Economic recovery: Lessons from antitrust history

By: Dan Mogin

It is an understatement to say the economic and banking crisis, and even the future of capitalism and free markets, have been in the headlines lately. Regulation — governmental control of business behavior — is being discussed to an extent unimaginable in the last 30 years. On March 17, the U.S. House of Representatives Judiciary Committee, Subcommittee on Courts and Competition Policy held hearings on “Too Big to Fail and the Role of Antitrust Law.” The consensus, not surprisingly, was that antitrust had a significant role to play in the economic recovery.

The policy goals of the antitrust or pro-competition laws are to encourage free and open competition in the marketplace, not to regulate. The marketplace is a battleground where numerous interests compete; antitrust tries to ensure a fair fight on a level field. It seeks to eliminate undue market power — the ability to control prices or outputs — generally by prohibiting restraints of trade (mostly in the form of collusion between competitors) and monopolization. The goal is for market participants, including businesses and ordinary consumers, to have economic choices and to receive better goods and services at the lowest economic cost (economic cost includes a normal profit or rate of return).

Antitrust is not a form of regulation, nor is it “anything goes” or laissez-faire. It tries to enhance efficiency and innovation by protecting competition but not particular competitors; it is not a small business protection act. Unlike regulation, the antitrust laws do not dictate outputs or prices. Private enforcement of the antitrust laws allows market participants to challenge alleged barriers to effective competition. Antirust seeks to restore competition and protect free markets via the legal process.

The antitrust laws are not intended to punish successful companies simply because of their success or large companies simply because of their size. Because we want consumers to get the best for the least through the free market, only conduct that excludes competitors, stifles innovation, limits supply or raises prices is prohibited. Superior products, prices and management are decidedly not grounds for liability. Because it involves marketplace behavior, however, antitrust has few bright lines. As a result, although Congressional intent is crystal clear, judicial and executive attitudes have vacillated.

The first antitrust economist was also the first free market economist — Adam Smith. It is no coincidence that Smith’s capitalist manifesto, “The Wealth of Nations,” was published in 1776. With tea parties currently in vogue in certain political circles, it is worth noting that the tea originally dumped in Boston Harbor belonged to a crown monopoly, the British East India Co. The founding fathers’ revolt against the monarchy was also a revolt against monopolies; legend has it that freedom from monopoly was among the rights considered for inclusion in early drafts of both the Declaration of Independence and the Bill of Rights. Fittingly, given this history, a long-ago Supreme Court proclaimed that the antitrust laws are the Bill of Rights for the economy.

Smith’s ideas about the political economy of liberty are the philosophical backbone of our antitrust laws. On individual initiative: “in promoting his own interest … an individual intends only his own gain, and is led by an invisible hand; thus promoting the social good.” On cartels: “people of the same trade seldom meet together, even for merriment or diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” On monopoly: “monopolists, by keeping the market constantly understocked, by never fully supplying the effectual demand, sell their commodities much above the natural price, and raise their emoluments, whether they consist in wages or profit, greatly above their natural rate.”

At the turn of the century, powerful combines controlled or monopolized many basic American industries. These were organized as trusts and functioned as holding companies. Trusts facilitated arrangements between firms that would otherwise be competitors. Railroad trusts controlled not just transportation but vast resources like land, timber and mining properties, as well as distribution channels. The Standard Oil Trust controlled the oil business from the wellhead through refining, transportation, shipping, pipelines, tank wagons, distributors, etc. — all in the age before gasoline and the automobile.

As the trusts grew and exercised their monopoly power, prices for basic goods and services rose dramatically. Political scandals resulted when muckrakers exposed the trusts’ cozy relationships with lawmakers.

One reaction to these forces was the rise of the Populist and Progressive political movements, which protested against the power of the trusts. Antitrust was a hot political issue and enjoyed strong public support. In 1890, Sen. John Sherman, an Ohio Republican, introduced and Congress passed the Sherman Act. It was intended to codify and strengthen existing common law unfair competition laws, which have existed since Biblical times.

