices without practicing perfect price discrimination that market inefficiencies occur: buyers pay more to receive less of the product in question; and the monopolist or cartel earns higher profits from selling less of the product in question. Therefore, the monopolist or cartel makes less and delivers less of the product to the buyers, resulting in the diversion to other markets of inputs that would be used to make the product if it were sold in a competitive market.[100]See Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law: An Analysis of Antitrust Principles and Their Application, at ¶¶403-405 (Wolter Kluwer online, 2021).In a competitive market, sellers would have sold the product at lower prices, buyers would have purchased more of the product, and sellers therefore would have made and delivered more of it. Inputs that would have been used to make this product in a competitive market are diverted to less efficient uses elsewhere in the economy when this market is monopolized or allocated by a price-fixing cartel. That diversion of inputs to other markets is the sole concern of the consumer-welfare standard. [101]See id.That is the sole or principal evil to be prevented and redressed by the Sherman Act, according to consumer-welfare jurisprudence.[102]See Rebel Oil, 51 F.3d at 1433.

In theory, consumer-welfare jurisprudence acknowledges that harm to competition can also occur when the “quality” of output is reduced by the challenged conduct,[103]See Rebel Oil, 51 F.3d at 1433.but the courts almost never find a defendant liable on this ground.[104]See Areeda & Hovenkamp, supra note 93 at ¶¶403-405.).Indeed, there are vanishingly few cases in which the courts have even taken up the matter in earnest. Perhaps the most well-known instance occurred in the Glen Holly case, in which the Ninth Circuit held that a plaintiff had adequately pled an antitrust claim under Section 1 by alleging that two sellers, whose offerings competed directly, agreed to remove one of their product offerings from the market, thereby obliging customers to buy the sole remaining offering; this conduct, if presumed true, was actionable under Section 1 because it “limited consumers’ choice to one source of output.”[105]See Glen Holly Enter., Inc. v. Tektronix Inc., 343 F.3d 1000, 1010–11 (9th Cir.), opinion amended on denial of reh’g, 352 F.3d 367 (9th Cir. 2003).But even this example shows how narrow is the reach of antitrust under the consumer-welfare standard: under classical antitrust law, any such agreement between the only two sellers in a market would be readily condemned as market allocation, or as an unlawful “combination,” and at best could be justified only if the defendants were able to show at trial that they had removed one of their offerings in order to improve the other under a joint collaboration agreement – which would have been a highly implausible and difficult showing. Any complaint alleging such an agreement never would have been dismissed on the pleadings as it was by the district court in Glenn Holly. Even more startling, the most aggressive proponents of consumer-welfare jurisprudence have cast doubt on the very theory of harm to competition caused by the removal of an entire product offering in order to force consumers to buy the only remaining version of the product at a higher price.[106]See Brantley v. NBC Universal, Inc., 675 F.3d 1192, 1202 (9th Cir. 2012) (“[A]llegations that an agreement has the effect of reducing consumers’ choices or increasing prices to consumers does not … Continue reading

To justify using the consumer-welfare standard, its proponents have argued that federal antitrust law was originally enacted and should always be enforced only to prevent trade restraints and monopolizing conduct that result in sub-optimal output, supracompetitive prices, and the ensuing misallocation of resources in the national economy, which is the “social cost” of monopoly. Only these matters constitute “harm to competition” under the consumer-welfare standard. Nothing else should be condemned as an antitrust violation, nor was ever intended to be condemned.[107]See Bork, at loc. 696, 733; see also Bork, “Legislative Intent and the Policy of the Sherman Act,” at 39, 43-47, 52-58, 61-70; see generally Hovenkamp, at 62-64; Areeda & Hovenkamp, at … Continue reading

On this telling, the evil to be averted is not an exclusionary firm’s willful cornering of its market, nor collusion by dominant rivals to suppress competition, nor the incremental acquisition of market power by exploitive covenantees, nor the many economic and social harms that arise from these kinds of practices, but only reduced output in a given line of commerce.[108]See Bork, at loc. 696, 733; see also Bork, “Legislative Intent and the Policy of the Sherman Act,” at 39, 43-47, 52-58, 61-70; see generally Hovenkamp, at 62-64; Areeda & Hovenkamp, at … Continue reading

If a widget company commits a classical violation, and if in so doing it also causes less widgets to be produced in the United States, it can be held liable for an antitrust violation. Otherwise, it gets a free pass. Indeed, monopolies are to be encouraged and congratulated for their contributions to the economy unless they restrict overall output in their lines of commerce.[109]See Verizon Commc’ns Inc. v. L. Offs. of Curtis V. Trinko, LLP, 540 U.S. 398, 407 (2004) (Scalia, J.) (“The mere possession of monopoly power, and the concomitant charging of monopoly prices, is … Continue reading

Perhaps the most forthright characterization of consumer-welfare jurisprudence is the following passage from Rebel Oil, a famous antitrust decision rendered by the Ninth Circuit in 1995 (with original citations preserved in the quotation):

Competition consists of rivalry among competitors. Hasbrouck v. Texaco, Inc., 842 F.2d 1034, 1040 (9th Cir.1987), aff’d, 496 U.S. 543 … (1990). Of course, conduct that eliminates rivals reduces competition. But reduction of competition does not invoke the Sherman Act until it harms consumer welfare. Products Liab. Ins. Agency, Inc. v. Crum & Forster Ins. Cos., 682 F.2d 660, 663 (7th Cir.1982); see Reiter v. Sonotone Corp., 442 U.S. 330, 343 … (1979) (Congress designed the Sherman Act as a “consumer welfare prescription”) (quoting Robert H. Bork, The Antitrust Paradox 66 (1978)). Consumer welfare is maximized when economic resources are allocated to their best use. National Gerimedical Hosp. and Gerontology Ctr. v. Blue Cross of Kansas City, 452 U.S. 378, 387–88 & n. 13 [1981], … and when consumers are assured competitive price and quality. Products Liab. Ins., 682 F.2d at 663–64. Accordingly, an act is deemed anticompetitive under the Sherman Act only when it harms both allocative efficiency and raises the prices of goods above competitive levels or diminishes their quality.

