One understudied area of the formative period of antitrust and of Standard Oil’s conduct during this period is in the use and nature of antitrust private claims against Standard Oil. In contemporary antitrust, the ratio of private to government brought cases is ten to one. In contrast, one hundred years ago government cases constituted nearly all antitrust cases, and many of such cases were state cases. On the hundredth anniversary of the Standard Oil decision, the present Article uses a discussion of the antitrust private actions against Standard Oil prior to the company’s court-ordered break up in 1911 as a starting point for a broader discussion about the interaction between public and private rights of action in antitrust in the modern era. Traditionally, government will bring antitrust cases to offset competitive distortions in the market either because private plaintiffs do not bring the right kinds of antitrust cases or because private actors lack the resources of government to bring good cases. This Article suggests circumstances in which government not only does not correct but also actually creates the market distortion by bringing a nonmeritorious case that aids the firm’s competitors rather than a case that helps consumers. In identifying this behavior, this Article combines two strands of literature–the strategic use of antitrust by private actors on the one hand and a public choice based economic theory of regulation on the other.
After one hundred years one might expect a rule of law to be settled. In the case of the “rule of reason,” first endorsed by the Supreme Court in its 1911 decision dissolving the Standard Oil trust, the conventional wisdom often portrays the opposite. Citing its principal early enunciation in Board of Trade of Chicago v. United States (“Chicago Board of Trade”), critics often denigrate the rule of reason variously as “unstructured,” “full-blown,” “uncertain,” “error-prone,” and costly to administer in all its forms. In a metaphor first applied by Judge Taft in his earlier United States v. Addyston Pipe & Steel Co. decision, application of the rule of reason has been likened to “set[ting] sail on a sea of doubt.”
That criticism of the rule of reason is dated and exaggerated. The rule of reason has evolved considerably since Standard Oil and Chicago Board of Trade, largely due to the Court’s own march away from per se rules and undemanding burdens of proof. As that march began in the late 1970s, the Court moved to add contemporary economic content to the broad principles articulated in Chicago Board of Trade. In formative cases like Continental T.V., Inc. v. GTE Sylvania Inc.; National Society of Professional Engineers v. United States (“NSPE”); Broadcast Music, Inc. v. CBS (“BMI”); and NCAA v. Board of Regents of the University of Oklahoma, the modern era’s rule of reason was honed to focus on specific, core economic concepts, especially anticompetitive effect and efficiency.
Few decisions are as maligned as Lochner v. New York, which struck down a law setting maximum hours for bakers. Innumerable critics assert that Lochner was a paradigmatic example of judicial activism, whereby laissez-faire judges imposed their personal policy preferences under the guise of judicial review. According to this widely shared view, both Lochner and its progeny improperly read the “liberty” of the Fourteenth and Fifth Amendments to include “liberty of contract,” which the Court then protected against substantive abridgment by laws that fell outside of the police power. The police power, in turn, was defined narrowly, so as to preclude, for instance, laws designed to transfer income from one class to another. Thankfully, this school of thought concludes, the Supreme Court abandoned Lochner and its progeny in 1937, thus allowing state legislatures and Congress to have their way and impose redistributive legislation, unfettered by private liberty, throughout the land.
Within antitrust circles, Standard Oil is every bit as beloved as Lochner is maligned. Despite its age, major decisions continue to endorse Standard Oil and its Rule of Reason as an appropriate exposition of the Sherman Act. Indeed, no Supreme Court Justice has (in recent memory) questioned the correctness of Standard Oil or its holding that Section 1 only forbids “unreasonable” restraints. On the contrary, the most “progressive” Justices, while expressly criticizing Lochner, have invoked and relied upon Standard Oil and its Rule of Reason when resolving antitrust controversies.
Academic commentators have, over the years, lamented the failure of monopoly remedies to achieve effective relief. For some, the failure highlighted the foolishness of the law interfering with market structures and conduct, while for others it was evidence of the failure of the courts and law enforcers to act with sufficient boldness and courage. Both lines of critics focus on the options chosen and by implication assume that a better option would have existed if only those enforcing the law had adopted it. A third perspective has emerged in a few works, notably that of Professor and former Federal Trade Commissioner William Kovacic, who has pointed out the great difficulty of finding appropriate and workable remedies. One of his central observations is that in monopoly litigation, the remedy should be a central concern at the outset of the case and not an afterthought.
The problem with finding appropriate remedy reflects in at least some of the cases an apparent failure to approach monopoly litigation with an “end game” in mind. But other institutional factors play a significant role in the apparently modest results of some remedies. Among those influences are the inherent economics of the market being monopolized, changes in the policy goals of those charged with enforcing antitrust law, the technological dynamics of the markets at issue, and the personification of the corporation such that some remedies are analogized to a “death sentence,” which in turn is conceived to be an extreme punishment for mere corporate misconduct.
We seek both to acknowledge and to begin to explain the FTC’s recent success in this industry, as this success provides a useful model for other agencies, including the DOJ’s working group, which often must consider how to address political interest in their law enforcement decisions. We focus on three areas of intense political interest in which the FTC has avoided implementing what we think are extreme and unnecessary suggestions from congressional and local enforcement officials: (1) merger enforcement; (2) scrutiny of certain business practices; and (3) retail prices. Our analysis is drawn primarily from incidents over the last fifteen years. We believe the FTC has largely succeeded in recent years in limiting the influence of political antitrust for five reasons: (1) continuity across administrations in the standards used to challenge mergers and identify problematic conduct; (2) a commitment to transparency; (3) engaging its critics and a willingness to subject itself to self-criticism through the use of retrospective reviews of its enforcement decisions; (4) a robust research agenda conducted by the FTC’s Bureau of Economics; and (5) an affirmative, pro-competition program, as exemplified by the FTC Office of Policy Planning’s comments on state proposals that would limit or restrict competition or competitive behavior in the petroleum industry.
