“An Overview of Antitrust Law”
(By William Markham, © 2000–2021)
Introduction
This article provides an overview and explanation of the essential principles of federal antitrust law, which is the law of competition and protects the interstate and foreign commerce of the United States from restraints of trade and monopolization. The below links allow you to proceed directly to different sections of the article.
The Essential Theory of Antitrust Law
Broadly speaking, antitrust laws seek to promote competitive markets. When sellers must compete against one another, customers usually benefit. When buyers must compete to hire employees and procure supplies, employees and suppliers usually benefit.
The essential theory of antitrust is that heightened competition keeps companies on their best behavior and best promotes the country’s broader prosperity. Sellers that must compete with one another to win customers are more likely to offer responsive services, improved products, customer-pleasing innovations, and so on. Likewise, buyers that must compete with one another are less likely to drive overly hard bargains with their suppliers and more likely to increase their offers to win supplies, including their supply of labor (i.e., they must pay higher wages to attract employees).
Conversely, diminished competition tends to reward inertia, dampen innovation, protect mediocre service and offerings, and allow the highest-level managers and owners to keep most of their outsized gains for themselves: where a small number of powerful sellers dominate a market, they can more readily collude or even participate in “non-cooperative oligopolistic practices.”
In most such markets, and in all markets dominated by a single powerful seller, it is the seller that usually dictates one-sided terms of trade to its suppliers, customers, and employees, who mostly accept its terms because they lack any meaningful alternative. Antitrust law seeks to prevent such circumstances from arising in the first place and offers remedies to those harmed by companies that create such circumstances on purpose in order to take advantage of their counterparties.
Broadly speaking, antitrust law should never punish a company for offering better products, even if it becomes a monopoly because customers strongly prefer its offerings to those of any other seller.
Rather, antitrust law generally imposes the following prohibitions: (i) no company can lawfully gain or enlarge a monopoly or near-monopoly position in a distinct line of commerce by anticompetitive practices, which include monopolistic acquisitions, predatory conduct, and exclusionary conduct (i.e., business practices whose principal or only purpose is to burden rivals); (ii) no company can unduly restrain marketwide competition by using contracts or course-of-dealing business arrangements with others whose primary purpose and effect are to hinder or prevent others from competing against it; and (iii) no company can lawfully commit a core cartel offense, such as horizontal price-fixing, horizontal market allocation, or bid-rigging.
Many cases present close calls and turn on whether a company’s challenged practices help the company to improve its own offerings or instead are used principally or only to impede or exclude rivals.
Uneven Enforcement Over Time
Modern antitrust law is mostly concerned only with certain cardinal offenses against competition: the core cartel offenses as well as restraints of trade and monopolization that can be shown to result in demonstrably higher consumer prices or lesser overall output in a properly defined antitrust market. In theory at least, lesser overall output can also mean reduced quality.
Antitrust was not always so myopic in its reach. Classical antitrust broadly prohibited restraint of trade and monopolization in the interstate and foreign commerce of the United States. Restraint of trade and unauthorized monopolization, in turn, were classical doctrines of common law developed by English jurists to redress the abuses of monopoly grants conferred by the English Crown. Over time, these doctrines were developed to ensure that in most markets sellers could freely offer their wares, and that qualified practitioners could ply their various trades without hindrance from public authorities or vested private interests.
Broadly speaking, private restraints of trade and unauthorized public monopolies were deemed “obnoxious to the law” and unenforceable, save in special cases. First, general regulations to protect public health and safety could properly regulate all sellers. Second, certain exceptions to the general rule would be permitted on policy grounds.
The most notable exceptions were as follows:
Patent rights, which reward inventors and encourage invention (the development of useful, non-obvious, and novel products and methods). This meant that an authorized government authority could lawfully confer on an inventor who publicly disclosed his invention the exclusive right to use or license it for a stated duration.
Copyrights, which reward authors and composers of every variety and thereby encourage works of genius. This meant that an authorized government authority could lawfully confer on a “creator” who registered his work of art the exclusive right to perform it or license its performance, but only for a limited duration.
Franchise rights, which were often used to encourage and facilitate private funding of public works. By such rights, a private operator held an exclusive right for a stated duration to collect tolls for the use of its road, bridge, tunnel, port, or other such public work.
Professional guilds, which protect the public from unqualified practitioners of learned professions and skilled trades (e.g., quack doctors, unskilled tradesmen, etc.). By these rights, each guild or professional society became empowered to determine who could practice its specific profession or trade and on what terms and conditions.
Otherwise, all private markets were supposed to be “free” (open to all comers) and subject only to general regulations enacted to promote public health and safety. Public grants of exclusive concessions that did not fall within a recognized exception were deemed “obnoxious to the law” and could be decreed void ab initio if challenged in court. The same was true of private efforts to acquire or exclude competitors and thereby seize control of an entire line of commerce.
U.S. antitrust law, originally promulgated by a nearly unanimous Congress in 1890, transformed these common-law doctrines into criminal and civil offenses. Under the new law, called the Sherman Act, each presidential Administration and United States Attorneys generally were vested with broad authority to enforce its provisions. Of even greater consequence, private parties claiming harm from violations of the law could maintain private actions in federal court for treble damages and unilateral fee awards (i.e., a prevailing plaintiff would recover a fee award, but not a prevailing defendant).
It was in this manner that the Sherman Act broadly forbade restraint of trade and monopolization in the interstate and foreign commerce of the United States. It notably charged the federal courts with the duty to explain and apply the common-law doctrines in the cases that would come before them.
