The Sherman Antitrust Act - Business Law - Essay Example

Name Tutor Course Date The Sherman Antitrust Act Introduction During the last third of the nineteenth century, there were massive developments of trusts in America. Many people thought that this new development of trusts would stiffen the competition and this will result in manipulation of prices. In response to this, many states enacted laws that could regulate this corporate behavior especially in the West and Southern states. The US congress later passed The Sherman Antitrust Act in 1890 to prohibit the business abuse caused by monopolies. The Sherman Act was the first federal antitrust law that was passed by the federal government any business combination, or contracts inform of trusts, or any plan to restraint trade. This law was passed as a result of strong public opposition to the increase in economic power of the big corporations and combination of businesses that was happening in US in the decades that followed the Civil War (US Bureau of corporations, 132). The act was named after John Sherman, who was the younger brother to William Tecumseh Sherman, the then American Civil War general. John Sherman acted as a senator in US and also as the chairman of the Senate finance committee in US. He was also an expert in trade regulation and was the main author of the Sherman Antitrust Act. This law seemed very pleasing to the eyes of the members of the congress but there would be difficulty in enforcing the act. The act faced strong opposition especially from the farmers who complained of the high charges in transporting their products to the big cities by rail. Importance of antitrust acts to consumers The major importance of the antitrust laws is to protect competition. When competition is open in the markets, the consumers benefit, businesses lower their prices and introduce better products to attract more customers. Since businesses will struggle to make profits with such opportunities, they turn to better methods of production and this improves their innovativeness. Consumers benefit from this by enjoying reduce prices, and high quality products and services. However, those companies that do not succeed in meeting the customer needs may lose out the battle of competition. In response to this, competitors may agree on fixed prices or to divide up the consumers. This leads to loss of competition benefits for the consumers. The resulting prices may be high, and may not be an accurate reflection of cost, resulting to poor allocation of a society’s resources (McEachern, 496). Nevertheless when the competition is working out properly, the government may not intervene. The antitrust laws are there to ensure that any arrangements that may be made between firms for example where competitors may agree to conduct a joint research or carry out a development project, may be of benefit to consumers. This law is only against arrangements between firms that that may result to increased consumer prices or to deny them access to new and better products. In cases where the competing firms agree to fix the prices, or make other arrangements that protect consumers from bad effects of competition, the government is laws ready to act to the best interest of the consumers (Givens, 37). Sections of the Sherman Antitrust Act (1890) Section 1: trusts, etc., in restraint of trade-penalty This states that any combination whether a trust or anything else that may be in restrain or trade among various states, or in a foreign country is termed as illegal. Anyone who may enter into a contract in such a combination that has been declared illegal will be charged guilty of a felony, convicted and may be fined an amount not more than ten million dollars. If it is a corporation that has been found guilty, it shall be fined $350,000. There will also be imprisonment of not more than three years or both. Section 2.monopolizing trade a felony; penalty Anyone who monopolizes, or try to monopolize, or conspire with any other person to monopolize in any American state, or with a foreign country, shall be charged of a felony and convicted. If a corporation, it shall be fined an amount not more than $10 million but if an individual, he shall be fined $350,000 or serve a jail term of not more than three years, or both according the court judgment. Section 3. Trusts in territories or District of Columbia illegal: combination a felony This states that any combination in restraint of trade in any territory of the United States, or in the District of Columbia, in restraint if trade between such a territory and another in United States or District of Columbia is declared illegal. Any one who shall engage in such a contract or a combination shall be charged of felony on conviction and shall be fined an amount not more than $10 million if it a corporation. If an individual, he shell be fined $350,000 or imprisoned for a jail term of not more than three years or both depending on the court’s discretion. Section 4: Jurisdiction of courts; duty of United States