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Sherman Act §2

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Overview Edit

Section 2 of the Sherman Antitrust Act[1] provides in pertinent part:

Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony. . . .

Section 2 establishes three offenses, commonly termed "monopolization," "attempted monopolization," and "conspiracy to monopolize." Liability under Section 2 requires

(1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.[2]

This provision represents a key component of U.S. antitrust enforcement. Unlike Section 1 of the Sherman Act or Section 7 of the Clayton Act, Section 2 specifically targets single-firm conduct by firms with monopoly power or a dangerous probability of attaining such power. Firms possessing monopoly power can reduce output and charge higher prices than would prevail under competitive conditions and thereby harm consumers.

The statutory language of section 2 is terse. Its framers left the statute's centerpiece — what it means to "monopolize" — undefined, and the statutory language offers no further guidance in identifying prohibited conduct.[3] Instead, Congress gave the Act "a generality and adaptability comparable to that found to be desirable in constitutional provisions"[4] and "expected the courts to give shape to the statute's broad mandate by drawing on the common-law tradition"[5] in furtherance of the underlying statutory goals. It is "the provision of the antitrust laws designed to curb the excesses of monopolists and near-monopolists."[6]

Purposes of Section 2 Edit

Section 2 serves the same fundamental purpose as the other core provisions of U.S. antitrust law: promoting a market-based economy that increases economic growth and maximizes the wealth and prosperity of our society.

As the Supreme Court has explained:

The Sherman Act was designed to be a comprehensive charter of economic liberty aimed at preserving free and unfettered competition as the rule of trade. It rests on the premise that the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices, the highest quality and the greatest material progress. . . .[7]

Section 2 achieves this end by prohibiting conduct that results in the acquisition or maintenance of monopoly power, thereby preserving a competitive environment that gives firms incentives to spur economic growth. Competition spurs companies to reduce costs, improve the quality of their products, invent new products, educate consumers, and engage in a wide range of other activity that benefits consumer welfare. It is the process by which more efficient firms win out and society's limited resources are allocated as efficiently as possible.[8]

Section 2 also advances its core purpose by ensuring that it does not prohibit aggressive competition. Competition is an inherently dynamic process. It works because firms strive to attract sales by innovating and otherwise seeking to please consumers, even if that means rivals will be less successful or never materialize at all. Failure — in the form of lost sales, reduced profits, and even going out of business — is a natural and indeed essential part of this competitive process. "Competition is a ruthless process. A firm that reduces cost and expands sales injures rivals — sometimes fatally.”[9]

Likewise, although monopoly has long been recognized as having the harmful effects of higher prices, curtailed output, lowered quality, and reduced innovation,[10] it can also be the outcome of the very competitive striving we prize. "[A]n efficient firm may capture unsatisfied customers from an inefficient rival," and this "is precisely the sort of competition that promotes the consumer interests that the Sherman Act aims to foster."[11] Indeed, as courts and enforcers have come to understand, the prospect of monopoly profits may well be what "attracts 'business acumen' in the first place; it induces risk taking that produces innovation and economic growth."[12] Competition is ill-served by insisting that firms pull their competitive punches so as to avoid the degree of marketplace success that gives them monopoly power or by demanding that winning firms, once they achieve such power, "lie down and play dead."

Section 2 thus aims neither to eradicate monopoly itself, nor to prevent firms from exercising the monopoly power their legitimate success has generated, but rather to protect the process of competition that spurs firms to succeed.[13] The law encourages all firms — monopolists and challengers alike — to continue striving. It does this by preventing firms from achieving monopoly, or taking steps to entrench their existing monopoly power, through means incompatible with the competitive process.

Evolution of Section 2 Standards and Enforcement Edit

The history of Section 2 reflects an ongoing quest to align the statute’s application with the underlying goals of the antitrust laws. Consistent with the law’s common-law character, courts have interpreted the Sherman Act’s broad mandate differently over time and have revisited particular Section 2 rules in response to advances in economic learning, changes in the U.S. economy, and experience with the application of Section 2 to real-world conduct.

Today, a consensus — as reflected in both judicial decisions and the views of a broad cross-section of commentators — exists on at least seven core principles regarding Section 2, each of which is discussed in the sections that follow:

  • Unilateral conduct is outside the purview of Section 2 unless the actor possesses monopoly power or is likely to achieve it.
  • The mere possession or exercise of monopoly power is not an offense; the law addresses only the anticompetitive acquisition or maintenance of such power (and certain related attempts).
  • Acquiring or maintaining monopoly power through assaults on the competitive process harms consumers and is to be condemned.
  • Mere harm to competitors — without harm to the competitive process — does not violate Section 2.
  • Competitive and exclusionary conduct can look alike — indeed, the same conduct can have both beneficial and exclusionary effects — making it hard to distinguish conduct that should be deemed unlawful from conduct that should not.
  • Because competitive and exclusionary conduct often look alike, courts and enforcers need to be concerned with both underdeterrence and overdeterrence.
  • Standards for applying Section 2 should take into account the costs, including error and administrative costs, associated with courts and enforcers apply in those standards in individual cases and businesses applying them in their own day-to-day decision making.