Early court decisions in the late 1800s limited the reach of federal antitrust law by severely limiting the meaning of “interstate commerce.” Other decisions at the same time and afterwards nevertheless began to enforce the common-law doctrines in federal statutory cases.
The Sherman Act was subsequently supplemented by the Clayton Act and the Federal Trade Commission Act in 1914, the Robinson-Patman Act in 1936, and the Celler-Kefauver Act of 1950, as well as by other statutory refinements over the years, which inter alia established statutory exemptions for entire lines of commerce as well as statutory limitations on the reach of U.S. antitrust law in foreign commerce.
This law has had an uneven history. Different Administrations have chosen to enforce it in varying ways. The federal courts have adopted varying approaches and, more important, their consensus views have evolved over time.
The one constant has been that private antitrust litigants have kept on coming whenever they can (i.e., whenever they believe they have good cause to proceed). That is by design: American antitrust law encourages aggrieved parties to complain of antitrust wrongs so as to promote broad enforcement of Congress’ competition policy in all interstate and foreign markets of the United States.
The Pendulum Has Swung Back and Forth
Antitrust law was originally enacted during the first Gilded Age (c. 1865-1900) in response to the increasing concentration of economic wealth and political power in the hands of enormous industrial trusts established by the dominant firms of the era, most famously the Standard Oil Trust. The aim was to break up monopolies and cartels and to promote a national economy characterized by intense competition between rival businesses. The law was enforced accordingly and at times very expansively.
It was most aggressively and successfully enforced from the late 1930s to the early 1970s. This is the period that I call the era of classical antitrust enforcement.
From the late 1970s onward, antitrust jurisprudence evolved as the United States Supreme Court began to adopt the principles developed by the “Chicago School” of antitrust law, which focuses strictly on allocative efficiency and enforces antitrust law very sparingly and solely to condemn a small subset of commercial practices that permit sellers vested with “market power” to charge supracompetitive prices or reduce marketwide output by other means.
In recent years, the pendulum has started to swing back to a more classical enforcement in response to a new era of extraordinary concentration of economic power and a dearth of meaningful competition in a surprising array of markets. That lack of competition has been empirically proven to lessen opportunity for most, stifle business development, suppress innovation and product development, increase prices that customers pay, oblige them to accept inferior goods and services, depress wages, and greatly increase profits for the few far above competitive and historic norms, but only for the winners in our winner-take-all markets.
That way lies trouble for any society that wanders down the path. That was why Congress enacted antitrust laws in the first place. The law of antitrust, then, has been an evolving law, which may be poised for a significant revival in the near future.
The General Prohibitions of Federal Antitrust Law
Subject to broadly varying interpretation, federal antitrust law prohibits the following kinds of commercial conduct in the interstate and foreign commerce of the United States:
— Unlawful restraints of trade, which are prohibited by Section 1 of the Sherman Act.
— The “monopolization” offenses, which are unlawful under Section 2 of the Sherman Act.
— Certain kinds of exclusive-dealing and tying arrangements, which in certain circumstances are unlawful under both Section 1 of the Sherman Act and Section 3 of the Clayton Act.
— Certain kinds of “price discrimination, which in appropriate cases are unlawful under the Robinson-Patman Act.
Anticompetitive mergers and acquisitions, i.e., those that are likely to have a significant anticompetitive effect in at least one properly defined market — a matter that is governed by Section 7 of the Clayton Act.
Also, the Federal Trade Commission (the “FTC”) asserts that it can enjoin other kinds of conduct that it deems inimical to ordinary competitive interplay in our markets under the broad powers afforded it by Section 5 of the Federal Trade Commission Act (the “FTC Act”).
Some of the foregoing practices, particularly unlawful trade restraints and certain kinds of price discrimination, are also unlawful under various state antitrust laws, including California’s Cartwright Act and Unfair Practices Act.
Antitrust law is the law of competition. It is concerned with wrongs committed against competitive processes in a given line of commerce or market. It is never enough for a plaintiff to allege that it has been harmed by an unscrupulous defendant. Rather, an antitrust plaintiff must show that the defendant or defendants have undermined competition in a distinct market, and that this injury to competition in general has specifically harmed the plaintiff in particular. A plaintiff in an antitrust case therefore must make a showing of “antitrust harm” with ensuing “antitrust injury” to the plaintiff itself.
The Doctrine of Antitrust Injury
Crucially, antitrust injury is a limiting doctrine that obliges a private plaintiff in an antitrust case to show that its claimed losses have been caused by a “competition-reducing” aspect of the challenged antitrust violation, as opposed to losses that are merely incidental to the antitrust violation but not the result of a reduction of competition. For example, suppose a dominant competitor acquires a bankrupt business and begins to steal business from the bankrupt business’ competitor, which suffers losses in consequence. Suppose also that the dominant competitor’s acquisition of the bankrupt business reasonably threatens to confer on it monopoly power in the affected market. Its acquisition may therefore be properly condemned as an anticompetitive merger under Section 7 of the Clayton Act, but the loss of profits suffered by its competitor does not qualify as antitrust injury, and therefore this competitor cannot assert a private claim against the dominant competitor under Section 7 of the Clayton Act. The underling competitor’s loss of profits has been caused by increased competition imposed by its dominant rival, not by any reduction in competition caused by the dominant rival’s acquisition of the bankrupt firm. It is consumers who stand to suffer losses by this anticompetitive acquisition, and they or public antitrust enforcers are the proper parties to challenge the acquisition under Section 7 of the Clayton Act.
