What Is the Sherman Antitrust Act?: History, Purpose & Clayton Act

The Sherman Antitrust Act was the first Federal act that made monopolistic business practices illegal. It was passed in 1890, but its power to control big business was undercut by a Supreme Court ruling. However, in 1914, Congress passed the Clayton Antitrust Act to supplement and strengthen the Sherman Act, and both the Sherman and Clayton Acts remain the primary statutory enforcement methods to curb monopoly activity.

In the late 1800s, European immigrants came to the United States in swarms, hoping to share in the higher wages enjoyed by workers here. The masses of new people looking for work hastened the expansion of industrialization, with railroads growing especially rapidly. The expanding business climate led to cutthroat competition as big companies jockeyed for increasingly larger shares of the market.

The companies worked to form monopolies with arrangements called trusts in which businesses joined and collaborated with one another to keep out new entries to the market and squeeze out smaller competitors. Congress became concerned about this business plan.

Congress enacted the Sherman Antitrust Act as an attempt to rein in big enterprises. The Sherman Act prohibits contracts or agreements in restraint of trade or commerce. It made it illegal to attempt to monopolize any aspect of interstate trade. Violation was a felony under the law.

The Sherman Act was intended to support competition and loosen the strangle hold some large enterprises had on business. But the law was not specific enough to accomplish the task. Just five years after its enactment, it was dealt a stunning blow by the Supreme Court in United States v. E. C. Knight Company (1895) when the Court ruled that one of the defendants charged with antitrust behavior (who controlled about 98 percent of all sugar refining in the country) did not violate the law. It is important to note that subsequent Supreme Court decisions, while not expressly overruling E.C. Knight, limited that decision to its specific set of facts, effectively nullifying it as legal precedent.

Read More: What is Antitrust Law?

By 1914, large companies had cornered entire segments of the country's economy, employing means like predatory pricing, exclusivity contracts and big-enterprise mergers to stifle local businesses and end competition. Congress remained concerned about the anti-competitive activities of the biggest companies in the country and, in 1914, took action.

Congress passed the Clayton Antitrust Act in October 1914. This law was a new government attempt to curb the power of trusts and monopolies and maintain market competition. It was intended to strengthen the Sherman Antitrust Act by prohibiting anti-competitive mergers and acquisitions, predatory pricing and discriminatory business dealing and all other types of unethical corporate behavior.

The Clayton Antitrust Act is quite long with many sections. Sections that have had the most impact address:

• Price discrimination. This section of the act forbids the practice of price discrimination, whereby a company sells its product or service for different prices depending on who is buying. This strategy is intended to lessen competition or enable amonopoly.
• Monopoly or attempts to create a monopoly. This section stops enterprises from making any sale, lease, contract or agreement that reduces competition or creates a monopoly in a specific industry.
• Mergers and acquisition. This section stops companies from merging or buying up smaller entities with the intention of gaining power, lessening competition and monopolizing an industry.* Labor union exclusion. Section 6 specifically exempts labor unions and agricultural activities from regulations. It prohibits companiesfrom preventing labor strikes, boycotts,collective bargaining and compensation disputes.

Under the Clayton Antitrust Act, anyone injured by violations of the act can sue corporations or their owners for their damages. If violations are proven, the victims can recover three times the amount of compensatory damages suffered.

This means that a consumer who was damaged by collusive behavior and had damages of $10,000 could sue for damages of $30,000. The act also gives the Federal Trade Commission the power to enforce its provisions.