In his 2012 article, Revisiting the Revisionist History of Standard Oil, Christopher Leslie takes issue with John McGee’s work on predatory pricing and its influence on antitrust law and scholarship. Leslie claims McGee’s analysis was methodologically flawed, ideologically motivated, but ultimately successful in “distorting” predatory pricing law by persuading courts to adopt a standard too permissive of anticompetitive predation. Holding aside the specific methodological critique of McGee’s analysis, in this paper I demonstrate that Leslie’s claim that McGee distorted predation law fails for a number of reasons. The most fundamental reason is that Leslie does not consider the likely counterfactual antitrust world without McGee’s analysis. Specifically, Leslie does not consider the very likely alternative explanation for the decline in plaintiffs’ success in predation cases–namely, Phillip Areeda and Donald Turner’s seminal 1975 analysis. Whether debates continue within the economics literature regarding the details of McGee’s contribution to our understanding of predatory pricing theory and the Standard Oil saga, there is scant evidence supporting Leslie’s primary claim that McGee has had a distorting influence that has induced courts to adopt permissive attitudes toward anticompetitive predation. Nor is there evidence in the economics literature supporting Leslie’s ancillary claim that current law underdeters anticompetitive predation. A proper understanding of the intellectual foundations of modern predation doctrine reveals a doctrine far more stable and durable than Leslie implies.
Andrew I. Gavil presents a thoughtful and illuminating portrait of the evolution of the rule of reason in United States antitrust law since Standard Oil. While the rule of reason, as initially embodied in Standard Oil Co. v. United States and Board of Trade of Chicago v. United States (“Chicago Board of Trade”), may have once been an invitation to make any and all arguments about the competitive nature of a given restraint, Gavil rightly points out that this is no longer the case. As currently employed, the rule-of-reason analysis is typically quite structured. The plaintiff must first show that the defendant’s action had an anticompetitive effect. If she can do this, then the defendant has the burden to prove that its action has a procompetitive benefit. If, and only if, the court finds that both sides have met their initial burden, will the court proceed to balance the two effects.
Of course, the evidence of anti- and procompetitive effects for any particular conduct is always far from perfect. Whenever evidence is imperfect, we know from decision theory (Bayes’ rule) that one’s prior beliefs about the plausibility of anti- or procompetitive effects will be important (and will be more important the less perfect the evidence). Thus, one can think of the per se rule in antitrust as just an extreme form of the rule of reason, in which the court’s prior beliefs dictate the decision. For example, a court’s prior belief that price-fixing is anticompetitive may be so strong that the evidence required to overcome that prior belief (establishing a procompetitive effect on balance) would have to be enormously powerful. One way to express the justification for the per se rule is that the probability that such evidence will exist is so small that it is not worth examining it. In that light, one can also view the structured rule of reason approach as one that should (although, in practice may not) reflect a similar paradigm in less extreme cases: we require stronger evidence of anticompetitive effects for conduct that we think are less likely to be anticompetitive and are more receptive to procompetitive effects arguments in such cases.
It has been well established in the economics literature that the antitrust laws have been used strategically to undermine the competitive market process, whether the alleged abuses were based in fact or not. It should, then, come as no surprise that the origins of one of the most famous decisions in antitrust jurisprudence, the 1911 judgment by the Supreme Court against Standard Oil, can be traced back to an alliance of rivals that had seen their business interests hurt by John D. Rockefeller, Sr.’s innovative entrepreneurship. In fact, the judgment seemed to confirm early fears attributed to “[m]ost economists in the late 19th century . . . [that] the law would impede attainment of superior efficiency promised by new forms of industrial organization.” Others concluded later that “the enforcement of the Sherman Act over the past 95 years has probably reduced industrial competitiveness.”
On that occasion more than a century ago–an event that has been called “the mother of all monopolization cases”–the Court decided unanimously (with Justice Harlan concurring in part and dissenting in part ) that the U.S. government had the right to impose “broader and more controlling remedies,” including the dissolution of an entire corporate entity, in announcing that they henceforth would apply a “rule of reason” in evaluating alleged antitrust law violations.
Even its more stalwart defenders are concerned that capitalism is in crisis. Alan Greenspan conceded a “flaw” in his free-market beliefs. The Financial Times, in 2012, invited Arundhati Roy and Occupy Wall Street to share a dialogue with high-level officials and leading economists over the crisis in capitalism.
The crisis in capitalism might have come as a shock to some, but not to many middle- and lower-income households. Well before 2008, middle-class Americans saw little gains in income, despite gains in productivity. When mass unemployment came, the middle class shrank further. America’s social net, U.S. Senator Bernie Sanders described in his historic speech, is threadbare. America’s infrastructure is crumbling. Primary and secondary education for many families is inadequate. Incarcerations, home foreclosures, underwater mortgages, the number of people in poverty, and the public’s dissatisfaction with Congress are at record highs. With America’s debt in the trillions of dollars, a larger fiscal crisis looms. Many Americans in 2012 were dissatisfied with the United States’ moral and ethical climate (68 percent surveyed), the federal government’s size and power (69 percent), and the state of America’s economy (83 percent). Given the dissatisfaction, it is a wonder why more people are not protesting.
For several years, HD DVD and Blu-ray competed to replace DVD and become the next-generation movie disc format. The battle was not fought with technological superiority but instead with exclusivity contracts. This Note analyzes whether these contracts violated the Sherman Antitrust Act (“Sherman Act”).