A Hypothetical Example of Antitrust Misconduct
Allow me the following example to illustrate the above points more vividly. If I own a restaurant in San Diego, and if I maliciously set fire to two other restaurants because I resent their flourishing success, I have clearly broken the law: I can be prosecuted criminally for arson and sued by the wronged, destroyed restaurants for intentional malfeasance, tortious interference, and very likely other civil wrongs. But my act, however evil, causes no harm to the thriving restaurant scene in San Diego. I have done nothing that even remotely upsets “competition on the merits” for restaurant dining in San Diego.
But suppose that my restaurant and the two other restaurants are all located on a remote island in the far away Pacific. If I burn them to the ground, then my restaurant alone will be the one restaurant remaining for the residents of this otherwise idyllic island. Suppose that I start charging them $50 for a plate of eggs and potatoes, quipping that “if they don’t like my service, they can eat at some other restaurant — oh, I forgot, there are no other restaurants!” My act of arson, if done under such circumstances, has likely caused harm to competition on the merits for restaurant services on this island.
Let’s suppose further that this remote Pacific Island is a territory of the United States and is therefore subject to U.S. antitrust law. When I am sued for redress under these laws, my clever antitrust attorneys will argue that, whatever else I might have done, I have not harmed competition on the merits because if I try to raise my prices for my restaurant services, others will soon establish competing restaurants to sell to customers who are disenchanted with my prices. This is the stuff of antitrust law, not mere arson and malicious misconduct. In this case, I might lose and be forced to pay three times the value of the harm that my misconduct has caused to competitors and customers alike, assuming the customers started a class action and my two ruined competitors also brought their own suit for lost profits. This is because a successful plaintiff in an antitrust case is entitled to treble damages and attorney’s fees and often can also obtain injunctive relief. Suppose that I set the fire in San Diego, but I have done so because my restaurant and the two others are the only ones in the area that serve a rare delicacy cuisine known to its aficionados as “Fuji-style cooking.” In such a case my erstwhile competitors might sue me under the antitrust laws for causing antitrust harm in the market for “Fuji-style cooking in the San Diego region.”
Antitrust law is thus the law of competition, and it exists to protect against harm done to an entire market, not harm done merely to a particular business or consumer. (These restaurant examples, however, are more colorful than apt, since it is likely impossible to harm competition in any market for restaurant services, no matter how narrowly defined. That is because there are very low barriers to entry: a new competitor can easily enter any such market by opening its own restaurant, and where this is possible competition itself provides the remedy to the defendant’s misconduct, no matter how egregious it might be.)
The antitrust laws are set forth in various federal statutes, most notably the Sherman Act and the Clayton Act. There are also copycat statutes in virtually every state. The federal statutes use conspicuously general language to proscribe “monopolization” and “restraints of trade,” leaving to the courts the task of articulating what is meant by these terms. The California antitrust statutes in effect adopted the federal prohibition of restraints of trade, but do not prohibit monopolization, and in recent years the federal courts and the California courts have diverged in their analysis of trade restraints.
The two principal antitrust offenses are “restraint of trade” and “monopolization.” There is a category of competition law, called “abuse of dominant position,” that is not expressly forbidden under the U.S. laws, but is proscribed by the competition laws of other jurisdictions, most notably the European Union and Canada.
In the U.S., a plaintiff can assail this kind of offense by claiming misuse of existing monopoly power in order to preserve or enlarge it (unlawful monopolization) or in order to establish a new monopoly (unlawful monopolization) or in an attempt to do so (unlawful attempted monopolization).
An antitrust claimant can be a competitor, customer, supplier, or other market participant, but subject to the interrelated doctrines of “antitrust standing” and “antitrust injury”. Typically, the best private plaintiffs in antitrust cases are direct competitors or immediate customers (commercial or consumer), but cases can sometimes be brought by potential competitors, affected suppliers, employees in labor markets, and other market participants that are intended targets or whose harm is “inextricably linked” to the challenged antitrust offenses.
Contracts and Conspiracies in Restraint of Trade
Section 1 of the Sherman Act codifies the common-law doctrine of restraint of trade, but does not distinguish between the two categories of restraint of trade recognized at common law, which forbade certain kinds of contracts made in restraint of trade and all conspiracies whose object or tendency were to restrain trade.
Broadly speaking, a contract in restraint of trade is one by which a covenantee (often, an employer or dominant seller) procures various kinds of non-compete covenants from a covenantor (often, an employer, independent contractor, supplier or commercial customer).
An employee, departing partner, or seller of a business might agree, for example, not to compete against it for a stated duration within a designated region. The limitation on the covenantor is an express condition of his employment by the business, or his agreement to sell it to a buyer, or his agreement with it upon departing from it, etc.
These kinds of covenants are lawful and enforceable under federal law so long as they are “subordinate” and “ancillary” to a legitimate transaction memorialized in the contract in which they appear, but they are unlawful when they are demonstrably overbroad or mere naked impediments to competition imposed by a dominant covenantee.
A conspiracy to restrain trade typically refers to the core cartel offenses that have become the principal focus of antitrust law in the consumer-welfare era. It refers to a conspiracy by two or more sellers (or two or more commercial customers) against their common customers (or suppliers). The classical conspiracies in restraint of trade are direct competitors’ price-fixing, market allocation, and bid-rigging (which is a form of market allocation). Naked no-poaching restraints between rival employers, which is likewise a form of market allocation, have been added to the list by a recent spate of decisions.