attorneys; procedure The various district courts in America are provided with jurisdictions to see that there is no violation of section 1 to 7 of this act, and it shall be the responsibility of various attorneys in United States, respective of their districts, directed by the Attorney General, to organize proceedings in equity to ensure that there no violation of such laws. Such proceedings may be done as petitions, putting forward the case and hoping that such violation shall be told or otherwise prohibited. If the parties involved in the complain shall have been notified of such petition accordingly, the court shall proceed with hearing and case determination soonest possible. If such a case is left pending and the final decree not made, any temporary restraining order or prohibition can be done by the court as it may be considered just in the premises. Section 5: Bringing in additional parties If the court will find it necessary that during the pending of a case as in section 4, that there are parties who should be brought before the court, the court may call for their summon, whether they live in the district where the court is located or not, and subpoenas in that area shall be attended to in any district by the marshal thereof. Section 6: Forfeit of property in transit Any property whose ownership is through a contract or the combination, and is subject to the one mentioned in section 1 of the act, and is in the process of being transported across two states or to a foreign country, it shall be surrendered to the United States. It shall also be seized and condemned in proceedings such as those stated in the law of forfeit, seizure or condemnation of imported property in US (Stanley & US Congress House, 107). Section6a: conduct involving trade or commerce with foreign nations This states the situations under which section 1 to 7 of this act shall not apply to conduct involving trade with foreign nations unless: i) The conduct has a direct and predictable impact on a) Trade or commerce which is not with foreign nations, or import trade/commerce with foreign nations. b) On export trade/commerce with foreign nations and the person is engaged in such trade in US. ii) Such effect leads to a claim under provisions of section 1 to 7 of this act. Section 7: The word person, or persons, wherever used in this act shall include corporations or associations existing under the U.S laws, or laws of any particular territory, state or foreign nation (US Bureau of corporations, 143). The main provisions of the Sherman Antitrust Act The Sherman Antitrust Act has two main provisions. These are “restraint of trade” and “monopolization”. The act makes it illegal for a group of corporations to engage into contracts in “restraint of trade” and also for an individual corporation to “monopolize” a certain market. a). Agreements in restraint of trade This is stated in section 1 of the act that says that any contract or conspiracy that has been that has been reached to in restraint of trade among various states in US or with foreign countries is considered illegal. The term restraint of trade is used to mean those business practices that are unreasonably competitive. Contract or conspiracy refers to any business garment involving two or more persons or businesses. These agreements can either be horizontal or vertical agreements. Horizontal agreements are those involving two or more corporations that are competing with each other. The most common agreement that is reached horizontally is in fixing prices where the two competing firms decide to settle on a common price that they will be charging the consumers (Townsend, 120). The other one is market division where the competing firms decide on the area that each will sell its products. Boycotts also occur in trade restraint where some firms may decide to lock others out of the market. This may be done to those firms that sell at lower prices or whose products are of high value. This can be done by the agreeing firms where they may instruct a certain supplier not to sell to those firms that are charging lower prices. These firms will therefore have nothing to offer wand will be locked out of the markets (Letwin, 100). Vertical agreements are those reached between the buyer and the seller. Almost all the vertical agreements are legal but there are some which are illegal. These include the resale price maintenance or vertical price fixing where the seller compels the buyer to sell at a certain retail price. The other one is vertical nonprice restraint where the suppliers order the retailers not to sell the products in some territories. Such agreements are declared illegal by the Sherman Antitrust Act (Broder, & Maitland, 51). b). Monopolization This is stated in section 2 of the Sherman Antitrust Act which states that any one who shall monopolize or attempt to monopolize in nay part of the United States shall be charged guilty. This section reaches the unilateral actions by dominant firms, referring to anticompetitive practices of the monopolists that may