Sherman Act – Antitrust Attorneys // White Collar Firm
In 1879, an attorney representing the Standard Oil Company of Ohio created a new kind of corporate arrangement. His name was C. T. Dodd, and his arrangement was designed to bypass Ohio laws which prohibited a corporation from owning stock in other corporations.
Dodd’s arrangement was a new kind of trust. In law, a trust agreement occurs when one party (Smith) entrusts some of his property (Smith-House) to another party (Jones). The second party (Jones) then uses the property (Smith-House) to benefit the first party (Smith).
Dodd’s innovation was to use the law to structure corporations on the trust model. In his arrangement one party (Standard-Oil) would entrust some of its property (Standard-Oil-Stock) to a second party (Board-of-Trustees). The second party (Board-of-Trustees) would use the property (Standard-Oil-Stock) for the benefit of the first party (Standard-Oil), running the company as usual and making profits.
Ohio law prevents one company (Standard-Oil) from owning stock in another company (Standard-Oil-Competitor). It does not prevent a non-corporate party (Board-of-Trustees) from owning stock in the other company (Standard-Oil-Competitor). Thus, under Dodd’s new arrangement, one non-corporate party (Board-of-Trustees) can be entrusted with the stock of two companies (Standard-Oil and Standard-Oil-Competitor), using their firms (the property) for their mutual corporate benefit.
With this clever legal arrangement, Dodd created a vehicle for one company to effectively own many other companies in their same industrial sector – or in other sectors. When combined with the deep pockets of Rockefeller’s Standard Oil, the vehicle allowed the creation of a near monopoly on Oil by the late 1880’s.
This was an unacceptable conclusion in the eyes of President Benjamin Harrison and Republican Senator John Sherman. So, in 1890 Sherman crafted what is now called the Sherman Anti-Trust Act, or simply the Sherman Act. The Act passed with just one dissenting vote in the Senate on April 8, 1980 and then passed unanimously through the House of Representatives on June 20. A sponsor of the bill, President Harrison signed it into law. It is now: 15 U.S.C. § 1-7.
It’s worth quoting the first section of the Act to get a feeling for the law involved:
Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $100,000,000 if a corporation, or, if any other person, $1,000,000, or by imprisonment not exceeding 10 years, or by both said punishments, in the discretion of the court.
The Sherman Act was a bold new step in American law. It was the first law to limit monopolies, the first foray into what is known internationally as “competition law.” However, as originally envisaged, the Act was only a moderate restriction.
According to authors of the bill, the Act was not designed to prevent a so-called “merit monopoly” – a monopoly caused in the free market by one companies greatly superior products. It was designed to prevent illicit means taken to preserve such a monopoly, with the idea that – unless broken up – these powerful trusts could completely determine the prices set in their sector.
1890 marked the end of the political history of the Sherman Act, but the beginning of the judicial case history. For more than eighty years the Court has struggled with interpreting the Act’s language – giving rise to different defense strategies as the years have passed.
The initial period of Sherman Act jurisprudence was marked by profound uncertainty. Various cases expressed confusion over the scope and focus of the Act, with many seemingly counterproductive decisions. Caught in the flurry of jurisprudence regarding the Commerce Clause, the Sherman Act became increasingly secondary in legal battles.
That changed with the development of the Chicago School of Law and Economics, whose experimental focus produced a large body of scholarship directly relevant to Court jurisprudence. With enough evidence to support expert testimony, case law clarified markedly, leading to an almost universal consensus in Reiter v. Sonotone Corp. (1979) that the exclusive substantive objective of the Sherman Act was the promotion of consumer welfare.
With this focus in mind, the Court now applies a two-part test when considering Sherman. Consider an act of collusion, call it the Jones Conspiracy. In the Jones Conspiracy a number of New Hampshire copper foundries agree to merge their pricing into the Jones Price Council.
The Federal Government disapproves, and so, applying the Sherman Act, they break up the Jones Council. The Court must now consider whether or not federal legal action (either through a congressional law or an executive injunction) is constitutional.
Using the reasoning embodied by United States v. Lopez (1995) and United States v. Morrison (2000), the Court will rule as follows. In order for the actions of the Federal Government to be upheld, the Jones Council must:
• 1. Have demonstrably damaged consumer welfare by limiting competition,
• 2. Concern a relevant interstate commerce issue.
This gives a counsel defending a client firm facing Sherman Act regulation two options. His first option is to dispute (1), arguing that the client firm did not damage consumer welfare by its actions. His second option is to dispute (2), arguing that this is a state or local matter and that the Court should stay out of it for Federalist reasons.
Let’s consider how these two defenses would play out for our fictional client firms in the Jones Council.
One strategy for defending the Council is to argue that, although their decision to set up a price council might have substantially limited competition in an otherwise free market, it did not damage consumer welfare. Perhaps the New Hampshire copper foundry market is so saturated that the price floors set by the council were substantially below the fair price on an open market. To support this defense counsel would present expert testimony backing economic arguments.
A second strategy would be to argue that, while their Conspiracy damaged consumer welfare, federal regulation exceeds the scope of the Commerce Clause. Perhaps the New Hampshire State Legislature, or state courts, should break up the Council – but that is a matter for state rather than Federal Government.
Counsel employing the second strategy should bear in mind that, even if successful, further challenges can arise through state law. Therefore, this strategy should be employed only when there is reason to think state antitrust law more favorable than federal law for this kind of client.
If your organization faces antitrust charges, contact The Blanch Law Firm’s team of experience Antitrust Attorneys.