To prove a per se violation of Section 1 of the Sherman Act, it is not necessary to prove the relevant market or any anticompetitive consequence caused by the challenged conduct. It is sufficient to prove that the challenged conduct falls within a recognized category of per se misconduct, in which case its anticompetitive effect is conclusively presumed.
Even so, a private plaintiff must show that it suffered antitrust injury caused by the per se violation.
The true per se offenses in the modern era are limited to horizontal price-fixing (but not vertical price restraints such as resale price maintenance), bid-rigging, and horizontal market allocation (including no-hire and no-poaching agreements lately favored by certain dominant employers and cartels of employers).
In addition, the courts use abbreviated reviews in order to condemn certain kinds of tying arrangements and group boycotts.
Broadly speaking, an unlawful tying arrangement is one by which a firm that has market power in one product market sells the product in question to its customers only on condition that they also purchase a second, separate product from it (there are many ways by which firms attempt this practice).
A group boycott occurs when two or more direct competitors, possibly acting in connivance with their own supplier or customer, withhold necessary “resources” from one or more targeted businesses, which in consequence cannot become or remain viable competitors in a given line of commerce. The withheld “resources” are typically certain kinds of supplies, or the use of a facility, or access to a market. The boycotting firms are typically dominant firms that jointly can exercise control over such a resource. Unlike the true per se offenses, business justifications can be invoked to avoid liability for unlawful tying or a group boycott.
Quick-look offenses. Other kinds of commercial practices are not deemed per se restraints of trade, but appear on their face to be so clearly anticompetitive in nature and likely effect that the courts will condemn them as unlawful trade restraints after a “quick look” at them.
Still other practices are deemed impermissible trade restraints only upon being shown to violate the structured rule of reason: A claimant in a rule-of-reason case must show that two or more firms have acted in concert to impose trading practices that demonstrably harm competition on the merits in a properly defined relevant market, thereby causing specific harm to the claimant.
In these rule-of-reason cases, the courts have elaborated a standard of proof that requires the claimant to make certain showings, which, if made, then oblige the defendants to proffer pro-competitive justifications for their challenged practices. The claimant can still prevail afterwards by establishing that the pro-competitive purposes could have been reasonably accomplished by less restrictive measures, or that these pro-competitive justifications serve as mere pretexts for anticompetitive practices.
Of note, a plaintiff can sometimes show that a trade restraint occurs when the defendant obliges the plaintiff to submit to a contract or other commercial arrangement that by itself or along with other such arrangements has the effect of harming competitive processes in a properly defined relevant market.
To prove a “rule of reason” offense, it is typically necessary to establish the “relevant product and geographic market” in which two or more firms have formed a “contract, combination or conspiracy” in order to restrain trade. The conspiracy need merely be a tacit understanding.
Broadly speaking, a restraint of trade is a predatory commercial practice undertaken by co-conspirators that impedes competitors, suppliers, customers or other market participants from engaging in rational, pro-competitive conduct.
The usual effect of such practices is that they permit the conspirators, or sometimes only the dominant conspirator, to charge higher prices, provide inferior offerings, or offer less accommodating service than it could do in a competitive market, i.e., a market unrestrained by the challenged trade restraints. When this occurs, customers are constrained to purchase goods or services on terms that they would not accept in genuinely competitive markets. The range of commercial practices that can constitute unlawful trade restraints is broad, but it can be difficult and expensive for a claimant to prove an unlawful trade restraint under the structured rule of reason.
Defenses. Defendants accused of employing an unlawful trade restraint under the structured rule of reason have various defenses available to them, including the following ones: (1) the plaintiff lacks antitrust standing; (2) the plaintiff did not suffer antitrust injury; (3) the plaintiff’s proposed relevant market is flawed or inferior to the defendants’ proposed market; (4) the defendants never practiced the alleged trade restraint (i.e., they never entered into the alleged “contract, combination or conspiracy”); (5) the challenged trade restraint lacks any anticompetitive effect; (6) the defendants lack market power in the affected market, and/or the challenged restraint is not apparently anticompetitive; and/or (7) the challenged restraint furthers legitimate commercial purposes, and on balance the challenged restraint is justified, notwithstanding any claimed anticompetitive effect.
Unlawful restraints are proscribed by Section 1 of the Sherman Act and the voluminous case law that interprets this statute. California’s Cartwright Act likewise prohibits trade restraints that have a substantial effect on businesses or consumers in California. The California courts historically have adopted federal precedents under Section 1 when deciding claims brought under the Cartwright Act, but in recent years they have declined to adopt certain federal doctrines, most notably the federal law on resale price maintenance. The California courts have also declined to follow federal precedent on predatory pricing, which can be deemed an offense under the California Unfair Practices Act.
Monopolization
Monopolization is unlawful, but the mere possession of a monopoly is not. Monopoly power means a very large degree of market power, which is the power to oblige a customer or other market participant to do something it would not likely agree to do in a competitive market — such as paying supracompetitive prices, accepting inferior goods or services, or acquiescing in unfair terms of trade. A firm that holds monopoly power can lastingly and profitably charge higher prices or impose other restrictions of output, doing so without fear of losing business to a rival firm that can offer better prices, products or terms. It is thus the power to restrict “output” (the quantity or quality of products sold); it is sometimes characterized by the courts as “the power to control prices or exclude competition.”