The Sherman Act remains our basic antitrust law. Government enforcement actions, including criminal penalties, are allowed. The act has two basic sections. The first prohibits concerted action by competitors in restraint of trade, such as price fixing, output restriction between competitors, group boycotts and the like. The second prohibits monopolization or attempts to monopolize, both of which require proof of relevant market and predatory acts to foreclose competition.

The Clayton Act, first enacted in 1914, supplements the Sherman Act. Its primary purposes are to combat price discrimination, control corporate mergers that might tend to create a monopoly or substantially lessen competition, and allow private enforcement of the antitrust laws by injured parties. Congress also passed the Federal Trade Commission Act in 1914 in partial reaction to fears that the federal judiciary was predisposed to hobble effective antitrust enforcement.

Early judicial decisions refused to apply the antitrust laws in the intended manner. In its first case involving the Sherman Act, the Supreme Court refused to apply the statute to the sugar trust that controlled more than 98 percent of the country’s sugar refining capacity. Subsequent judicial decisions also stifled the legislative intent. The Justice Department adopted a policy of non-enforcement.
It was not until trust-buster Teddy Roosevelt attacked the Standard Oil Trust that early antitrust enforcement gained any real traction with the federal judiciary. Although politically overshadowed by Roosevelt, William Howard Taft, a once and future member of the federal judiciary, was an even larger figure in antitrust’s formative years

Judicial attitudes toward antitrust enforcement, particularly at the Supreme Court level, can be tepid. For example, the Supreme Court has repeatedly held that consumer benefit is the paramount goal of our antitrust law. Yet one of its decisions slams the courthouse door on consumers by allowing only “direct purchasers” access to federal court and the Sherman Act. If you buy a can of beans at the grocery store, or a computer at the discount store, you are not a direct purchaser of the product in relation to the manufacturers and distributors, even though you are most assuredly paying a higher price as the antitrust overcharges are passed on through the chain of distribution.

The Rehnquist Court’s decisions eroded the role of juries and trials in antitrust cases and helped shaped our health care system. Perhaps greater trust in competition (and facts) would have staved off the enormous rise in market power by insurers compared to health care providers at the expense of patients, and would have rewarded efficiency rather than lobbying prowess.
More recently, the Roberts Court has radically altered longstanding antitrust precedents. Their decisions have imposed stringent threshold pleading requirements (upsetting over 50 years of Supreme Court precedents), restricted circumstantial evidence, made vertical price-fixing or resale price maintenance more difficult to prove and immunized securities and telecomm markets from antitrust liability, contrary to at least 55 years of the court’s jurisprudence that disfavored implied immunities.

Executive branch antitrust policies change with each administration. FDR vacillated between aggressive antitrust enforcement and government-sponsored industrial cooperation. The Carter administration tackled the AT&T (NYSE: T) and IBM (NYSE: IBM) monopolies and de-regulated the airlines. The Reagan and Bush II administrations had non-enforcement policies, while Bush I was more centrist. The Clinton administration took on the Microsoft (Nasdaq: MSFT) and Intel (Nasdaq: INTC) monopolization cases, but its merger policy was not aggressive. Ironically, in the major merger enforcement case attempted under Bush II, a Reagan-appointed judge ruled against the government.

Economists frequently complain that while the courts profess fealty to economics, they are in fact 20-30 years behind the times. In light of the current Supreme Court’s hostility toward antitrust and the nation’s proclivity to discount competition as remedy in times of economic duress, the Obama administration may well have a very tough row to hoe in antitrust.

That said, we are currently in a crisis of confidence in markets. History has discredited economic regulation in no small part because regulators are frequently captured by the regulated, stifling innovation and entrenching incumbents. Restoring confidence requires a commitment to protect competition. Our antitrust laws do not need to be updated; they need to be enforced.
Dan Mogin, managing attorney of The Mogin Law Firm PC, specializes in antitrust, consumer protection, securities/investment and other complex business litigation, including class actions. Mogin also teaches antitrust at USD School of Law.

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