 

The Ninth Circuit Court of Appeals, explaining the consumer-welfare standard in the case of Rebel Oil Co. v. Atl. Richfield Co., 51 F.3d 1421, 1433 (9th Cir. 1995).

Apart from everything else, this theory of federal antitrust law is contrary to the original aim of antitrust law, which was to deter and prohibit undue restraint of trade and monopolization even if doing so entailed a sacrifice of commercial efficiency.[110]See Sections III & IV, supra.

The Practical Significance of the Consumer-Welfare Standard

In practice, the consumer-welfare standard has been usually impossible to satisfy. That is because its principal required showing – supracompetitive prices – is usually difficult or impossible to make in most markets, in which sellers offer differentiated products or services that are sold at varying prices, often under confidential contracts, so that a defendant’s prices might be higher than those of its rivals, but justified by its brand, or by superior or additional features in its product, or because the defendant offers related services that its rivals do not provide or provide in slightly different ways.[111]See Areeda & Hovenkamp, at ¶504 (“[T]he technical measure of [supracompetitive pricing] … can seldom be used explicitly in antitrust cases…. Many firms do not sell their products at a … Continue readingAlso, it is usually difficult or impossible to ascertain a firm’s true marginal cost – the economic cost of selling an additional unit; but Chicago School price theory posits that a monopolist or cartel charges supracompetitive prices only when its pricing is higher than its marginal costs, including the cost of attracting capital investment (i.e., paying reasonable profits to investors).[112]Id. (explaining the practical impossibility of proving “the excess of price over marginal cost to find market power”); see also Microsoft, 253 F.3d at 51 (“[D]irect proof [that a firm … Continue reading

That means that antitrust plaintiffs usually must make a poorly defined substitute showing, using “indirect evidence” to prove that a defendant’s challenged practices likely have resulted in reduced output.[113]See Ohio v. Am. Express Co., 138 S. Ct. 2274, 2284 (2018) (“Amex”) (“Direct evidence of anticompetitive effects would be proof of actual detrimental effects on competition, such as reduced … Continue readingIn most cases, the courts find these proofs to be deficient.[114]See Nat’l Collegiate Athletic Ass’n v. Alston, 141 S. Ct. 2141, 2161 (2021) (“[C]ourts have disposed of nearly all rule of reason cases in the last 45 years on the ground that the plaintiff … Continue reading

It turns out that supracompetitive prices can be readily shown only in perfectly competitive markets, where such prices will never be charged, except when a secret cartel organizes and enforces a marketwide conspiracy to fix prices or allocate markets. In perfectly competitive markets, all sellers offer an undifferentiated commodity at the market price (say, sweet corn by the bushel delivered to Chicago wholesalers on November 1, 2021). The market price, in turn, is the price that it costs efficient sellers to bring the commodity to market, including a minimally reasonable profit. If any seller strays above this price, it will instantly lose all future sales to other sellers that continue to charge the market price. If a seller charges below the market price, its ensuing sales will be done at a loss, and it will be quickly inundated with orders that will harm it the more it fills them.[115]See generally Hovenkamp, at 3-12 (explaining how firms set prices in perfectly competitive markets).In such a market, sellers have no power over their prices, and every seller can deprive every other of business if the other charges uncompetitive prices or otherwise imposes unfair terms of trade. That is a perfectly competitive market. It is perfectly competitive precisely because many sellers vie to make sales of an undifferentiated commodity that buyers will readily buy from any seller that offers it at the market price.[116]See generally id.; see also Paul A. Samuelson, Economics, at 483-509 (1st Ed. 1948). Cartels might occasionally try to fix prices and allocate sales in such markets, giving rise to conduct that is condemned under the consumer-welfare standard. It is the mere low-lying fruit of antitrust law, but seemingly the only target of consumer-welfare jurisprudence.[117]Wu, at 104–109; Vaheesan, at 792–800.

In contrast to a perfectly competitive market, a monopolized market is one in which one seller or a cartel offers a product or service which customers cannot procure from any other seller, and which they use for purposes that cannot be fulfilled by any other product or service.[118]See generally Hovenkamp, at 12-14 (explaining how monopolies and cartels set prices in monopolized or cartelized markets); see also Samuelson, at 493–509.Proving the hypothetical price of such a product in a competitive market is often difficult, and it becomes a meaningless exercise when the service in question is funded by advertisers rather than customers, which is the case for online services such as Facebook’s social-media network.

Most markets, however, are neither perfectly competitive, nor monopolized, but are said to be “monopolistically competitive.” Sellers in these markets have varying degrees of market power over subsets of customers, and each tries to distinguish its offerings from those of rival sellers by brand, product features, service options, financing terms, and so forth. It is almost impossible to measure supracompetitive prices in these markets, since by their very nature they include differentiated products or services.[119]See Samuelson, at 491-493.

There lies the rub. Supracompetitive prices can be readily shown only in markets where they typically cannot be charged – i.e., in perfectly competitive markets. In consequence, antitrust claims in the modern era too often fail because the consumer-welfare standard requires a showing of a classical antitrust offense, plus a further showing of supracompetitive prices, but this second showing usually cannot be made by direct evidence in the very markets where classical antitrust offenses are most likely to occur – markets that have been monopolized or are monopolistically competitive.[120]Cf. Areeda & Hovenkamp, at ¶504 (explaining practical difficulties of proving that a defendant is charging supracompetitive prices). In fairness, during the consumer-welfare era the Supreme … Continue readingThe courts have limited any possible daylight by usually taking a skeptical, narrow view of “indirect evidence” used to show how a defendant’s challenged practices have reduced economic efficiency in such markets.[121]See Alston, 141 S. Ct. at 2161 (the overwhelming majority of rule-of-reason cases fail on the ground that the plaintiff has failed to show harm to competition); Vaheesan, at 792–800.