Practically speaking, a firm has monopoly power if a substantial number of its customers find themselves obliged to purchase particular kinds of products from it because they lack reasonable alternatives — i.e., they cannot turn to another seller to purchase the same product or a substitute product that can answer the same purpose. A firm has monopoly power over a particular product market (market for the relevant category of products) if it can profitably impose a small, significant increase of its prices (5% or more) for a non-transitory period (one year or longer). Monopoly power can be proven by (1) an empirical demonstration of these points, or (2) a showing that (a) the firm makes a large or dominant share of sales in a given product market, and (b) its market position is protected by strong barriers to entry and expansion that effectually prevent existing rivals from expanding output and potential rivals from entering the market. (Market power can exist to a lesser extent when a firm has significant power over a substantial number of customers or other market participants, but does not have monopoly power.)
Not every instance of monopoly power is unlawful. Some firms acquire it by superior skill or fortuitous circumstance.
The offense of monopolization specifically condemns only the wrongful “acquisition” or “maintenance” of monopoly power: a firm commits the offense and becomes liable under Section 2 of the Sherman Act only if it obtains or maintains monopoly power by means of anticompetitive or exclusionary practices. To prove the offense, a plaintiff must show that (1) the defendant wields monopoly power, and (2) the defendant has used anticompetitive or exclusionary practices in order to acquire or maintain this power.
There are various standards used to decide whether a given business practice is anticompetitive (because it reduces output) or exclusionary (because it tends to exclude rivals but is not justified by any commercial efficiency). The common feature of all anticompetitive practices is that they hinder or ruin the commercial opportunities of the defendant’s rivals but do not improve its own offerings, or do so in a manner that needlessly impairs its rivals’ opportunities. The best and simplest test to evaluate whether a challenged practice is anticompetitive is to determine whether the defendant has employed it to improve its own offerings or to sabotage or undermine its rivals.
Broadly stated, a firm commits unlawful monopolization if it employs commercial practices whose calculated purpose and effect are to impair or destroy its rivals’ opportunities, so that it alone can acquire or preserve monopoly power in a relevant market.
To prove monopolization, a claimant usually must demonstrate what is the “relevant market,” then demonstrate the following three points: (1) the defendant holds “monopoly power” in this market; (2) the defendant acquired or preserved this monopoly power by employing business practices that were indefensibly exclusionary or predatory; and (3) the plaintiff has suffered proximate losses in direct consequence of either (a) the defendant’s exclusionary or predatory practices; or (b) the defendant’s use of business practices made possible by its exclusionary or predatory practices, such as charging customers supercompetitive prices or paying suppliers or employees depressed prices.
It is also an offense for two or more independent firms to conspire together so that one of them can acquire or maintain monopoly power. This offense is called “conspiracy to monopolize.”
Attempted monopolization constitutes a third monopolization offense. It occurs when a firm employs anticompetitive practices with the specific intent of acquiring monopoly power, but only if there is a dangerous probability that it will succeed in the effort. This offense is called “attempted monopolization.”
The monopolization offenses are set forth in Section 2 of the Sherman Act and in the many cases that have interpreted this statute.
A monopoly by its mere existence does not constitute a violation of Section 2. Monopolies are even deemed necessary or useful in some markets: for example, electrical utilities used to be treated as “natural monopolies” whose prices and practices must therefore be regulated by local utility commissions (this circumstance finally might change because of recent developments in the relevant technologies). Nevertheless, a firm always violates Section 2 if it employs anticompetitive or exclusionary practices to acquire or maintain monopoly power in a particular market.
Unlawful Tying and Exclusive Dealing
Unlawful tying and exclusive dealing can be challenged under Section 1 of the Sherman Act (the contract or combination is established by the defendant’s contract with its restrained customer). They can also be challenged under Section 2 of the Sherman Act (when the defendant uses such a practice in furtherance of its effort to acquire or maintain monopoly power). They lastly can be challenged under Section 3 of the Clayton Act, possibly under a slightly more expansive standard of liability, but such a challenge can be made only to the sale of goods, not the sale of services.
Price Discrimination
Unlawful price-discrimination is governed by the Robinson-Patman Act and occurs when a seller sells the same or similar goods at around the same time to two or more commercial customers, but offers preferred prices only to one or some of them, but not to its disfavored commercial customers, which in consequence suffer losses to the favored customers, or whose own commercial customers suffer losses in downstream markets because of the price-discrimination. There is some tension between the jurisprudence of the Sherman Act and the Robinson-Patman Act. It is a highly technical topic.
Mergers and Acquisitions
Section 7 of the Clayton Act forbids mergers and acquisitions that may substantially lessen competition in a given market. If a proposed merger meets specified criteria (which are updated every year), its proponents must give notice of the proposed merger before consummating it. This notice is required under the Hart-Scott-Rodino Act and must be given to the Federal Trade Commission (“FTC”) and to the Antitrust Division of the United States Department of Justice (the “Division”). Either agency might then require further information and thereafter object to the merger, or seek to enjoin it, or threaten to do so unless the merging firms agree to divest assets or business operations or agree to certain restrictions or “conduct remedies.”
To analyze a proposed merger or acquisition, it is always necessary to define and review the relevant markets affected by it. The FTC and Division have issued and periodically revise extensive merger guidelines that explain how they define antitrust markets and analyze whether a proposed combination poses a significant risk of harm to competition in any properly defined relevant market. More generally, these guidelines explain how the Division and FTC analyze proposed mergers and acquisitions (horizontal, vertical, and conglomerate).
The FTC and/or Division can challenge a merger or asset acquisition under Section 7 of the Clayton Act on the ground that it poses an “incipient” threat to competition in a properly defined relevant market. Subject to various restrictions, a private litigant can also bring such a challenge.