result in their increased power. Basically, for a corporation to be termed as monopoly, it should have control of at least 70 percent of the market in its area of operation. Now for the corporation to be accused of monopolization, it must get involved in anticompetitive practices defined in the act. This is because most of the monopolies engage in such practices to reinforce their monopoly status and prolong this status (Cefrey, 17). Enforcement of the Sherman Antitrust Act For a long time after it was passed, the law was rarely applied against the industrial monopolies and it did not succeed. It came to be effective after a number of years and it worked against the labour unions which were considered to be illegal by the courts. This was due to the political pressure that the act was facing and also the undefined wording of the act. There were claims that the act did not adequately define some words such as combination, monopoly, conspiracy and trust. There were also some judicial; interpretations against the act on what trade among states was made of. Five years after the Sherman Antitrust Act was passed, the Supreme Courts of United States took the act to pieces in a case of U.S v E.C Knight Company in 1895. This was after a court ruling that the defendant, American Sugar refining company, had not violated the act being in control 98 percent of sugar refining in US. The court’s explanation was that even if the company controlled sugar manufacturing, it did not control trade in sugar. The trust-bursting era was later launched by President William McKinley in 1898 by appointing a number of senators to the U.S industrial Commission. The commission later gave a report to President Theodore Roosevelt which acted as a basis for Roosevelt’s action on the trust and eventually the success of the Sherman Antitrust Act (Arnold, 112). The most influential decision was reached in 1904 when the Supreme Court held that the Federal Government’s suit under the Sherman Antitrust Act to end the Northern Securities Company ( that held a railroad in Minnesota) v. Northern Securities company. In1911, after several years of proceedings, the court found that Standard Oil Company of New Jersey had violated the Sherman Antitrust Act due to its excess limitations on trade. These restrictions were mostly seen in practices of eradicating competitors through buying them out directly and also by eliminating them out of the business by short term price reduction in a given region. This was historic decision that saw the Supreme Court establish a crucial legal standard referred to as the rule of reason. This standard stated that the large size and monopoly are basically not bad and do not go against the Sherman Antitrust Act. Instead, they use some illegal tactics to acquired and maintain the monopoly or the large size status. Following this decision, the court ordered that Standard Oil should break apart 33 of its crucial associates and to supply the stock to its own shareholders and not to create new trusts. The resulted to formation of several and entirely independent and vertically associated oil companies that were ranked among the most influential companies in the world. The intense competition that followed after this decision was reached led to a big impulsion to innovation and expansion of the Oil industry. Subsequent laws After the Sherman Antitrust Act was passed, the U.S congress passed two other legislations in 1914. These were to give additional support to the Sherman Antitrust Act. These were the Clayton Antitrust Act, the Robinson-Patman Act and the Celler-Kefauver Act of 1950. The Clayton Antitrust Act was a further elaboration on the various provisions of the Sherman Antitrust Act (Martin, 311). It gave specifications on several illegal practices that led to or resulted from monopolization. It openly banned commercial practices such as price discrimination, buying out of competing firms and linking the board of directors. Another contribution of the Clayton Antitrust Act was creation of Federal Trade Commission, a body that was given power to carry out possible violations of antitrust laws and to give orders against unfair competitive practices (Kirkwood, 57). The enforcement of the antitrust Act started to diminish during the 1920s booming but was later revived during the Administration of president Franklin Delano Roosevelt. He passed other laws to strengthen the powers of the government towards antitrust. These included the Robinson-Patman Act of 1926 that offered support for the Clayton Act by banning the large firms from selling at different prices for different customers if this could harm any small firm. The other act was the Celler-Kefauver Act of 1950 that gave further support to the Clayton Act by preventing merger between one firm and a competitor where the firm buys the physical assets of the competitor to lessen that competition power of the competitor (Fligstein, 161). The most successful enforcement of the Sherman Antitrust Act was during the second half of the twentieth