Sherman Antitrust Act

First legislation enacted by the United States Congress (1890) to curb concentrations of power that interfere with trade and reduce economic competition. It was named for U.S. Senator John Sherman of Ohio, who was an expert on the regulation of commerce.

One of the act's main provisions outlaws all combinations that restrain trade between states or with foreign nations. This prohibition applies not only to formal cartels but also to any agreement to fix prices, limit industrial output, share markets, or exclude competition. A second key provision makes illegal all attempts to monopolize any part of trade or commerce in the United States. These two provisions, which comprise the heart of the Sherman Act, are enforceable by the Department of Justice through litigation in the federal courts. Firms found in violation of the act can be ordered dissolved by the courts, and injunctions to prohibit illegal practices can be issued. Violations are punishable by fines and imprisonment. Moreover, private parties injured by violations are permitted to sue for triple the amount of damages done them.

For more than a decade after its passage, the Sherman Act was invoked only rarely against industrial monopolies, and then not successfully, chiefly because of narrow judicial interpretations of what constitutes trade or commerce among states. Its only effective use was against trade unions, which were held by the courts to be illegal combinations. The first vigorous enforcement of the Sherman Act occurred during the administration of President Theodore Roosevelt (1901–09). In 1914 Congress passed two legislative measures that provided support for the Sherman Act. One of these was the Clayton Antitrust Act, which elaborated on the general provisions of the Sherman Act and specified many illegal practices that either contributed to or resulted from monopolization. The other measure created the Federal Trade Commission, providing the government with an agency that had the power to investigate possible violations of antitrust legislation and issue orders forbidding unfair competition practices.

In 1920, however, the Supreme Court applied the so-called “rule of reason” interpretation of the Sherman Act, which explains that not every contract or combination restraining trade is unlawful. Only “unreasonable” restraint of trade through acquisitions, mergers, exclusionary tactics, and predatory pricing constitute a violation of the Sherman Act. This interpretation allowed large firms considerably more latitude. But in a case involving the Aluminum Company of America (1945), the court reversed its stance, declaring that the size and structure of a corporation were sufficient grounds for antitrust action. Since that ruling, the prohibition against monopoly has been periodically enforced, involving in some cases the dismemberment of the offending firm. One notable example late in the 20th century was the 1984 breakup of the American Telephone & Telegraph Company, which left the parent company, AT&T, as a provider of long-distance service while seven regional “Baby Bell” companies provided local telephone service. Many of the original Baby Bell companies have since merged. One of the largest antitrust suits since that time was brought against the Microsoft Corporation. A decision in 1999 found the company had attempted to create a monopoly position in Internet browser software, but a court-ordered breakup of Microsoft was overturned by an appeals court in 2001.

Copyright © 1994-2011 Encyclopædia Britannica, Inc. For more information visit Britannica.com.