The Antitrust Statutes
The antitrust laws are set forth in various federal and state statutes. The federal statutes concern practices that affect interstate commerce, while the state ones address practices that affect commerce within each state. Owing to the modern, expansive interpretation of interstate commerce, virtually any significant commercial transaction can deemed subject to federal antitrust regulation. Even so, some practitioners prefer for various reasons to plead their antitrust claims in state court, even when so doing means overlooking significant aspects of the case.
The state statutes and case law incorporate the federal standards, so that in most instances it is not possible to litigate an antitrust case in state court without having a thorough grasp of federal antitrust law. Notably, California antitrust law incorporates and expands upon Section 1 of the Sherman Act and the Robinson-Patman Act, but it does not address the monopolization offenses. Here is a brief summary of these statutes.
The Sherman Act. This statute, enacted in 1890, is the original antitrust law. It sets forth the broad statutory proscriptions of unlawful trade restraints and monopolization and acts as a “charter of the marketplace” and “constitution of competition law” in American jurisprudence. The Sherman Act codifies the principal antitrust offenses — conspiracies to restrain trade, monopolization, attempted monopolization, and conspiracies to monopolize. The Sherman Act is worded in broad, open-ended language, so that clever competitors cannot elude its provisions by lawyerly evasions and obfuscation. Its detractors have argued that the statutory language is so broad and open-ended as to be almost meaningless, and that this circumstance has allowed the courts excessive discretion in interpreting and applying it, so that the antitrust law has become arbitrary and unpredictable. The rejoinder is that the Sherman Act sets forth the fundamental standards, and it is for the courts to decide in each case whether the challenged conduct constitutes monopolization of a line of commerce or the concerted imposition of an improper restraint of a line of commerce. More than a century of case law has helped to provide clarity and meaning to this statute, establishing how it is supposed to be applied in order to forbid and sanction illegal trade restraints and monopolization. Every antitrust lawyer must be familiar with this case law, especially the leading cases issued by the U.S. Supreme Court and in the local appellate circuit.
The Clayton Act. This law is another federal statute that imposes restrictions on exclusive dealing, tying arrangements, and proposed mergers and acquisitions. It also supplements the Sherman Act, prohibiting certain kinds of commercial practices that excessively stifle competition on the merits, and it established a private cause of action for antitrust offenses, allowing private parties to act as private attorneys general, but only in cases in which they have suffered antitrust injury. If a private litigant prevails, it is entitled to treble damages and attorney’s fees. The Clayton Act also authorizes the courts to enjoin anticompetitive conduct and grant related relief. It has been supplemented by various acts, most notably the Robinson-Patman Act (discussed below) and the Celler-Kefauver Act of 1950.
The Robinson-Patman Act. As noted above, this statute modified the Clayton Act and forbids sellers to employ certain kinds of price-discrimination, i.e., a seller’s sales of the same or similar products at the same time to different commercial buyers at different prices, if the practices cause harm to competitive processes in the seller’s market, the buyers’ market or in a market further downstream in which a disfavored buyer competes against customers of a favored buyer. This statute is highly technical and disfavored by the modern courts, which are disinclined to meddle in the prices that a seller unilaterally sets, but there are instances in which price discrimination remains actionable and can serve as a potent antitrust claim.
The Federal Trade Commission Act. This is another federal statute that established the FTC, which has regulatory authority to enforce the Sherman Act, the Clayton Act, and the Robinson-Patman Act. Significantly, Section 5 of the FTC Act confers additional authority on the FTC, allowing it to test the limits of antitrust policy. An aggrieved firm that concludes that it has no civil remedy under the Sherman Act or Clayton Act might decide that its best recourse is to complain to the FTC, asking that it invoke its authority under Section 5 of the FTC Act in order to investigate the matter and initiate administrative proceedings in order to enjoin the challenged conduct.
The Hart-Scott-Rodino Act. This federal statute imposes disclosure requirements for certain kinds of mergers, acquisitions, and other combinations of two or more business operations. The duty to make a disclosure depends on the size of the transaction and the size of the participating companies. If a firm wishes to conduct a transaction that is covered by this Act, it must first make prescribed disclosures to the FTC and Division, either of which can thereafter require additional disclosures, object to the transaction, grant conditional approval (e.g., require a divestiture as a condition of approval of the proposed transaction or impose certain “conduct remedies”), or decline to object and allow the proposed transaction to be consummated without further inquiry. It is sometimes possible to obtain expedited approval and a waiver of the obligatory waiting period. If the FTC or Division objects, the proponents of the merger can challenge the objection, abandon the transaction, or modify their proposal and re-submit it.
State Antitrust Statutes. In addition to the federal statutes, nearly every state in the United States has its own antitrust statutes. These statutes govern intrastate commerce.
The Courts and Antitrust Theory
Since the antitrust statutes are couched in general language (e.g., “it is an offense to conspire to restrain trade”), they have no practical meaning until the courts actually enforce them against the businesses accused of violating them. It is therefore impossible to understand antitrust law merely by reading the applicable statutes. It is necessary to know the cases as well as their underlying reasoning, and it is equally necessary to have a thorough grasp of antitrust theory (antitrust economics), which is elaborated and debated by economists and law professors across the country, and which is often referred to expressly in the cases.
Why Antitrust Law Matters
Antitrust law matters to consumers and businesses that have been harmed by anticompetitive abuses or have been accused of employing them. The underlying purpose of the antitrust laws is to promote robust competition in the markets and to prohibit anticompetitive monopolists, cartels, illicit conspiracies and anticompetitive restraints of trade.