The upshot is easy to state. In the age of consumer-welfare antitrust, countless plaintiffs have forgone claims that would likely have prevailed on simple proofs in the era of classical antitrust jurisprudence, while countless others have made the attempt in vain, devoting much of the case to proving supracompetitive prices or other harms to economic efficiency, and paying fortunes to expert economists to prepare supporting reports, but all too often with the same luck as Don Quixote enjoyed when trying to joust against the windmills of Spain. In these cases, any court so inclined can find fault with the plaintiff’s evidence, or merely find that the plaintiff has failed to provide preponderant evidence of supracompetitive prices, which properly speaking do not exist or are usually impossible to discern or demonstrate in markets that are monopolistically competitive or monopolized.[122]See Alston, 141 S. Ct. at 2161; Vaheesan, at 792–800.

Even so, some antitrust claims have miraculously survived the consumer-welfare standard. Most notably, when the charging offense is a trade restraint challenged under a per se or quick-look standard, the courts presume “harm to competition” (i.e., macroeconomic inefficiency) and do not oblige the plaintiff to demonstrate how the offense resulted in supracompetitive prices or restricted output.[123]For per se violations, harm to competition is presumed, and there is no need to show supracompetitive prices or a reduction of output. See Amex, 138 S. Ct. at 2283 (“A small group of restraints are … Continue reading

This concession has mattered less than it should, since the same courts have abolished most of the per se prohibitions from the classical era, finding that these prohibitions cannot be reconciled with the ideal of “economic efficiency” extolled by consumer-welfare jurisprudence.[124]See Section V.C, infra.

The courts have also been willing to issue preliminary injunctions to prevent anticompetitive mergers and acquisitions challenged under Section 7 of the Clayton Act by the Federal Trade Commission or the U.S. Department of Justice.[125]See, e.g., F.T.C. v. H.J. Heinz Co., 246 F.3d 708, 715-725 (D.C. Cir. 2001); F.T.C. v. Whole Foods Mkt., Inc., 548 F.3d 1028, 1035 (D.C. Cir. 2008); F.T.C. v. Penn State Hershey Med. Ctr., 838 F.3d … Continue reading To do so under the current standards, however, the plaintiff must show that each seller’s market share in a properly defined market; then calculate the sum of each market share squared. The resulting number, if sufficiently high, confirms that the market is “highly concentrated” according to the DOJ-FTC Horizontal Merger Guidelines of 2010. Any such merger is presumptively anticompetitive and subject to injunction or divestiture, especially if it directly eliminates existing competition between the merging parties. Even then, the merger’s proponents can try to justify it by arguing that on balance it is pro-competitive. [126]See generally H.J. Heinz, 246 F.3d at 715–25.

In these cases, however, the required threshold showings are so high that successful challenges are usually made only to patently anticompetitive mergers, which likely would never have even been attempted in the classical era. Antitrust law during the consumer-welfare era has thus failed to check rampant, pervasive market consolidation. Public prosecutors and private claimants, knowing what to expect, choose not to challenge most of them.)))But here too the relief has been very modest, often amounting to mere tinkering at the edges, since merger challenges in the modern era are infrequent and made only in accordance with the FTC-DOJ’s highly exacting merger guidelines, which are predicated on consumer-welfare analysis.[127]See generally U.S. Department of Justice & Federal Trade Commission, Horizontal Merger Guidelines (2010); Vaheesan, at 800–03.

Lastly, a few courts sometimes invoke classical antitrust doctrines still on the books to condemn especially egregious misconduct that plainly exposes the defendant’s exclusionary aims and practices, but these cases are rare and always vulnerable to challenge on appeal on the ground that the plaintiff failed to show harm to competition – i.e., supracompetitive prices or reduced marketwide output.[128]See, e.g., F.T.C. v. Qualcomm Inc., 969 F.3d 974, 982–1003 (9th Cir. 2020) (a district court held that defendant, a maker of computer chips for smartphones, had committed unlawful restraint of … Continue reading

Indeed, the consumer-welfare standard has not been absolutely fatal to American antitrust law only because it has been superimposed on existing classical precepts, even if many of the bright-line rules have been abrogated by consumer-welfare jurisprudence. Courts inclined to enforce antitrust law expansively have therefore been able to recite the consumer-welfare standards in passing while imposing antitrust liability that typically depends at bottom on classical doctrines. Courts disinclined to find antitrust liability have tended to apply the consumer-welfare standard more rigorously to absolve defendants, except those that have committed a core cartel offense (price-fixing, market-allocation, or bid-rigging secretly undertaken by orthodox cartels).

None of this should come as any surprise. The consumer-welfare standard was initially developed and applied by judges who did not want to enforce antitrust law at all, and the standard was one that sounded eloquent and easily applied on paper, but meant in practice that the antitrust laws would hardly ever be enforced.[129]Wu, at 102-09 ; Vaheesan, at 792–800.Here is how Professor Eleanor Fox stated the matter when this transformation of antitrust law was underway, but not yet completed:

Proponents of one currently popular formula for the solution of all antitrust problems would examine challenged behavior to determine whether it is primarily output-restricting and therefore inconsistent with short-run aggregate consumer welfare as adduced from neo-classical price-theory. If so, the business activity would be condemned. If not, it would be encouraged. This conception of antitrust would prohibit almost nothing at all.

 

Law Professor Eleanor Fox, explaining in 1980 how the consumer-welfare standard would severely limit the reach of antitrust law.[130]Eleanor Fox, “The Modernization of Antitrust: A New Equilibrium,” 66 Cornell L. Rev. 1140 (reprinted in The Political Economy of the Sherman Act: The First One Hundred Years 260 (1991).