The Monopoly-Power Requirement Edit

Section 2’s unilateral-conduct provisions apply only to firms that already possess monopoly power or have a dangerous probability of achieving monopoly power. This core requirement’s importance as a basic building block of Section 2 application to unilateral conduct should not be overlooked. Among other things, this requirement ensures that conduct within the statute’s scope poses some realistic threat to the competitive process, and it also provides certainty to firms that lack monopoly power (or any realistic likelihood of attaining it) that they need not constrain their vigorous and creative unilateral-business strategies out of fear of Section 2 liability.[14]

As the Supreme Court explained in its 1984 Copperweld decision, because “robust competition” and “conduct with long-run anti-competitive effects” may be difficult to distinguish in the single-firm context, Congress had authorized “scrutiny of single firms” only where they “pose[d] a danger of monopolization.”[15]

The Anticompetitive-Conduct Requirement Edit

Section 2 prohibits acquiring or maintaining (and in some cases attempting to acquire) monopoly power only through improper means.[16] As long as a firm utilizes only lawful means, it is free to strive for competitive success and reap the benefits of whatever market position (including monopoly) that success brings.[17] Anticompetitive conduct may take a variety of forms, but it is generally defined as conduct to obtain or maintain monopoly power as a result of competition on some basis other than the merits.[18] Conduct that impairs the opportunities of rivals and either does not further competition on the merits or does so in an unnecessarily restrictive way may be deemed anticompetitive.[19] Conduct that merely harms competitors, however, while not harming the competitive process itself, is not anticompetitive.[20]

Nearly a century ago, in Standard Oil, one of the Supreme Court’s first monopolization cases, the Court observed that the Act does not include “any direct prohibition against monopoly in the concrete.”[21] The Court thus rejected the United States’ assertion that Section 2 bars the attainment of monopoly or monopoly power regardless of the means and instead held that without unlawful conduct, mere “size, aggregated capital, power and volume of business are not monopolizing in a legal sense.”[22]

United States v. Aluminum Co. of America reemphasized Standard Oil’s distinction between the mere possession of monopoly and unlawful monopolization as a key analytical concept.[23] Writing for the Second Circuit, Judge Hand reasoned that, simply because Alcoa had a monopoly in the market for ingot, it did “not follow” that “it [had] ‘monopolized’” the market: “[I]t may not have achieved monopoly; monopoly may have been thrust upon it.”[24] The court determined that mere “size does not determine guilt” under Section 2 and that monopoly can result from causes that are not unlawful, such as “by force of accident” or where a market is so limited it can profitably accommodate only one firm.[25]

Further, the court observed that monopoly can result from conduct that clearly is within the spirit of the antitrust laws. Where “[a] single producer may be the survivor out of a group of active competitors, merely by virtue of his superior skill, foresight and industry,” punishment of that producer would run counter to the spirit of the antitrust laws: “The successful competitor, having been urged to compete, must not be turned upon when he wins.”[26]

Twenty years after Alcoa, and more than fifty years after Standard Oil, the Supreme Court articulated in Grinnell[27] what remains the classic formulation of the Section 2 prohibition. Drawing from Alcoa, the Court condemned “the willful acquisition or maintenance of [monopoly] power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.”[28]

Enforcement Edit

To prove unlawful monopolization under Section 2, a plaintiff must establish two elements:

(1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.”[29]

Section 2 enforcement is an area of great debate within the antitrust world today. Legal and economic scholarship has revealed that many single-firm practices once presumed to violate Section 2 can create efficiencies and benefit consumers. At the same time, there is a greater appreciation for the potential harm from excessive restrictions on single-firm conduct, particularly harm to innovation, which is the most important source of economic growth. These developments cause some to question whether certain unilateral conduct should be per se lawful, whether penalties for Section 2 violations should be reduced, and even whether Section 2 should be repealed.

Others, however, contend that certain potentially anticompetitive practices may be more prevalent, or at least more theoretically possible, than earlier scholarship suggested. In addition, some suggest that certain characteristics of today’s markets, for example, the increasing emergence of network effects, make timely and effective Section 2 enforcement even more important than in the past.

