ANTITRUST AND FREE MARKETS (By William Markham, © 2022)

A Misplaced, Recurring Critique

Some critics of antitrust law treat it as mere governmental overreach and an unwelcome infringement upon the ordinary operations of our free markets. Their refrain, it seems, is that each company should be left to do as it pleases in its markets with as little regulation as possible, or possibly without any regulation at all.

That criticism betrays a fundamental misunderstanding of the very term “free markets,” which refers to markets that are free of any undue restraint, whether public or private. Indeed, antitrust law was established and exists specifically to protect markets from undue restraints imposed by either public authorities or private actors. Criticizing this law on the ground that it is an imposition on free markets omits consideration of the last part of the equation – protecting markets from indefensible private restraints.

The Origins of Antitrust: Redressing the Crown’s Monopoly Licenses (Letters Patent)

The origins of antitrust law clarify this very point. In England during the late 1500s, Queen Elizabeth abused her royal prerogative to grant letters patent — i.e., a royal grant of the exclusive right to sell or use something. Queen Elizabeth increasingly granted her patents to local traders of basic commodities.
Each trader thus paid the Crown high fees and ongoing royalties in exchange for a patent, which granted him an exclusive concession to sell or license the sale of a specified commodity in a designated region (e.g., the sale of salt in southeastern England).

Under each of these patents, only the designated trader and his licensees could sell the commodity in question within the designated territory.[1]See generally Ramsey, George (1936) “The Historical Background of Patents,” Journal of the Patent Office Society. Patent and Trademark Office Society; Pila, Justine (2001). “The … Continue reading

Each such trader, having paid dearly for his exclusive concession, tended to exploit it and could successfully do so precisely because no other seller could undersell him or offer superior wares, more responsive service, or indeed any competition at all. Instead, each trader was protected from private competition by his patent. Thus protected, he could charge high prices for inferior wares and indifferent service.[2]See id.

Not every seller instantly oppressed his customers, but each seller gained the power to do so by his patent, and most tended sooner or later to abuse this power in various ways that would have been impossible if rival sellers had vied for sales and offered better prices, products, and services to win business.[3]See id.

The Crown relished issuing its patents since by them it not only generated lucrative fees, but also gained the allegiance and support of loyal traders in every part of the kingdom. The traders and their licensees became rich or greatly increased their original wealth and enjoyed close ties to the Crown. But just about everyone else received a poor bargain. Those who supplied or worked for the exclusive traders received miserly pay in exchange for fulfilling their overbearing demands. Captive customers paid exorbitant prices for shoddy goods and poor service, which they were forced to accept for want of any alternative. If absolute political power tended to corrupt absolutely, so too did absolute local monopolies for every common article.[4]See id.

That is how most businesses and people in Elizabethan England became beholden to monopolist traders. They had no meaningful choice. That circumstance is a feature of monopolistic economies, not a bug. Elizabethan England proved no exception. It teemed with underpaid dependents and overcharged, underserved customers.[5]See id.

Not surprisingly, the oppressive monopolies that gave Queen Elizabeth great riches and immense power also provoked widespread discontent among the populace. This circumstance in turn led to worsening civil strife, episodic riots, and their violent suppression from the late 1500s onward. Elizabeth herself died in 1604, largely indifferent to the calamites and hardships wrought by her inequitable monopolies. Her successor, the mercurial and combative King James VI, abused royal patents even more ardently than his predecessor had done, precipitating an epochal struggle between his Crown and an ascendant English Parliament, which emerged as a counterpoise to the English Crown and its claim of absolute power by divine right.[6]See Hostettler, John (1997). Sir Edward Coke: A Force for Freedom. Barry Rose Law Publishers.