Consumer-Welfare’s Evisceration of Classical Antitrust’s Bright-Line Rules to Protect Competition

From the start, consumer-welfare jurists allowed that certain kinds of trade restraints should remain unlawful per se, but only those that fit within their extraordinarily narrow construct.[131]See Leegin, 551 U.S. at 886 (“Resort to per se rules is confined to restraints, like those mentioned, that would always or almost always tend to restrict competition and decrease output. To justify … Continue readingUsing this analysis, they have shortened the list of per se offenses, so that it now includes only secret conspiracies between “horizontal competitors” to fix prices, allocate markets, and rig bids. During the consumer-welfare era, the Supreme Court has struck down and abrogated the classical per se rules against vertical market allocations,[132]See Cont’l T. V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 59 (1977) (abrogating per se rule against manufacturer restraints that prohibit a distributor from selling its products in specified … Continue reading vertical maximum price-fixing,[133]See State Oil Co. v. Khan, 522 U.S. 3, 7 (1997) (abrogating per se rule against vertical maximum price-fixing – which is a producer’s requirement that its sellers not sell its products above … Continue readingresale price maintenance (vertical minimum price fixing),[134]See Leegin, 551 U.S. at 907 (abrogating per se rule against resale price maintenance – which is a producer’s requirement that its sellers not sell its products below specified prices).most kinds of group boycotts,[135]See Nw. Wholesale Stationers, Inc. v. Pac. Stationery & Printing Co., 472 U.S. 284, 294 (1985) (limiting the per se rule against group boycotts); NYNEX Corp. v. Discon, Inc., 525 U.S. 128, 135 … Continue readingand most kinds of tie-in arrangements,[136]See Jefferson Par. Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 15–17 (1984) (significantly limiting per se rule against tie-in arrangements); Illinois Tool Works Inc. v. Indep. Ink, Inc., 547 U.S. 28, … Continue readingall of which used to be treated as trade restraints that were unlawful per se under Section 1.

During the consumer-welfare era, the courts have also adopted other restrictive doctrines that have further limited the reach of antitrust law, such as the doctrines on antitrust injury,[137]See Brunswick Corp. v. Pueblo Bowl–O–Mat, Inc., 429 U.S. 477, 489 (1977) (to prevail on an antitrust claim, a plaintiff must prove its antitrust injury, which is harm that “should reflect the … Continue readingcircumstantial evidence of antitrust conspiracies,[138]See Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587-88 (1986) (“On summary judgment the inferences to be drawn from the underlying facts must be viewed in the light most … Continue readingpredatory pricing,[139]See Brooke Grp. Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 222–23 (1993) (severely limiting, or rendering unprovable, the rule against predatory pricing and primary-line price … Continue readingbeneficial monopoly,[140]See Trinko, 540 U.S. at 407 (2004). beneficial vertical price-fixing,[141]See Leegin, 551 U.S. at 887–892 (explaining why resale price maintenance should not be unlawful per se and recounting its various procompetitive, beneficial uses and effects). beneficial price discrimination,[142]See generally Hovenkamp, at 574–575 (explaining how a monopolist’s perfect price discrimination does not result in any reduction of output); id. at 578–581 (explaining how rules against price … Continue readingbeneficial tie-in arrangements,[143]See generally Hovenkamp, at 399-410 (explaining how economic efficiency can be improved by tie-in arrangements, warning against the cost of enforcing rules against tie-in arrangements that do not … Continue reading“two-sided markets”,[144]See Amex, 138 S. Ct. at 2287 (to prevail on a claim for unlawful restraint of trade “in two-sided transaction markets,” such as a credit-card platform that affords credit to customers and … Continue readingand the presumption of legality for all vertical mergers.[145]See Alberta Gas Chemicals Ltd. v. E.I. Du Pont de Nemours & Co., 826 F.2d 1235, 1244 (3d Cir. 1987) (“Indeed, respected scholars question the anticompetitive effects of vertical mergers in … Continue readingCrucially, it is the consumer-welfare standard that underpins these other doctrines, so that all of them properly belong within the category of consumer-welfare jurisprudence.

Collectively, the various consumer-welfare doctrines have been repeatedly used during the past forty years to defeat antitrust claims, exonerate the defendant, and absolve conduct that likely would have been condemned during the classical era.[146]See Alston, 141 S. Ct. at 2161; see generally  Graglia, at 37-42 (2008).Under the consumer-welfare standard, very little conduct is prohibited by federal antitrust law, and conduct that would have been readily deemed unlawful and therefore rarely or never attempted is openly tolerated under our modern antitrust law.[147]See Rowe, “New Directions in Competition and Industrial Organization Law in the United States”, Enterprise Law of the 80’s, at 177, 201 (1980) (“Carried to its full logical rigor, as it has … Continue reading

The Consequences of Consumer-Welfare Jurisprudence

The debate is anything but academic. The consumer-welfare standard, as presumably intended, has severely limited the reach and force of federal antitrust law, which in its modern version prevents only the most egregiously anticompetitive behavior. For this reason, antitrust law has ceased to accomplish its original purposes. That has mattered greatly. It has been during the forty-year period of consumer-welfare jurisprudence that the American economy has ceased to be one characterized by competitive markets. Instead, markets in the United States have been increasingly dominated by monopolies, duopolies, and closed oligopolies that overcharge and underserve their captive customers, underpay their suppliers and employees, and stifle threatening innovators before they can get their operations off the ground.

In 2016, the Economist published a groundbreaking study on the dearth of competition in American markets, which described the modern economy of the United States in the following terms.

After a bout of consolidation in the past decade the [American airline industry] is dominated by four firms with tight financial discipline and many shareholders in common. And the return on capital is similar to that seen in Silicon Valley. What is true of the airline industry is increasingly true of America’s economy as a whole. Profits have risen in most rich countries over the past ten years but the increase has been biggest for American firms….

 

Profits are an essential part of capitalism. They give investors a return, encourage innovation and signal where resources should be invested. Their accumulation allows investment in bold new ventures…. But high profits across a whole economy can be a sign of sickness. They can signal the existence of firms more adept at siphoning wealth off than creating it afresh, such as those that exploit monopolies. If companies capture more profits than they can spend, it can lead to a shortfall of demand. This has been a pressing problem in America….

 

High profits can deepen inequality in various ways. The pool of income to be split among employees could be squeezed. Consumers might pay too much for goods. In a market the size of America’s prices should be lower than in other industrialised economies. By and large, they are not. Though American companies now make a fifth of their profits abroad, their naughty secret is that their return-on-equity is 40% higher at home. [T]he most troubling aspect of America’s profit problem [is] its persistence. Business theory holds that firms can at best enjoy only temporary periods of ‘competitive advantage’ during which they can rake in cash. After that new companies, inspired by these rich pickings, will pile in to compete away those fat margins, bringing prices down and increasing both employment and investment. It’s the mechanism behind Adam Smith’s invisible hand. In America that hand seems oddly idle…. The obvious conclusion is that the American economy is too cosy for incumbents.

