The Sherman Antitrust Act, 1890 - Competition Law

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1. Background: the trusts
2. Section 1: restraints of trade
3. Section 2: monopolisation
4. Rule of reason and per se rule
5. Enforcement and penalties
6. Criticism
How this is examined

Cases checked to exist. Read the judgment before quoting a holding.

Every case cited here has been checked to exist — the citation resolves and names the right parties. The propositions attributed to each case have not been verified line by line against the judgment. Case names link through to the full judgment: read it before quoting a holding in an examination answer, and never carry a proposition from notes into court on trust.

The examinable core. Two sections, two judge-made rules. Section 1 forbids contracts, combinations and conspiracies in restraint of trade; section 2 forbids monopolising or attempting to monopolise. Because almost every contract restrains trade a little, the courts developed the rule of reason (Standard Oil, 1911) and, for hard-core cases, the per se rule (Socony-Vacuum, 1940). The papers print “Sherman Anti-Trust Act, 1980”; the year is 1890, and it is worth saying so in the first line.

1. Background: the trusts

After the Civil War, American industry consolidated rapidly. Competing companies in oil, sugar, whisky, tobacco and railways transferred their shares to a board of trustees, who then ran the businesses as one. The best known was John D. Rockefeller’s Standard Oil Trust (1882). The trusts raised prices, squeezed farmers and small businesses, and obtained preferential railway rates. Several States passed laws against them, but the trusts operated across State lines. Congress responded with the Act “to protect trade and commerce against unlawful restraints and monopolies”, sponsored by Senator John Sherman of Ohio and signed on 2 July 1890. It is codified at 15 U.S.C. sections 1 to 7. The word “antitrust” for competition law comes from this history.

2. Section 1: restraints of trade

Section 1 declares illegal “every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations.” Three points:

It requires two or more parties acting together. A single firm’s conduct is outside section 1.
It covers both horizontal agreements (among competitors) and vertical ones (between supplier and dealer).
Read literally, “every contract” would condemn ordinary commerce, since any sale or partnership restrains the parties to some degree. The courts therefore read in the word unreasonable.

3. Section 2: monopolisation

Section 2 makes it an offence for any person to monopolise, or attempt to monopolise, or combine or conspire with others to monopolise, any part of inter-State or foreign trade. It reaches a single firm. The leading formulation is in United States v. Grinnell Corp. (1966): monopolisation needs (1) the possession of monopoly power in the relevant market and (2) the wilful acquisition or maintenance of that power, as distinguished from growth or development as a consequence of a superior product, business acumen or historic accident. Monopoly itself is not unlawful; acquiring or keeping it by exclusionary conduct is. In United States v. Microsoft Corp. (D.C. Circuit, 2001) Microsoft was held to have unlawfully maintained its monopoly in PC operating systems by exclusionary dealings designed to protect Windows from Netscape and Java.

Indian law follows the same idea through section 4 of the Competition Act: dominance is lawful, abuse is not.

4. Rule of reason and per se rule

Rule of reason. In Standard Oil Co. of New Jersey v. United States (1911) the Supreme Court ordered the break-up of Standard Oil into some thirty-four companies, but held that section 1 forbids only unreasonable restraints. In Board of Trade of the City of Chicago v. United States (1918) Brandeis J. stated the method: “The true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition.” The court looks at the business, the condition before and after the restraint, its nature and effect, and the reason for adopting it.

Per se rule. Some practices are so plainly harmful that no inquiry into reasonableness is needed. In United States v. Socony-Vacuum Oil Co. (1940) the Court held price-fixing illegal per se: a combination formed to raise, depress, fix, peg or stabilise prices is illegal whatever its reasonableness. Northern Pacific Railway Co. v. United States (1958) described per se offences as agreements whose “pernicious effect on competition and lack of any redeeming virtue” make them conclusively presumed unreasonable. The per se category covers price fixing, bid rigging, market allocation and (in some forms) group boycotts.

The vertical shift. Vertical restraints were once per se illegal too (Dr. Miles Medical Co. v. John D. Park & Sons, 1911, on resale price maintenance). The Court moved non-price vertical restraints to the rule of reason in Continental T.V. Inc. v. GTE Sylvania (1977) and finally overruled Dr. Miles in Leegin Creative Leather Products v. PSKS (2007), holding that minimum resale price maintenance is to be judged by the rule of reason.

The Indian parallel. Section 3(3) of the Competition Act presumes that horizontal cartels, market sharing and bid rigging have an appreciable adverse effect on competition — a rebuttable version of the per se rule. Section 3(4) judges vertical agreements by their effect, with the factors in section 19(3) — a statutory rule of reason. That is the best single sentence to carry from this note into a Unit III answer.

5. Enforcement and penalties

Criminal. Violations of sections 1 and 2 are felonies. As amended in 2004, the maximum fine is US$100 million for a corporation and US$1 million for an individual, with imprisonment up to 10 years; the fine can be raised to twice the gain or loss under the general federal sentencing law. The Antitrust Division of the Department of Justice prosecutes, and in practice reserves criminal cases for hard-core cartels.
Civil. The Department of Justice can seek injunctions, including structural relief (break-up) as in Standard Oil.
Private actions. Persons injured can sue; under section 4 of the Clayton Act they recover treble damages and costs. Private enforcement is a large share of US antitrust.
Extra-territorial reach. The Act covers trade “with foreign nations”; in United States v. Aluminum Co. of America (1945, the Alcoa case) Learned Hand J. applied it to agreements abroad intended to and actually affecting US imports — the origin of the effects doctrine reflected in section 32 of the Indian Act.

6. Criticism

The Act is short and general, which left the courts to make the law and produced uncertainty for decades. It also said nothing about mergers through asset purchases, price discrimination or interlocking directorates, and created no specialist agency. Congress filled these gaps in 1914 with the Clayton Act and the Federal Trade Commission Act.

How this is examined

January 2026 set “Discuss the salient features of Sherman Anti-Trust Act” as the Unit II essay; June 2025 set it as a short note. For the essay: background, section 1, section 2, rule of reason and per se rule with the four cases, enforcement and penalties, criticism, and a closing paragraph on what India borrowed (section 3(3) presumption, section 3(4) effects test, section 4 abuse not size, section 32 effects doctrine). For the note, sections 2 to 4 are enough.