About the Clayton Antitrust Act

The Clayton Act Adds Teeth to US Antitrust Laws

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Longley, Robert. "About the Clayton Antitrust Act." ThoughtCo, Apr. 7, 2017, thoughtco.com/the-clayton-antitrust-act-4136271. Longley, Robert. (2017, April 7). About the Clayton Antitrust Act. Retrieved from https://www.thoughtco.com/the-clayton-antitrust-act-4136271 Longley, Robert. "About the Clayton Antitrust Act." ThoughtCo. https://www.thoughtco.com/the-clayton-antitrust-act-4136271 (accessed September 22, 2017).
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Monopoly Fighting US Antitrust Laws. Butch Martin / Getty Images

 If trust is a good thing, why does the United States have so many “antitrust” laws, like the Clayton Antitrust Act?

Today, a “trust” is simply a legal arrangement in which one person, called the “trustee,” holds and manages property for the benefit of another person or group of people. But in the late 19th century, the term “trust” was typically used to describe a combination of separate companies.

The 1880s and 1890s saw a rapid increase in the number of such large manufacturing trusts, or “conglomerates,” many of which were viewed by the public as having too much power. Smaller companies argued that the large trusts or “monopolies” had an unfair competitive advantage over them. Congress soon began to hear the call for antitrust legislation.

Then, as now, fair competition among businesses resulted in lower prices for consumers, better products and services, greater choice of products, and increased innovation.

Brief History of Antitrust Laws

Advocates of antitrust laws argued that the success of the American economy depended on the ability of small, independently owned business to compete fairly with each-other. As Senator John Sherman of Ohio stated in 1890, “If we will not endure a king as a political power we should not endure a king over the production, transportation, and sale of any of the necessaries of life.”   

In 1890, Congress passed the Sherman Antitrust Act by nearly unanimous votes in both the House and Senate. The Act prohibits companies from conspiring to restrain free trade or otherwise monopolize an industry. For example, the Act bans groups of companies from participating in “price fixing,” or mutually agreeing to unfairly control prices of similar products or services.

Congress designated the U.S. Department of Justice to enforce the Sherman Act. 

In 1914, Congress enacted the Federal Trade Commission Act prohibiting all companies from using unfair competition methods and acts or practices designed to deceive consumers. Today the Federal Trade Commission Act is aggressively enforced by the Federal Trade Commission (FTC), an independent agency of the executive branch of government.

Clayton Antitrust Act Bolsters the Sherman Act

Recognizing the need to clarify and strengthen the fair business safeguards provided by the Sherman Antitrust Act of 1890, Congress in 1914 passed an amendment to the Sherman Act called the Clayton Antitrust Act. President Woodrow Wilson signed the bill into law on October 15, 1914.

The Clayton Act addressed the growing trend during the early 1900s for large corporations to strategically dominate entire sectors of business by employing unfair practices like predatory price fixing, secret deals, and mergers intended only to eliminate competing companies.

Specifics of the Clayton Act

The Clayton Act addresses unfair practices not clearly prohibited by the Sherman Act, such as predatory mergers and “interlocking directorates,” arrangements in which the same person makes business decisions for several competing companies.

For example, Section 7 of the Clayton Act bans companies from merging with or acquiring other companies when the effect “may be substantially to lessen competition, or to tend to create a monopoly.”

In 1936, the Robinson-Patman Act amended the Clayton Act to prohibit anticompetitive price discrimination and allowances in dealings between merchants. Robinson-Patman was designed to protect small retail shops against unfair competition from large chain and “discount” stores by establishing minimum prices for certain retail products.

The Clayton Act was again amended in 1976 by the Hart-Scott-Rodino Antitrust Improvements Act, which requires companies planning major mergers and acquisitions to notify both the Federal Trade Commission and the Department of Justice of their plans well in advance of the action.

In addition, the Clayton Act allows private parties, including consumers, to sue companies for triple damages when they have been harmed by an action of a company that violates either the Sherman or Clayton Act and to obtain a court order prohibiting the anticompetitive practice in the future. For example, the Federal Trade Commission often secures court orders banning companies from continuing false or deceptive advertising campaigns or sales promotions.

The Clayton Act and Labor Unions

Emphatically stating that “the labor of a human being is not a commodity or article of commerce,” the Clayton Act forbids corporations from preventing the organization of labor unions. The Act also prevents union actions such as strikes and compensation disputes from being in antitrust lawsuits filed against a corporation. As a result, labor unions are free to organize and negotiate wages and benefits for their members without being accused of illegal price fixing.

Penalties for Violating the Antitrust Laws

The Federal Trade Commission and the Department of Justice share the authority to enforce the antitrust laws. The Federal Trade Commission can file antitrust lawsuits in either the federal courts or in hearings held before administrative law judges. However, only the Department of Justice can bring charges for violations of the Sherman Act. In addition, the Hart-Scott-Rodino Act gives the state attorneys general authority to file antitrust lawsuits in either state or federal courts.

Penalties for violations of the Sherman Act or the Clayton Act as amended can be severe and can include criminal and civil penalties:

  • Violations of the Sherman Act: Companies violating the Sherman Act can be fined up to $100 million. Individuals – typically executives of the violating corporations—can be fined up to $1 million and sent to prison for up to 10 years. Under federal law, the maximum fine may be increased to twice the amount the conspirators gained from the illegal acts or twice the money lost by the victims of the crime if either of those amounts is over $100 million.
  • Violations of the Clayton Act: Corporations and individuals violating the Clayton Act can be sued by the people they harmed for three times the actual amount of the damages they suffered. For example, a consumer who spent $5,000 on a falsely advertised product or service can sue the offending businesses for up to $15,000. The same “treble damages” provision can also be applied in “class-action” lawsuits filed on the behalf of multiple victims. Damages also include attorneys' fees and other court costs.

The Basic Objective of Antitrust Laws

Since the enactment of the Sherman Act in 1890, the objective of the U.S. antitrust laws has remained unchanged: to ensure fair business competition in order to benefit consumers by providing incentives for businesses to operate efficiently thus allowing them to keep quality up and prices down.

Antitrust Laws in Action – Breakup of Standard Oil

While charges of violations of the antitrust laws are file and prosecuted every day, a few examples stand out due to their scope and the legal precedents they set. One of the earliest and most famous examples is the court-ordered 1911 breakup of the giant Standard Oil Trust monopoly.

By 1890, the Standard Oil Trust of Ohio controlled 88% of all oil refined and sold in the United States. Owned at the time by John D. Rockefeller, Standard Oil had achieved its oil industry domination by slashing its prices while buying up many of its competitors. Doing so allowed Standard Oil to lower its production costs while increasing its profits.

In 1899 the Standard Oil Trust was reorganized as the Standard Oil Co. of New Jersey. At the time, the “new” company owned stock in 41 other oil companies, which controlled other companies, which in turn controlled yet other companies. The conglomerate was viewed by the public – and the Department of Justice as an all-controlling monopoly, controlled by a small, elite group of directors who acted without accountability to the industry or the public.

In 1909, the Department of Justice sued Standard Oil under the Sherman Act for creating and maintaining a monopoly and restricting interstate commerce. On May 15, 1911, the U.S. Supreme Court upheld the lower court’s decision declaring the Standard Oil group to be an "unreasonable" monopoly. The Court ordered Standard Oil broken up into 90 smaller, independent companies with different directors.