 

The Economist, commenting in 2016 on the chronic, pervasive lack of competition throughout the American economy.[148]“Too much of a good thing,” The Economist (Mar. 26, 2016), https://www.economist.com/briefing/2016/03/26/too-much-of-a-good-thing.

Dave Leonhardt of The New York Times performed independent research in 2018 and reached similar conclusions: large firms have increasingly dominated American commerce and use their dominance to exploit their counterparties – their suppliers, employees, and customers.[149]See David Leonhardt, “The Charts That Show How Big Business Is Winning,” The New York Times (June 17, 2018), https://www.nytimes.com/2018/06/17/opinion/big-business-mergers.html (explaining how … Continue reading

Indeed, a surprising number of markets in the United States have become highly concentrated, including markets for various online services, broadband internet, cable television, wireless telephone, hospital services, air travel, beer, and numerous other markets.[150]David Autor, et al., “Concentrating on the Fall of the Labor Share,” 107 Am. Econ. Rev.: Papers & Proceedings 180, 183 (2017) (identifying “a remarkably consistent upward trend in … Continue readingBefore the coronavirus pandemic began in early 2020, the number of start-ups in the American economy had been in decline since 1979, resulting in a clear loss of innovation and commercial dynamism.[151]See Ryan A. Decker, et al., “Where Has All the Skewness Gone? The Decline in High-Growth (Young) Firms in the U.S.,” 86 Eur. Econ. Rev. 4 (2016) (finding a decline in the firm entry rate since … Continue reading

As the Economist explained in its above study, large firms not only hold dominant positions across the American economy, but generate far higher pre-tax profits from their sales in U.S. markets than they do from their sales in foreign markets.[152]See “Too much of a good thing,” The Economist (Mar. 26, 2016) (quoted at length above).That sounds like the very kind of harm that the consumer-welfare standard supposedly seeks to prevent (unless all of these incumbents have successfully practiced perfect price-discrimination all the while, which would seem to be an impossible scenario as well as a highly unwelcome one to most people).

The consumer-welfare standard, it appears, has failed even according to its own myopic terms: plaintiffs have been too often rebuffed by stringent applications of the standard, and many have been discouraged from even trying to meet it. Modern antitrust law, informed by the consumer-welfare standard, has failed even to redress the one evil that the standard was purportedly invented to redress. As happened before during the original Gilded Era, dominant firms in our own era increasingly control the country’s markets and regularly abuse this control to charge supracompetitive prices that result in the misallocation of resources, lesser overall output, and the dead weight of monopoly pricing.[153]See id.But the consumer-welfare standard, rather than redress even this circumstance, weeds out cases that by its own standards it should condemn. The standard is too difficult to prove and largely unworkable, and more than anything else it resembles a “get-out-of-jail-for-free” card that adroit monopolists and oligopolies can readily invoke to defeat antitrust challenges.

In direct consequence, the private markets of the United States have become far less competitive than they otherwise would have been. Indeed, a persistent, endemic dearth of competition has become the hallmark of our modern economy: this fatal flaw in the national commerce has foreclosed business opportunities, stifled innovation, diminished general prosperity, and given rise to various popular discontents. Our antitrust laws, hobbled by consumer-welfare doctrines, have permitted this state of affairs and as currently interpreted are largely powerless to redress it.

It is time, then, to reform federal antitrust law.

THE SIMPLEST, BEST WAY TO REFORM AMERICAN ANTITRUST LAW

The antidote is simple. The federal courts have long recognized their authority to develop and elaborate a common law of American commerce under the Sherman Act and its sequel statutes.[154]See Leegin, 551 U.S. at 899–900 (“From the beginning the Court has treated the Sherman Act as a common-law statute. Just as the common law adapts to modern understanding and greater experience, … Continue readingThe courts should exercise this prerogative to clarify that the consumer-welfare standard is never a sine qua non of any antitrust claim, but at most one method among others to prove a relevant market, a defendant’s monopoly power or a defendant’s anticompetitive conduct. The lynchpins of antitrust, however, should be the exclusionary-practices test for exclusionary conduct and the doctrine of ancillary restraints for collusion and oppressive covenants.

The Exclusionary-Practices Test. The exclusionary-practices test incorporates classical antitrust jurisprudence and is used to determine whether an antitrust defendant has used exclusionary practices to restrict, prevent or suppress competition in a properly defined relevant market. Proof of this point is always required (but never sufficient) to prove a claim of monopolization or attempted monopolization under Section 2.[155]See United States v. Microsoft Corp., 253 F.3d 34, 58 (D.C. Cir. 2001) (“[H]aving a monopoly does not by itself violate § 2. A firm violates § 2 only when it acquires or maintains, or attempts to … Continue readingThis same proof is likewise required (but not sufficient) to prove certain other antitrust claims (e.g., competitor suits brought under Section 1 or Section 3 of the Clayton Act to challenge a rival’s exclusive-dealing, tie-ins or bundled discounts).

The Exclusionary-Practices Test: Its Essential Inquiry and Terms of Art. The essential inquiry made by the exclusionary-practices test is whether a defendant has used a business practice (the “accused practice”) to develop, offer, or improve its own products (variously called “pro-competitive conduct,” “competing on the merits,” or “efficiency-enhancing conduct”), or whether the defendant has used the accused practice to restrain, prevent or suppress competition in its market (“exclusionary conduct”). If the accused conduct is pro-competitive, it is blameless under the antitrust laws and does not constitute predicate conduct for any claim that requires proof of the defendant’s exclusionary conduct. If the accused conduct is exclusionary, it constitutes the necessary predicate conduct, and the defendant will be held liable for an antitrust violation if the other required elements of the violation are also present (e.g., in a claim for monopolization, it is also necessary to establish that the defendant has acquired or maintained monopoly power in a properly defined relevant market).