In activities that enjoy First Amendment protection, such as lobbying, firms may enjoy broad immunity from antitrust liability for concerted efforts to influence political action in restraint of trade, even when such efforts employ unethical or deceptive methods.[30] “[I]n less political arenas,” however, “unethical and deceptive practices can constitute abuses of administrative or judicial processes that may result in antitrust violations.”[31] Private standards-determining organizations, in contrast to legislative or quasi-legislative bodies, have historically been subject to antitrust scrutiny.[32]

References Edit

  1. 15 U.S.C. §2.
  2. Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297, 306-07 (3d Cir. 2007) (full-text).
  3. 15 U.S.C. §2; see also 3 Areeda & Hovenkamp, Antitrust Law ¶632, at 49 (2d ed. 2002) ("[T]he question whether judicial intervention under §2 requires more than monopoly is not answered by the words of the statute."); Robert H. Bork, The Antitrust Paradox 57 (1978) ("The bare language of the Sherman Act conveys little . . . ."); Frank H. Easterbrook, "Vertical Arrangements and the Rule of Reason," 53 Antitrust L.J. 135, 136 (1984) ("The language of the Sherman Act governs no real cases."); Thomas E. Kauper, "Section Two of the Sherman Act: The Search for Standards," 93 Geo. L.J. 1623, 1623 (2005) ("Over its 114-year history, Section Two of the Sherman Act has been a source of puzzlement to lawyers, judges and scholars, a puzzlement derived in large part from the statute's extraordinary brevity." (footnote omitted)).
  4. Appalachian Coals, Inc. v. United States, 288 U.S. 344, 360 (1933) (full-text).
  5. National Soc'y of Professional Eng'rs v. United States, 435 U.S. 679, 688 (1978) (full-text).
  6. LePage's Inc. v. 3M, 324 F.3d 141, 169 (3d Cir. 2003) (full-text) (en banc).
  7. Northern Pac Ry. Co. v. United States, 356 U.S. 1, 4 (1958) (full-text).
  8. See 2B Phillip E. Areeda et al., Antitrust Law ¶402 (3d ed. 2007). See generally William W. Lewis, The Power of Productivity: Wealth, Poverty, and the Threat to Global Stability 13–14 (2004).
  9. Ball Mem'l Hosp., Inc. v. Mutual Hosp. Ins., Inc., 784 F.2d 1325, 1338 (7th Cir. 1986) (full-text) (Easterbrook, J.).
  10. See, e.g., Standard Oil Co. of N.J. v. United States, 221 U.S. 1, 52 (1911) (full-text) (citing the danger that a monopoly will "fix the price," impose a "limitation on production," or cause a "deterioration in quality of the monopolized article"); Sherman Act Section 2 Joint Hearing: Empirical Perspectives Session Hr'g Tr. 13, Sept. 26, 2006 [hereinafter Sept. 26 Hr'g Tr.] (Scherer) (observing that reluctance to "cannibalize the rents that they are earning on the products that they already have marketed" may make monopolists "sluggish innovators"); Sherman Act Section 2 Joint Hearing: Welcome and Overview of Hearings, Hr'g Tr. 25, June 20, 2006 [hereinafter June 20 Hr'g Tr.] (Barnett) (identifying as "a major harm of monopoly" the possibility that a monopolist may not feel pressure to innovate).
  11. Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 767 (1984) (full-text).
  12. Verizon Comm'ns, Inc. v. Law Offices of Curtis v. Trinko, LLP, 540 U.S. 398, 407 (2004) (full-text); see also June 20 Hr’g Tr., at 25–27 (Barnett).
  13. The statute targets "the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident." United States v. Grinnell Corp., 384 U.S. 563, 570-571 (1966).
  14. See John Vickers, "Market Power in Competition Cases," 2 European Competition J. 3, 12 (2006).
  15. Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 768 (1984).
  16. See Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 456 (1993); United States v. Grinnell, 384 U.S. 563, 570–71 (1966).
  17. Verizon Commcn's Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 407 (2004).
  18. LePage's Inc. v. 3M, 324 F.3d 141, 147 (3d Cir. 2003) (en banc).
  19. Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 604-05 & n.32 (1985).
  20. See Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 224 (1993) (“It is axiomatic that the antitrust laws were passed for ‘the protection of competition, not competitors.’ ” (quoting Brown Shoe Co. v. United States, 370 U.S. 294, 320 (1962); Spectrum Sports, 506 U.S. at 458 (“The law directs itself not against conduct which is competitive, even severely so, but against conduct which unfairly tends to destroy competition itself.”).
  21. Standard Oil Co. of N.J. v. United States, 221 U.S. 1, 62 (1911).
  22. Id. at 10; see also id. at 62.
  23. 148 F.2d 416 (2d Cir. 1945) (Hand, J.).
  24. Id. at 429.
  25. Id. at 429–30.
  26. Id. at 430.
  27. 384 U.S. 563 (1966).
  28. Id. at 571.
  29. United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966); see Verizon Communications, 540 U.S. st 407; Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451, 481 (1992); Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 596 n.19 (1985).
  30. See Eastern R.R. Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127, 136-38, 144-45 (1961); Mine Workers v. Pennington, 381 U.S. 657, 669-72 (1965); see also Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492, 499-500 (1988).
  31. Allied Tube, 486 U.S. at 500.
  32. Id. ; American Soc. of Mech. Eng'rs, Inc. v. Hydrolevel Corp., 456 U.S. 556, 571 (1982) (“[A] standard-setting organization . . . can be rife with opportunities for anticompetitive activity.”).

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