Antitrust Sanctions, Civil and Criminal
An antitrust offender sued in civil court risks paying treble damages (three times the value of proven antitrust harm caused by its offense), as well substantial attorney’s fees and costs. An antitrust defendant, even if it prevails, cannot recover its attorneys’ fees, unless the case was demonstrably frivolous. An antitrust offender might also be enjoined — i.e., ordered to curtail certain business practices during the lawsuit and perhaps permanently if the suspended practices are deemed at trial to be antitrust violations. Antitrust cases are usually very costly to the alleged offender even if it prevails, but under the new pleading standards a frivolous or poorly conceived case can be quickly terminated upon a well-stated motion to dismiss. Firms that are tempted to monopolize a market or collude with others in order to gain an insurmountable advantage over customers or rivals should well consider the perils of private antitrust enforcement before embarking on their venture. The very practices that might generate outsize profits today might later involve the participating firms in outsize antitrust litigation tomorrow.
Conversely, an antitrust plaintiff can recover treble damages, injunctive relief, and its attorney’s fees and costs of suit (but not experts’ fees). In some cases, antitrust plaintiffs can obtain very substantial judgments against solvent firms that must pay them.
In really egregious cases, which typically concern the well-established per se violations of Section 1 of the Sherman Act, the alleged offenders might be subjected to criminal prosecutions, and their officers and employees might be personally indicted, tried, and convicted. Criminal prosecutions of antitrust law are typically conducted by the DOJ as well as by state prosecutors (called “Attorneys General”). The FTC, as noted above, has strong regulatory powers and can readily refer matters to the Division or act in concert with it. The Division sometimes collaborates with the United States Attorney’s Office (which also belongs to the United States Department of Justice), particularly in cases in which the charges include both antitrust offenses and alleged mail fraud, bank fraud, wire fraud and/or RICO violations. The Division prosecutes both criminal and civil claims, and the FTC prosecutes civil and administrative claims.
A corporation convicted of a criminal violation can be ordered to pay enormous restitution and fines, and an individual can be ordered to pay enormous restitution and fines as well as serve substantial terms in prison (up to ten years in a federal prison!). If a corporation is convicted of a criminal violation, it will usually be sued civilly by the civil victims of the offense. It is often sued merely upon news of an indictment or ongoing criminal investigation. Sometimes a convicted firm must try to wade through a ruinous succession of civil cases from competitors and customers. In some cases, a criminal conviction for antitrust violations foretells the demise of the company that receives it.
Criminal prosecutions principally concern horizontal price-fixing, bid-rigging, horizontal market allocations, and other brazen instances of antitrust wrongdoing. To prevail in a criminal prosecution, the government must prove each element of the alleged offense beyond a reasonable doubt and must prove that the defendant acted with the requisite “scienter” or criminal intent. The requirement of scienter was imposed by the US Supreme Court in a case whose reach has been significantly limited by appellate courts that have ruled that criminal intent in a prosecution for a per se offense merely means the intention to commit an act in furtherance of a common plan by which the per se violation was committed. Since virtually all criminal prosecutions of antitrust violations, if not all of them, concern per se offenses, the requirement of proving criminal intent has been eviscerated by these cases, but the rationale for this limitation seems arguable (at least to the author of this article), and the issue will likely be revisited by the US Supreme Court at some point or other.
The Origins of Antitrust Law, Briefly Stated
Antitrust law makes more sense if you have some understanding of its origins. What, for example, does “antitrust” mean? As with everything else, it all makes much more sense if you understand the first principles.
Antitrust law is really the law of competition. The term “antitrust” merely refers to the enormous trusts (industrial conglomerates) set up in the U.S. in the late 1800s by the infamous robber-baron magnates. These trusts directly and indirectly controlled entire markets for petroleum, steel, railroad transport, banking and finance, and various related industries and services. The great robber-baron trusts imposed a stranglehold on competition in the different markets in which they operated and threatened to undermine the charter principles of free-market economics. If unchecked, they would have led to a society overly dominated by monopolies and oligopolies in most if not nearly all of our key markets and many others too.
Using immense market power and control of commercial opportunities, the trusts exercised domination over national commerce, earning the lion’s share of profits and determining which businesses could succeed in their markets and related upstream and downstream markets. That economic power also conferred immense political power, especially over decisions made in local and state government. Indeed, the great trusts were generally wealthier than the wealthiest state governments.
The “antitrust laws” were originally enacted as a public policy response to the problems caused by the great trusts: the evils occasioned by excessive market concentration and the vesting of immense economic power in only a handful of great trusts (conglomerates headed by a single person, family or firm).
The remedy that antitrust law supplied was competition: the evils of market power and excessive concentration of economic power would cease to exist if the normal state of affairs in most markets was intense, ongoing competition between rival sellers. If no seller or small group of sellers could dominate a market, and if instead all sellers stood at constant risk of losing suppliers, employees or customers to their rivals, then no seller could afford to mistreat its suppliers, employees or customers. Sellers would be “kept honest” by their unceasing competition with one another. That is the core tenet of American antitrust law.
Antitrust laws aim to vindicate this principle by forbidding market participants to do either of the following: (1) using contracts or other concerted activity to restrain competition indefensibly; or (2) using indefensible exclusionary or predatory practices in order to monopolize entire lines of commerce. To this end, the principal antitrust laws are worded in open-ended language that require judicial interpretation and application to have any meaning at all. By express grant, only the federal courts have authority to interpret and enforce the federal antitrust laws — i.e., the open-ended statutory provisions that require judicial interpretation to have any meaning at all. The antitrust statutes thus vest the federal courts with the authority and responsibility of developing a common law of competition for American commerce.