Different Courts Have Used Varying Terminology to Describe the Exclusionary-Practices Test. The courts have used varying terms of art to make this same essential inquiry, asking whether the defendant’s accused practice is “pro-competitive,” “competition on the merits,” or “efficiency-enhancing conduct.”[156]See Cascade Health Sols. v. PeaceHealth, 515 F.3d 883, 894 (9th Cir. 2008) (“Anticompetitive conduct tends to impair the opportunities of rivals and either does not further competition on the … Continue reading

Despite the slightly different phrasing, these cases have established the following standard or test. Namely, a defendant’s accused practice is exclusionary if (1) it imposes significant or prohibitive burdens or restrictions on marketwide competition; and (2) it is not pro-competitive (or, what is the same thing, it is not “competition on the merits” or “efficiency-enhancing conduct”).[157]See Cascade Health, 515 F.3d at 894; Aspen Skiing, 472 U.S. at 605.The harm to marketplace competition must be sufficient to insulate the defendant from competitive discipline imposed by a rival that can deprive it of business: it might be sufficient to show the exclusion of a single rival where the defendant’s monopoly has come under threat from one rival, and the defendant uses various exclusionary practices to run the rival out of business and thereby suppress this one threat to its monopoly.[158]See Microsoft, 253 F.3d at 59–80 (examining a series of accused practices to determine whether each one was an exclusionary practice that defendant used to suppress one competitor’s nascent … Continue readingIt might also be sufficient to show that the defendant uses trade restraints with many customers (e.g., exclusive-dealing contracts or bundled rebates), and that cumulatively they foreclose competition for such a substantial part of the market that no substantial rival can make enough sales to attain a foothold in the market or produce at scale and thereby pose a competitive threat.[159]See Twin City Sportservice, Inc. v. Charles O. Finley & Co., 676 F.2d 1291, 1302–03 (9th Cir. 1982) (ruling that it is appropriate to consider the defendant’s “aggregate pattern of … Continue readingBut mere harm to a rival or even various rivals is by itself insufficient to prove the requisite harm to marketplace competition caused by the accused practice: it must “harm the competitive process and thereby harm consumers.”[160]United States v. Microsoft Corp., 253 F.3d 34, 58 (D.C. Cir. 2001) (“[Defendant’s exclusionary conduct] must harm the competitive process and thereby harm consumers. In contrast, harm to one or … Continue reading

In the landmark Microsoft case, the D.C. Circuit announced a five-step inquiry for making similar determinations.[161]The Microsoft decision uses some terms that have been adopted by consumer-welfare jurisprudence, but it uses them in their classical sense, and while it cites some of the leading consumer-welfare … Continue reading

Whether any particular act of a monopolist is exclusionary, rather than merely a form of vigorous competition, can be difficult to discern: the means of illicit exclusion, like the means of legitimate competition, are myriad. The challenge for an antitrust court lies in stating a general rule for distinguishing between exclusionary acts, which reduce social welfare, and competitive acts, which increase it. From a century of case law on monopolization under § 2, however, several principles do emerge. First, to be condemned as exclusionary, a monopolist’s act must have an anticompetitive effect. That is, it must harm the competitive process and thereby harm consumers. In contrast, harm to one or more competitors will not suffice.(….) Second, the plaintiff … must demonstrate that the monopolist’s conduct indeed has the requisite anticompetitive effect.(….) Third, if a plaintiff successfully establishes a prima facie case under § 2 by demonstrating anticompetitive effect, then the monopolist may proffer a procompetitive justification for its conduct. If the monopolist asserts a procompetitive justification—a nonpretextual claim that its conduct is indeed a form of competition on the merits because it involves, for example, greater efficiency or enhanced consumer appeal—then the burden shifts back to the plaintiff to rebut that claim. Fourth, if the monopolist’s procompetitive justification stands unrebutted, then the plaintiff must demonstrate that the anticompetitive harm of the conduct outweighs the procompetitive benefit.(….) Finally, in considering whether the monopolist’s conduct on balance harms competition and is therefore condemned as exclusionary for purposes of § 2, our focus is upon the effect of that conduct, not upon the intent behind it. Evidence of the intent behind the conduct of a monopolist is relevant only to the extent it helps us understand the likely effect of the monopolist’s conduct.

 

United States v. Microsoft Corp., 253 F.3d 34, 58–59 (D.C. Cir. 2001) (explaining a five-step inquiry for determining whether a monopolist has used exclusionary conduct to gain or keep its monopoly)

My Proposed Exclusionary-Practices Test. From the foregoing principles, I have derived the following standard for identifying a defendant’s exclusionary practices and propose it as my “exclusionary-practices test”: An antitrust defendant will be deemed to have used exclusionary practices if its challenged trade restraints or other business practices (the “accused practices”) meet the following three criteria: (1) the accused practices have the effect of undermining, burdening, or excluding one or more of the defendant’s competitors; (2) by so doing, they substantially lessen competition in the defendant’s market — i.e., they impair, prevent, or suppress competitive interplay in this market and thereby insulate the defendant from meaningful competitive discipline, or at least that is their clear and necessary tendency; and (3) the defendant does not use these practices to develop or improve its own products or services, or at best uses them for this purpose, but in a manner that causes needless or gratuitous harm to competitors and the competitive process in the defendant’s market. In other words, the exclusionary-practices test identifies and condemns business practices that antitrust defendants use not to build a better mousetrap, but only to hinder or prevent all others from doing so.

If a business practice meets the above three criteria, it fails the exclusionary-practices test, is deemed “exclusionary,” and therefore constitutes predicate conduct for any antitrust claim that requires a showing of the defendant’s exclusionary conduct. Proof of a defendant’s exclusionary conduct never suffices to establish an antitrust violation, but is a necessary showing for many antitrust claims — namely, all claims made under Section 2 of the Sherman Act (15 U.S.C. § 2) (“Section 2”), as well as some claims made under Section 1 of the Sherman Act (15 U.S.C. § 1) (“Section 1”) and Section 3 of the Clayton Act (15 U.S.C. § 14).