Both the Crown and Parliament looked to the courts for relief. The Crown wanted them to administer the law and decide its claims in ways that would protect its prerogatives, while Parliament appealed to the courts to limit the Crown’s powers and uphold its own laws even when the Crown proclaimed contrary edicts. Adding to the turmoil, different court systems competed with one another to fulfill this role, and they sometimes reached contrary conclusions on the same issues.[7]See id. The different court systems were the ecclesiastical courts (which decided religious questions), courts of common law (which decided legal claims), and courts of chancery (which decided … Continue reading

Natural Rights, Restraint of Trade, and the Original Statute of Monopolies

The courts of common law eventually took the lead role, developing a series of related doctrines that form the bedrock of all liberal democracies. The doctrines in question addressed and elaborated upon natural rights, the limits of governmental power, restraints of trade, patents, and copyrights.

One jurist in particular played an indispensable role in the formulation of these foundational doctrines: the legendary Edward Coke (later, Lord Coke), who rose to prominence as an ambitious, enterprising, ruthless prosecutor of the Crown’s ecclesiastical claims, but who was also famously incorruptible and both a masterful jurist and eloquent writer. By the twists and turns of his career, he eventually became Chief Justice of the Court of Common Pleas (the highest court of common law), where in the early 1600s he emerged as England’s unlikely and original proponent of natural rights and free markets [8]See “Wagner, Coke and the Rise of Economic Liberalism,” 6 Econ. Hist. Rev. 30 (1935).

Lord Coke’s most essential contribution to common-law jurisprudence was his doctrine on natural rights, which in turn he used to support his doctrines on free markets, monopolies, and patents. According to this doctrine, no monarch or other public body had any legitimate authority to impose a law or edict that infringed upon its citizens’ natural rights. Rather, these rights were inalienable and included the right to life, liberty, and property. Any such right could be forfeited or compromised only on the basis of preexisting law applied to the accused by fair procedures, which must afford him full notice and an opportunity to be heard (due process).[9]See Hostettler, John (1997). Sir Edward Coke: A Force for Freedom. Barry Rose Law Publishers.

Essential to this doctrine was that markets and commerce should be free of undue restraint. That was the meaning of free markets. According to Coke, any grant of monopoly by the Crown or any other body was presumptively an unjustified infringement upon each Englishman’s natural rights to practice a trade and to purchase goods from any merchant of his choosing. This presumption could be overcome only when the grant furthered the public interest, as was the case when a patent was given to protect the sale and use of a useful, non-obvious invention or work of genius, or when an exclusive franchise was granted to a private funder of a road, bridge, port, or common carrier. Patents thus encouraged scientific discovery, invention, and artistic creation, and franchise rights attracted investment in public goods.

After leaving the Court of Common Pleas, Lord Coke became a leading member of Parliament, where he codified his legendary doctrines in the England’s original Statute of Monopolies, which was enacted in 1624. It nullified all of the Crown’s prior, existing, and future patents (monopoly concessions) and permitted monopolies only when authorized by his doctrines on patents and monopolies [10]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

The Crown viscerally opposed and resisted these doctrines, while Parliament supported them. In consequence, England embarked upon a long period of civil strife and reform, which eventually and incrementally resulted in the modern constitution of its society: its Parliament makes the laws, but does so only after consulting the Crown, which sits as its head of state and representative to the rest of the world; and its courts decide whether any law infringes upon any natural right.

In the meantime, similar progress was made in English political economy, as this topic was then called. In 1776, when the British colonies finally declared war against the Crown’s oppressive mercantilism, the legendary political economist Adam Smith published his opus on the Wealth of Nations, which postulated throughout that long-term prosperity and social comity are best promoted by self-interested competition between rival sellers and rival buyers. According to this view, each person is selfish by nature (even if magnanimous in countless instances). Rather than make futile, self-defeating attempts to change man’s nature by decree, it is better by far to induce each man to pursue his self-interest in ways that benefit society at large. That effort entails obliging each person engaged in commerce to compete against rivals, seeking to offer more attractive or less expensive goods or services that customers require or wish to purchase. According to Adam Smith, this approach leads to broader prosperity for the largest number and to the greatest possible long-term increase of a society’s overall wealth and political stability.