American antitrust law in turn traces its origins to the English common law’s original precepts on natural rights, free markets, monopolies, patents, and such matters. I encourage my readers to read more about the seminal importance of these closely related laws.
The Inescapable Injustice of Antitrust Law
The courts have tried for well over a century to give meaning to the broad standards enunciated in the principal antitrust statutes, and not surprisingly they have often contradicted one another in their rulings: some courts have been disposed to find antitrust violations in every corner, while others have refused to see it in even the most brazen instances of predatory exclusions and anticompetitive conspiracies. It sometimes seems as though the many decisions, if considered as a whole, appear to be an unwieldy, incoherent hodge-podge of ad hoc improvisations that hopelessly contradict one another, if not in specific outcomes then in their underlying reasoning.
If laws should be generally understood in advance by the population whom they are supposed to govern, then the antitrust laws can be assailed as being overly vague and subject to the changing humors of the courts that must supply meaning to them, which they do only when called upon by an aggrieved private litigant or a government prosecutor. Thus one competitor might object to the business practices of its more successful rival. It then brings an antitrust suit, or complains about the matter to the Division. A civil antitrust case is brought, or, in some instances, a criminal proceeding is initiated. The court, having been thus summoned, now decides whether or not there has been an antitrust violation — and this it does by applying the general formulas of the statutes to the specific business practices under challenge. Whether or not the practice is improper becomes known only after the court has ruled. This is inevitably followed by appeals made by the losing party, and then by further appeal. The entire process can last for years.
This is a very curious brand of law, one that arguably fails the first test of all laws: is it generally understood to forbid certain conduct in advance of the fact, or is its application unpredictable, unknowable, seemingly arbitrary, and therefore disruptive?
Even so, firms that set out to destroy competition on the merits tend to be skillful, subtle, and infinitely more pernicious to society than mere ordinary tortfeasors. The antitrust laws offer meaningful redress, sufficient incentives to private litigants to enforce the laws of competition, and real deterrence to those firms that might otherwise be inclined to seek profits by crushing competitive conditions in the markets in which they operate. The antitrust laws must be stated in general terms, or else they would be successfully eluded. The evil of these laws is therefore a necessary one in this author’s opinion.
Most important of all, the antitrust statues should be treated as charters that authorized the courts to develop a common law of competition, and it is the task of judge and lawyers to follow, apply and develop this common law. They have done so, and there is now a fully developed common law of competition in the United States, which, in the true spirit of the common law, has evolved over time according to our changing understanding of market conditions, industrial organization, and the proper purposes of antitrust law.
The Injustice Is Perhaps Necessary
It is impossible to foresee every sort of business arrangement that might constitute an unfair practice that impedes the marketplace, and it is therefore impossible to enumerate the forbidden practices. The antitrust laws therefore wisely limit themselves to the statement of general principles, and leave to the courts and regulatory authorities the difficult task of applying these principles to contested business practices. In effect, the antitrust statutes are a “constitution of the marketplace,” setting forth the broad principles of how markets should operate. The civil and criminal penalties, including the onerous burden of treble damages, seem necessary because they deter anti-competitive behavior, and also because they give strong incentive to victims to come forward to complain of antitrust misconduct, which never could be adequately policed by the Division, the FTC, or state prosecutors without the active cooperation of the aggrieved competitors or customers whom the offender has run out of business or gouged into paying monopoly prices.
A Sensible Reform
One sensible manner of redressing the foregoing problems might well be to reform the penalties imposed and damages awarded under Section 4 of the Clayton Act (15 U.S.C. § 15), which governs the award of antitrust damages in any case that arises under any federal antitrust law.
Under my proposal, treble damages would be reserved for cases in which the jury found that the defendant had “willfully” committed an “obvious” antitrust violation or sought to obstruct discovery of its antitrust violation by its subsequent conduct, including its conduct during the litigation itself, since many defendants, once sued, seem to prefer the worst kinds of costly stonewalling in antitrust cases.
Otherwise, the penalties for antitrust violations would be proximate damages for “antitrust injury,” plus reasonable attorney’s fees and all costs of suit, including fees for one or more expert witnesses, since expert fees are necessary in all antitrust cases governed by modern doctrines and therefore should be a recoverable cost for a prevailing plaintiff, so as to give effect to Congress’ intent when it enacted the Sherman Act — which was to ensure that a prevailing plaintiff that wins a deserving case receives not only damages, but also full recompense of its costs.
Litigating An Antitrust Case
The devil truly does lie in the details, and it cannot be emphasized enough how important it is to pay close attention to every item of communication sent or received by the concerned parties. But none of this Spartan attention matters a whit, unless the person paying it has a well-formed theory of the case that he has set out to prove. In antitrust litigation, as in all other kinds of trial work, he who tells the better story wins the case. But the story will ring false, unless it is backed up by the facts, which can be culled only by a painstaking review of everything in sight and everything that is not in sight as well. You have to know what to ask for, whom to ask, what to look for once you have the requested materials, and how to organize it all.
Antitrust cases are won by perseverance, determination, unflagging attention to the trifles, and all of this in service to proving a larger theory of the case that will convince both judge and jury.
Article by William Markham, San Diego Attorney. © 2000 (updated most recently in 2023).