Use of Exclusionary-Practices Test in Section 2 Cases. Under my proposed reform of antitrust law, the exclusionary-practices test would be used as follows to decide claims under Section 2. A defendant would be held liable for monopolization if the following matters were proven: (1) the defendant acquired or maintained a monopoly in a properly defined relevant market; and (2) to do so, the defendant used an accused practice (a trade restraint or other business practice) that fails the test. For an attempt, the necessary proofs would be as follows: (1) the defendant nearly acquired monopoly power in a properly defined relevant market; (2) to do so, the defendant used an accused practice that fails the test; and (3) the defendant must have intended to acquire a monopoly – a point that can be inferred from its conduct. For conspiracy to monopolize, it would be necessary to meet the elements of attempted monopolization or monopolization and further show that two or more independent defendants conspired to procure the monopoly or near-monopoly for one legal person (one of the defendants or some other legal person). A private plaintiff must also show that the defendant’s use of trade restraints was a substantial cause of harm to the plaintiff’s business or property. The doctrine of antitrust injury would be treated as a narrowly construed affirmative defense that the defendant must prove, as I explain below. There would be no requirement of proving restricted output or supracompetitive prices in the relevant market.

Use of Exclusionary-Practices Test in Cases Arising Under Section 1 or Section 3 of the Clayton Act. Under my proposed reform of antitrust law, the exclusionary-practices test would be used as follows to decide any claim under Section 1 or Section 3 of the Clayton Act that requires a showing of the defendant’s exclusionary conduct. Namely, a defendant would be held liable for unlawfully restraining trade if the following matters were proven: (1) the defendant’s trade restraints fail the exclusionary-practices test; and (2) the defendant used these trade restraints in a way that substantially lessened marketwide competition in a properly defined market – i.e., the trade restraints durably foreclosed competition for a substantial part of overall sales, or durably deprived threatening rivals of an input or sales outlet that they required to compete proficiently, and in consequence competitive interplay in the market was substantially diminished. A private plaintiff must also show that the defendant’s use of trade restraints was a substantial cause of harm to the plaintiff’s business or property. The doctrine of antitrust injury would be treated as a narrowly construed affirmative defense that the defendant must prove (see below). There would be no requirement of proving restricted output or supracompetitive prices in the relevant market.

More broadly, the exclusionary-practices test would be used in antitrust cases to identify exclusionary practices – trade restraints or other business practices that are (1) unrelated or not reasonably related to the defendant’s development or improvement of its products; and (2) used by the defendant to restrain, prevent or suppress marketwide competition. Those are the very evils that the Sherman Act was originally supposed to prevent and redress.

The Doctrine of Ancillary Restraints. The doctrine of ancillary restraints, first announced by Judge William Howard Taft in 1899, governs two categories of antitrust claims: (1) collusion (i.e., collusion between buyers against suppliers and collusion between sellers against their customers); and (2) restrictive covenants that unduly prevent covenantors from competing against their covenantees. The ancillary-restraints doctrine concerns agreements by which two or more parties have agreed not to compete against one another in some way (“non-compete agreements”). These agreements include conspiracies to fix prices, allocate markets, rig bids, or refrain from soliciting or hiring the counterparty’s employees. According to the ancillary-restraints doctrine, a non-compete agreement is blameless under antitrust law if it is “ancillary” to a legitimate transaction or collaboration: it must be narrowly tailored to its purposes and reasonably calculated to promote the successful performance of the transaction or collaboration. If a non-compete agreement is not ancillary to a legitimate transaction or collaboration, it is an unlawful restraint of trade in violation of Section 1.[162]Addyston Pipe & Steel, 85 F. at 279–84 (explaining doctrine of ancillary restraints); L.A. Mem’l Coliseum Comm’n v. NFL, 726 F.2d 1381, 1395 (9th Cir. 1984) (“The common-law ancillary … Continue readingIn many cases, the covenantee is held liable to the covenantor when the offending covenant impedes or altogether prevents the latter from developing its business and earning profits. There is no need to establish the covenantee’s market power when applying this doctrine, but in many cases the covenantee is a monopolist or near-monopolist or at least wields significant market power, especially in labor markets.

The Core Function of Both Tests, and Their Suggested Application in Specific Cases. The exclusionary-practices test and ancillary-restraints doctrine distill antitrust to its essentials and solve the problems antitrust law was enacted to redress. They never punish commercial excellence and target only cartels, buyers’ conspiracies, sellers’ conspiracies, overreaching covenantees who favor monopolistic practices, and exclusionary business practices typically used by dominant firms to suppress competition and take control of entire markets. If the consumer-welfare standards were no longer obligatory burdens of proof, and if claims were governed instead by the exclusionary-practices test (for exclusionary conduct) and the doctrine of ancillary restraints (for collusion and oppressive covenants), antitrust would once again fulfill its original and enduring purpose — ensuring that the interstate and foreign commerce of the United States is not burdened by undue restraints of trade or monopolization. Below I explain how these tests should be used in specific kinds of cases.

Non-Compete Covenants. When two or more independent firms agree in some way not to compete against one another, their agreement is unlawful per se under Section 1, unless they can show that it is ancillary to a legitimate transaction or collaboration that they have undertaken.[163]See preceding note. Such agreements include naked horizontal restraints, such as horizontal price-fixing, horizontal market-allocation, and employers’ no-poaching agreements. If a covenantor (the party that relinquishes its right to compete) suffers competitive injury because of the agreement, the covenantee can be held liable to it under Section 1.

Group Boycotts. A group boycott (concerted refusal-to-deal) constitutes a per se violation of Section 1 if its demonstrable aim is to deprive the target of inputs or sales channels that it requires to become or remain a viable competitor in the relevant market. When a defendant can plausibly argue that the boycott improves its own offerings or those of another participant, the boycott should be condemned only if (1) its use substantially forecloses access on commercially reasonable terms to necessary inputs or sales channels; or (2) its use forecloses a significant part of overall competition for sales in a market; and (3) the defendant lacks a redeeming justification sufficient to overcome its anticompetitive effects.