Smith thus opposed both public and private acts that conferred monopoly privileges or restrained trade for the sake of private advantage or the gratuitous enrichment of a government. Relatedly, he opposed causeless restraints of (1) foreign imports and (2) English exports abroad. He also opposed English mercantilism, which he decried as a wasteful set of policies that were inimical to England’s lost-term prosperity. For Smith, all such measures enriched tiny groups (favored merchants and their special pleaders), but harmed everyone else.

English and American jurists took note. By the early 1800s, American jurisprudence presumed that a public grant of monopoly was “obnoxious to the law” and therefore unenforceable, except in the following narrow circumstances:

— Patent Rights: A public body might lawfully give the owner of a novel, useful, non-obvious invention the exclusive right to sell or use it, but this right would expire after a stated duration, and the patentee must publicly disclose how his invention worked.

— Copyrights: A public body might lawfully give an author, composer, or other original creator the exclusive right to show, publish, copy, sell, or use his work, but this right expired after a stated duration.

— Exclusive Franchise Rights: A public body might authorize private actors to furnish public works and services and to charge the public for them (e.g., bridges, roads, ports, etc).

— Professional Licensing Requirements: A public body might regulate entry into a skilled trade or learned profession, admitting only those who met minimal qualifications. To this end, a public body might delegate this authority to a designated group of professionals or tradesmen in each skilled trade or learned profession.

— General Regulation of Commerce. A public body could use its legitimate police powers to regulate commerce conducted within its jurisdiction, but only in accordance with universal standards applicable to everyone.[11]See generally 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 … Continue reading

Contracts and Combinations in Restraint of Trade

The courts of England and especially the United States also developed analogous doctrines that addressed private restraints of trade. Specifically, they condemned both contracts and conspiracies in restraint of trade.

— A contract in restraint of trade was one by which a covenantor (e.g., a seller of a business, a departing partner) agreed not to compete against a covenantee (e.g., the buyer of the business, a partnership).[12]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 … Continue readingSuch a covenant was enforceable only so far as it was ancillary and subordinate to a legitimate transaction or collaboration — i.e., only so far as the restraint on the covenantor’s right to compete did no more than afford reasonable protection of the covenantee’s legitimate rights under the contract. For example, the seller of a business might lawfully agree not to compete against it, or a former partner might reasonably agree not to compete against his former partnership, but in both cases only for a limited duration and only to a limited extent. Any “general” or “unrestricted” agreement not to compete was always unenforceable even if it was somehow related to a legitimate transaction or collaboration.[13]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

— A combination or conspiracy in restraint of trade was one by which two or more sellers (or buyers) joined forces to seize control of an entire market or colluded against customers or suppliers by fixing prices or allocating markets. Any such combination or conspiracy was unlawful, and its acts were unenforceable.[14]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

American Antitrust Law

American antitrust laws incorporated and reinvigorated these doctrines, proscribed the foregoing practices, and clarified that no private actor could seize control of an entire market by naked design, as occurs when two or more sellers combine their operations merely to gain substantial control over an entire market, or when a single seller becomes a monopolist by using business practices whose primary or only purpose is to impede or eviscerate rival sellers. Rather, a monopoly would be deemed lawful only when acquired by fortuity, practical necessity, or the monopolist’s own commercial excellence.[15]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 restraint … Continue reading

In addition, American antitrust law treated restraints of trade and illicit monopolies not merely as unenforceable and subject to injunction, but also as civil and criminal offenses that carried onerous penalties.

That was the origin and purpose of federal antitrust law, as it was originally conceived.

Antitrust Law Protects Free Markets

Antitrust law thus exists precisely to protect free markets from undue restraints and illicit monopolization, whether imposed by a public body acting ultra vires or by private actors. This law is a corollary to our laws on patents and copyrights, which are best understood as narrow exceptions to the general rule that markets must remain free of public and private restraints. Critics of antitrust law would do well to remember its origins and to consider these points when debating its merits. Antitrust law is not antithetical to free markets, but rather exists to protect them from indefensible restraints.

By William Markham, © 2022