Antitrust Laws and Cases Economics

Antitrust Laws and Cases

Economics is oftentimes shaped by societal conditions and political decisions. Such is the case with business operations in the United States. Antitrust laws have gradually emerged to reflect the values and perspectives of American society. A discussion of the historical context of anti-trust laws; an examination of individual antitrust laws and amendments; and an overview of the implications such regulations have had on specific companies lends one a fuller understanding of the subject matter.

In the United States during the late 1800s, there emerged a collective ambivalence toward big businesses. Most acknowledged big businesses' abilities to produce high-quality goods at relatively inexpensive prices, which undoubtedly made Americans' lives much easier and more comfortable. At the same time, however, citizens also recognized the economic and political power that such businesses wielded. There was fear that large enterprises had the potential to destroy the democratic process and economic freedom so dearly valued by Americans. In fact, such concerns were well grounded as political corruption blossomed towards the turn of the nineteenth century.

In addition, a small number of businesses controlled substantial, if not all, portions of essential markets, such as transportation, oil, and steel. For these reasons, social pressure mounted for Congress to enact legislative restraints on businesses' structures and actions.

The first piece of federal legislation, the Sherman Antitrust Act, was enacted in 1890. It prohibited businesses from forming monopolies and from purposefully or unintentionally restraining trade. The terms employed in the Sherman Antitrust Act were fairly nebulous, and as usual, the courts were left to interpreted them, sometimes in conflicting ways. A further implication of this law is the U.S. government's right to sue infringing enterprises, to demand their disintegration, and to seek restitution.

Northern Securities Company, a mammoth conglomerate of railroads, was brought to court on accusations of antitrust violations. Most of the major railroad lines were under its control, including the Northern Pacific Railway. In 1904, Northern Securities Company was forced to dissolve after the Supreme Court ruled that the corporation held a monopoly over the railroad industry. The importance of this case lies in the precedent it set for similar rulings on cases with analogous circumstances.

Standard Oil, a huge enterprise dealing in the production, transportation, refinery, and marketing of oil, fell after the Sherman Antitrust Act was enacted. The judicial system deemed its trust unreasonable, monopolistic, and therefore illegal since the same board of directors controlled companies from various states. It demanded Standard Oil to split into 34 separate enterprises, each with its independently operated board of directors.

A merger between rival tobacco firms formed American Tobacco Company. It then quickly absorbed more than 200 competing companies and began manufacturing and storing its products. The court did not view the company's monopolistic practices favorably; in fact, they declared them illegal. Due to its industry's dominance, American Tobacco Company was dissolved into four distinct companies in 1911 by the judicial system, under the Sherman Antitrust Act.

The Aluminum Company of America (Alcoa) 'was charged...with violating Section 2 of the Sherman Act' (Case & Ray, p. 272) in 1945. The United States government pointed out Alcoa's monopolistic practices in the refined aluminum market. This was a revolutionary and high profile case because it included an attack not on Alcoa's business actions, but rather on 'the structure of the market itself' (Case & Ray, p. 272). The court ordered the breakup of Alcoa into several distinct companies because it 'concluded that regardless of how it developed, the very existence of Alcoa's monopoly' (Wells, 2002, p. 63) ran counter to antitrust laws.

As mentioned, the Sherman Antitrust Act was hazy; its terminology regarding monopolies and anti-competitive actions did not provide enough guidance and impact. As a result, the Clayton Act of 1914 served to clarify and strengthen its predecessor. The Clayton Act made price discrimination illegal, unless it was based on tangible differences in selling prices, grade, quality, and quantity (Case & Ray, p. 272). Tying contracts, which include purchasers' promises to refrain from using and buying competitors' good, were also outlawed when it restricted competition. A limited anti-merger provision emerged; wherein corporations were forbidden to acquire a competing company's shares or business when such acquisition substantially reduced rivalry. Lastly, the Clayton Act prohibited interlocking directorates -- situations in which an individual served on more than one board of directors, when: (1) the corporations are rivals, (2) eliminated competition violates antitrust laws, and (3) if each firm has over $1 million in profits, capital, and/or surplus (Case & Ray, p. 272). Along with the Clayton Act, Congress created the Federal Trade Commission (FTC) under the Federal Trade Commission Act in the same year, the former being an independent government agency capable of initiating court cases. The FTC serves as a watchdog; its creation bolsters the provisions set forth in the Clayton Act.

Amendments to the Clayton Act began in 1936, with the passage of the Robinson-Patman Act. This revision supplemented the anti-price discrimination stipulations presented in the Clayton Act. Again, its aims were to prevent monopolistic actions and to maintain a reasonable amount of competition within an industry. The Wheeler-Lea Act of 1938, an amendment to the Federal Trade Commission Act, declared misleading and unjust competitive practices illegal. Another amendment was passed in 1950, the Celler-Kefauver Anti-merger Act. As the name implies, it served to strengthen the existing terms regarding mergers, including those both vertical and conglomerate in nature.

Just as the Sherman Antitrust Act affected some businesses, so too did the Clayton Act, its amendments, and the FTC. In the Standard Oil Co. Of California and Standard Stations, Inc. versus the U.S. suit, the court declared the companies' tying agreements a violation of the Clayton Act and therefore illegal as they restricted free commerce. A similar decision was made regarding IBM after it was uncovered that the corporation required buyers of its computers to also purchase its brand-name punch cards (Dolan, 1983, pp. 253 & 254). A breach of the Celler-Kefauver Anti-merger Act was cited in a case involving Von's Grocery Company. The court ruled its merger with Shopping Bag Food Stores a violation of the Celler-Kefauver Anti-merger Act in that such an action decreased competition, albeit modestly (Dolan, pp. 252 & 253).

In the historic1948 U.S. versus Paramount Pictures et al. case, the Supreme Court declared that the studios maintained a monopoly in the motion pictures industry, the existence of which violated antitrust legislation. Specifically, it stated that block booking, a common practice among the studios, prevented healthy competition. As a result, the court ordered the corporations to sell their theater chains, thereby breaking up the monopolistic hold over that market.

Westinghouse, General Electric, and other industry giants were charged with and convicted of price-fixing practices in 1957. The case's importance lies in the fact that it was the largest price-fixing suit at the time; the involved parties garnered one and three quarters of a billion dollars per year due to its illegal practices (Golson, 2004, p. 3). It is also a significant case in that it was the first time 'individual white collar criminals [were] jailed for their offenses' (Golson, p. 3).

Naturally, not all legal suits result in company breakups. Legal action was taken against Continental Can Company in 1964. Almost a decade prior, Continental Can Company, a prominent producer of metal containers, had acquired Hazel-Atlas Glass Company, one of the largest producers of glass containers (Wells, p.82). The government claimed the merger violated the Clayton Act as it significantly diminished competition. Interestingly, the court declared that the government did not provide sufficient proof of an unreasonable reduction in competition; it dismissed the case.

Communications Goliath AT&T has been brought to court more than once. First, in 1949, the Federal Communications Commission (FCC) claimed AT&T violated antitrust laws. The FCC wished to purge AT&T of its subsidiaries. However, AT&T retained its two subsidiaries in exchange for a promise not to expand into other areas of the communication market.

The second time AT&T went to court was in 1974, under allegations of suppressing competition. In 1982, the court 'determined that AT&T used profits from its monopoly on local telephone service to suppress competition in the emerging long-distance and telephone equipment industries' (Konrad, 2000, p. 1). As a result, AT&T was forced to breakup its gargantuan corporation, thereby allowing competitors a more reasonable chance to enter the telecommunications market. In return for its dissolution, AT&T was permitted to enter the computer industry.