Exclusive Dealing and Tie-Ins. Exclusive-dealing and tie-ins between sellers and buyers often serve legitimate functions and should enjoy a rebuttable presumption of legality when neither counterparty has market power. Their use should constitute a violation of Section 1 when (1) the exclusive dealer or tying seller has market power; (2) the exclusive deal or tie-in, or its marketwide use, substantially lessens competition in the relevant market; and (3) the exclusive dealer or tying seller lacks a redeeming business justification.[164]Tie-ins and exclusive dealing of commodities can be challenged under Section 1 or Section 3 of the Clayton Act, 15 U.S.C. § 14.Comment: for the tie-in, the defendant’s market power is its market power is in the tying-product market, and the substantial lessening of competition is the forbidden harm in the tied-product market.

Vertical Price-Fixing. Vertical price-fixing imposed by a manufacturer should be presumptively unlawful under Section 1, but can be saved if the manufacturer can justify its use by showing how it improves the manufacturer’s offerings. Vertical price-fixing imposed at the behest of any dealer or reseller should be unlawful per se. The old distinction between Colgate pricing policies and concerted vertical price-fixing should be abolished because it is unworkable and leads to unpredictable outcomes.[165]Compare United States v. Colgate & Co., 250 U.S. 300, 307, 39 S. Ct. 465, 468, 63 L. Ed. 992 (1919) (permits a manufacturer to announce the lowest prices at which dealers can sell its products … Continue reading

Gatekeeper Firms. a gatekeeper firm (i.e., one that controls an essential input or facility required to compete) commits predicate antitrust misconduct when it denies others access to necessary inputs or sales channels on commercially reasonable terms. If it does so by contract or in connivance with another firm, it should be held in violation of Section 1; and if it does so to acquire, gain or preserve its own near-monopoly or monopoly in any market, it should be held in violation of Section 2.[166]See Otter Tail Power Co. v. United States, 410 U.S. 366, 377 (1973) (“The record makes abundantly clear that Otter Tail used its monopoly power in the towns in its service area to foreclose … Continue reading

Standard-Essential Patents. A defendant commits predicate antitrust misconduct when it obtains a standard-essential patent (SEP) or a fraudulently procured patent and thereafter uses it in a way that substantially lessens competition in the relevant market. If the defendant does so by contract or connivance, it commits a violation of Section 1. If the defendant uses this practice to acquire, gain or preserve its own near-monopoly or monopoly, it commits a violation of Section 2. One leading decision already recognizes this rule.[167]Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297, 314 (3d Cir. 2007) (“We hold that (1) in a consensus-oriented private standard-setting environment, (2) a patent holder’s intentionally false … Continue reading

Monopolization and Other Exclusionary Conduct. The exclusionary-practices test should be used to assess Section 2 claims, conspiracies against targeted rivals under Section 1, and all other antitrust claims that implicate exclusionary conduct. The fundamental inquiry should be whether the defendant uses the accused practice to improve its offerings or prevent competition. In Section 1 cases, the plaintiff must also show that (1) the accused trade restraints are accomplished by contract or connivance with another firm; and (2) the accused trade restraints substantially lessen competition in the relevant market by foreclosing competition for a substantial part of overall sales, or by preventing access to necessary inputs or sales channels. In Section 2 cases, the defendant’s use of the accused practice must have significantly contributed to its acquisition or maintenance of a monopoly or near-monopoly position in the relevant market.

Predatory Pricing. Predatory pricing constitutes predicate antitrust misconduct when a firm uses it to drive rivals out of business and thereby gain or preserve a monopoly or near-monopoly position. There should be no required showing of the predator’s ability to recoup its loss-making sales.

The exclusionary-practices test and the doctrine of ancillary restraints should be thus construed and become the lynchpins of antitrust law. In addition, the courts should further revive antitrust law by adopting the following modifications or abrogations of consumer-welfare jurisprudence.

Horizontal Mergers: Standing Presumptions. A merger or acquisition of a rival’s business should be presumptively unlawful if it takes place or results in a market that is “moderately concentrated”, per existing HHI guidelines. Absent extraordinary circumstances, such a merger or acquisition should be prohibited if it takes place or results in a market that is “highly concentrated.”[168]The Herfindahl–Hirschman Index or “HHI” is used by the DOJ, the FTC and the courts to measure the degree of market concentration in a given relevant market. It is used most frequently to review … Continue reading

Vertical Mergers: Standing Presumptions. A vertical merger or acquisition should be presumptively unlawful if it raises dual barriers to entry (i.e., barriers to entry at two levels of distribution), or if it exposes rivals at either level of distribution to a plausible threat of increased costs or limited access to a necessary input or sales channel. Existing case law supports this rule.[169]See Fruehauf Corp. v. F. T. C., 603 F.2d 345, 352 (2d Cir. 1979) (if a vertical merger obliges competitors to vertically integrate, and if this vertical integration by itself does not create inherent … Continue reading

Preemptive Mergers. A merger or acquisition of a rival’s business should not be permitted if its purpose is to avert or stifle a competitive threat posed by a disruptive or innovative rival.

Antitrust Injury Treated as an Affirmative Defense. Proving antitrust injury should never be a plaintiff’s burden, but a defendant can still invoke the doctrine of antitrust injury as a narrowly construed affirmative defense. The doctrine, which defendants routinely employ to confuse issues, should be clearly stated as follows: when a defendant has committed an antitrust violation, a private plaintiff cannot obtain money damages caused by the violation if the plaintiff’s damages arise from increased competition with the defendant rather than harm caused by the defendant’s exclusionary practices or exercise of market power acquired or maintained by committing the antitrust violation. Competitors are usually entitled to lost profits caused by their exclusion. Customers and suppliers are usually entitled to recover the higher prices that they paid to sellers or the lower prices that they received from buyers because of the antitrust violation.

The Purpose of Antitrust Law. The courts and Congress should confirm that the Sherman Act, the Clayton Act, the FTC Act, and their amendments exist to prevent firms from unduly restraining or monopolizing the interstate and foreign commerce of the United States. If the immediate aim was to check the increasing power and encroachments of the original industrial trusts, the larger aim will always be to keep our commerce free of undue trade restraints and monopolists that employ exclusionary practices. I can think of no better way to promote general prosperity, economic opportunity, honest business practices, innovation, low prices, social comity, and sound democratic governance.

© William Markham, 2021

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