century during the breakup of the American Telephone and Telegraph Technology (AT&T) whose decision was reached in 1982 but went to effect in 1984. This breakup has intense effects both to the telecommunication industry and also to the entire American economy (Mueller & US Congress House,7). Criticism of the Sherman Antitrust Act The Sherman Antitrust Act has attracted a lot of criticism. One area from which criticism was coming from is on the ability of the Act to improve competition for the sake of benefiting the consumers or was just to benefit the poorly performing businesses at the expense of the big well performing and innovative ones. Some critics argued that the act was putting down innovativeness and this was causing harm to the society. They stated that some mergers were to bring innovative ideas and better products that would have benefited the society in future. The Act was therefore o blame of the society does not enjoy these benefits that were shunned by the act. Another aspect of the antitrust act that faced criticism was normative. This means arguing against the ability of the law, if it is inevitable, to achieve its goals. For example, they argued that the antitrust act made the prices of some products to be low, but if the prices of Oil were to be reduced, this would not correct the wrong that trusts have done to the people since they destroyed the legitimate competition and had driven those who were doing honest business from the enterprises. Secondly, they argued that if the aim of the Act was to protect the consumers and did this by offering them lower prices, this would be harmful since to breaks the economies of scale hence breaking up the big and established businesses (Cise, & Lifland, 36). The argument here is that the goal of the act is not to lower the prices, but to protect competition in the market and also the consumers; the law is acting on the contrary since it should be protectionist. This argument was due to the William McKinley tariff that was supported by Senator Sherman three months after the Act. This was the argument of an American economist Thomas Dilorenzo who further said that the aim of the protectionist was not to see consumer prices fall. Instead, since they needed political support, they had to assure members of the public that businesses will not combine to increase the prices to a politically prohibitive level. Generally, these criticisms were from the conservative politicians, judges and scholars such as Robert Bork and Richard Posner among others. Conclusion The Sherman Antitrust Act was enacted when the United States of America was experiencing a massive increase in trusts in decades that followed the Civil war. Basically, people though that these would reduce the prices and benefit the consumers but this was the case. The consumers benefitted for a short while but later the trusts started engaging the unreasonable competitive practice that led to oppression of consumers. These practices included fixation of prices and market division. In response to this, the government settled on the Sherman Antitrust Act that aimed at protecting the competition. This act faced many challenges in its enforcement and also criticism from some judges and economists. Eventually it was passed as a law that acted to the best interests of the consumers. Works Cited US Bureau of corporations. Trust laws & unfair competition. New York: Government printing Office, 1916. McEachern, William. Microeconomics: A Contemporary Introduction. Boston: Cengage Learning, 2008. US Bureau of corporations. The Sherman Antitrust Act of 1890. New York: Oceana Publishers, 1976. Broder, Douglas. & Maitland Julian. A guide to US antitrust law. New York :Sweet & Maxwell publishers, 2005. Stanley, Augustus. & US Congress House. Violations of Antitrust Act of 1890: hearings before the Committee on Rules of the House of Representatives on House resolution no. 139, to Cefrey, Holly. The Sherman Antitrust Act: Getting Big Business Under Control. New York: The Rosen Publishing Group, 2003. Kirkwood, John. Antitrust law and economics. London: Emerald Group, 2004. Givens, Richard. Antitrust: An Economic Approach. California: Law Journal Press, 1983. Fligstein Neil. The transformation of corporate control. Harvard: Harvard University Press, 1993. Mueller Willard. & US Congress House. The Celler-Kefauver Act: the first 27 years : a study. Washington, DC: G.P.O, 1978. Cise, Jerrold. & Lifland, William. Understanding the antitrust laws. Boston: Practising Law Institute, 1980. Townsend, James. Extraterritorial antitrust: the Sherman antitrust act and U.S. business abroad. Mexico: Westview Press, 1980. Letwin, William. Law and economic policy in America: the evolution of the Sherman Antitrust Act. Chicago: University of Chicago Press, 1981. Arnold, Thurman. & , Duke University. School of Law. The Sherman antitrust act and its enforcement. Kansas: School of Law, Duke University, 1940. Martin, David. Mergers and the Clayton act. California: University of California Press, 1959. Read More