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Sherman Antitrust Act

"An Act to Protect Trade and Commerce Against Unlawful Restraints and Monopolies"

What is the Sherman Antitrust Act?

The Sherman Antitrust Act is the first antitrust legislation to be passed by the United States Congress. It was introduced during the term of former US President Benjamin Harrison. The law was named after Ohio politician John Sherman, who was an expert in trade and commerce regulation.

 

Sherman Antitrust Act

 

Sherman crafted the law to prevent the concentration of power into the hands of a few large enterprises to the disadvantage of smaller enterprises. Specifically, the act attempted to prohibit business practices that attempt to monopolize the market, as well as anti-competitive agreements that push small enterprises and new entrants out of the market. The act gave the federal government and the Department of Justice the authority to institute legal suits against enterprises that violate the act.

 

History of the Sherman Antitrust Act

The Sherman Act is codified 15 U.S.C. §§ 1-38 in Title 15 of the U.S. Code. The law was passed during the Gilded Age (the 1870s to 1900) when the United States experienced great transformation in the economy, government, and technology. At that time, American workers received higher wages than their counterparts in Europe, which led to an influx of millions of European immigrants.

The influx resulted in the rapid expansion of industrialization, with the railroad industry experiencing the largest growth. The rapid growth resulted in ruthless competition, as large enterprises became bigger, while the small entities struggled to maintain their profit margins.

The uneven trading ground led to discussions about controlling large entities to ensure a level playing field for everyone. Although the word “trust” has evolved to mean entities that hold wealth for a third party, it was initially used to mean collusive behavior that made competition unfair. For example, large companies in the railroad industry merged to form strong conglomerates that would dominate the market.

Such behavior justified the US Congress’ action to regulate trade and commerce to prevent deliberate monopolization or attempts to monopolize the market. Monopolies that achieve their power through honest and natural means are not subject to the regulation.

 

Sections of the Sherman Antitrust Act

The Sherman Antitrust Act is divided into the following three sections:

 

Section One: Anti-competitive practices that restrain trade

One of the provisions of the Sherman Antitrust Act makes all anti-competitive practices that restrain trade between states illegal. Some of the practices may include agreements to fix prices, exclude certain competitors, and limit production outputs, as well as combinations to form cartels.

Any individual or entity that engages in a contract or combination that is anti-competitive is guilty of a felony. If convicted, such a party will be fined an amount not exceeding $10 million for a corporate entity, or $350, 000 for an individual or imprisonment not exceeding three years or both as the court deems fit.

 

Section Two: Prohibits monopolization or attempts to monopolize trade or commerce

The second provision prevents monopolization or attempts to monopolize trade in the United States. Such conducts may include mergers and acquisitions that concentrate too much power in the hands of one entity to the disadvantage of the smaller enterprises.

The Federal Trade Commission (FTC) reserves the right to approve or reject mergers and acquisitions transactions in the United States. Corporations and individuals that violate the provision are guilty of a felony, and the Department of Justice can take legal action against them.

 

Section Three: District of Columbia and US Territories

The third section of the Sherman Act extends the provisions provided in section one and two to the District of Columbia and US territories.

 

Impact of the Sherman Antitrust Act

The Sherman Antitrust Act was implemented at a time when there was growing hostility against companies that were seen to be monopolizing specific markets. Examples of such companies include the American Railway Union and Standard Oil that merged and acquired their smaller competitors to form conglomerates. The conglomerates conspired to charge high prices to consumers while driving small competitors out of business.

They also conspired to divide the market into zones where each entity would operate without meddling in the other party’s trading zone. After the Sherman Antitrust Act was enacted, the law was praised by consumers who were on the receiving end of the monopolization and collusion between large and small enterprises.

One notable case when the Sherman Antitrust Act was enforced was the Northern Securities Co. vs. United States (1904). National Securities was the holding company, and it controlled the Northern Pacific, Chicago, Great Northern, Burlington and Quincy Railroad companies. The public was alarmed that Northern Securities threatened to monopolize the railroad industry and become the dominant company in the United States. It led to public outcry, as the public and antitrust advocates called for the government’s involvement to prevent such unfair business practices that disadvantaged small and medium enterprises.

President Theodore Roosevelt ordered the DOJ to commence legal action against Northern Securities. The case was presented before the Supreme Court in 1903, and the judges ruled 5 to 4 against the stockholders of Northern Pacific and Great Northern. The judgment dissolved the Northern Securities Company, and the stockholders were forced to manage each railroad company independently.

 

Additional Resouces

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful

  • Antitrust Acts
  • Barriers to Entry
  • Natural Monopoly
  • Price Fixing

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