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What is the Clayton Antitrust Act?

definition

The Clayton Antitrust Act of 1914 outlawed various abusive business practices, including predatory and discriminatory pricing and anticompetitive mergers.

🤔 Understanding the Clayton Antitrust Act

The Clayton Antitrust Act of 1914, named for U.S. Congressman Henry Clayton, who introduced the bill in the House of Representatives in 1914, was an effort to curb abusive business practices such as the creation of monopolies. In the late 19th and early 20th century, large companies routinely formed agreements with each other (trusts) to fix prices and divide up territory. The Sherman Act of 1890 declared some types of monopolies illegal, but corporations soon found loopholes. The Clayton Antitrust Act of 1914 was an attempt to strengthen the Sherman Act by specifically addressing the weaker aspects of the earlier legislation.

example

Imagine there are three large paving companies that frequently bid against each other for state and federal highway projects. One day, over lunch, the heads of the three companies decide that it would be simpler and more lucrative if they simply merged — eliminating all competition. Their scheme would be an anticompetitive merger, which would likely be a violation of antitrust laws and one of the actions the Clayton Antitrust Act was designed to stop.

Takeaway

The Clayton Antitrust Act of 1914 is like your mom stopping the playground bullies from keeping you out of the basketball game…

The big kids (a group of large companies) scheme to keep you (a small company) out of their basketball game (the marketplace). Unfortunately, you’re too small to force the bullies to let you play (compete). But your mother (the federal government) uses her authority (the Clayton Antitrust Act) to step in and break up the monopoly the bullies have on the neighborhood basketball court.

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What was the Sherman Antitrust Act of 1890?
What is the Clayton Antitrust Act?
The Sherman Antitrust Act and the Clayton Antitrust Act: What are the differences?
What was the intended purpose of the Clayton Antitrust Act?
What were the effects of the Clayton Antitrust Act?
What did the Clayton Antitrust Act make illegal?
What are the amendments to the Clayton Antitrust Act?
What are the major provisions of the Clayton Antitrust Act?

What was the Sherman Antitrust Act of 1890?

The Sherman Antitrust Act of 1890 was the first federal law outlawing unfair business monopolies. United States Senator John Sherman, who introduced the legislation, said of the law, “If we will not endure a king as a political power, we should not endure a king over the production, transportation, and sale of any of the necessities of life.”

Unfortunately, the act was loosely worded, creating various loopholes that some businesses exploited. Later legislation, notably the Clayton Antitrust Act of 1914, sought to address those issues.

What is the Clayton Antitrust Act?

The Clayton Antitrust Act is a law that makes it difficult for businesses to limit their competition unfairly. It was signed into law in October of 1914. The bill gets its name from the sponsor of the legislation, U.S. Congressman Henry Clayton of Alabama.

At the end of the 19th and the beginning of the 20th century, the term “trusts” described massive business conglomerations. Together, the companies in a trust could control their field, making it difficult for competitors to thrive. Individuals and small businesses reached out to the federal government for protection against such cartels. The result was legislation that blocked the creation of these trusts, so the rules are called antitrust laws.

The first federal antitrust law was the Sherman Antitrust Act of 1890, sponsored by United States Senator John Sherman of Ohio. The Clayton Act is an amendment to the Sherman Act.

The Clayton Antitrust Act prohibits a number of unfair business practices, including anti-competitive mergers and predatory and discriminatory pricing; the law also allows individuals to sue corporations for unfair practices and protects the rights of workers to organize and protest businesses.

The Sherman Antitrust Act and the Clayton Antitrust Act: What are the differences?

One of the significant differences between the Sherman Antitrust Act and the Clayton Antitrust Act is their contrasting views toward human labor. The Sherman Act considered labor as a commodity. The act, therefore, regulated work in much the same way it did other products.

Under the Sherman Act, unions were not lawful because, by their very nature, they require cooperation. Workers must combine forces to create a new entity. The Sherman Act saw this as the creation of an unfair trust. A union was also vulnerable to the charge of price fixing.

On the other hand, the Clayton Act doesn’t see labor as a commodity. The act doesn’t attempt to apply the rules governing business monopolies to unions. Rather, the Clayton Act is legislation that explicitly legalizes the formation of unions. It also recognizes a union’s right to engage in such activities as collective bargaining and striking.

What was the intended purpose of the Clayton Antitrust Act?

The Clayton Act is widely considered an improvement on the Sherman Antitrust Act of 1890. The Sherman Act contained legal loopholes exploited by large companies. As a result, the Sherman Act was never as effective at preventing the growth of monopolies as Congress had hoped it would be.

Before the Clayton Act, large businesses routinely collaborated to dominate their fields. Instead of competing against each other to offer the lowest prices, they secretly coordinated to keep prices high.

Small businesses were unable to compete with industrial giants, and the lack of competition reduced consumers’ chances of finding products at reasonable prices.

What were the effects of the Clayton Antitrust Act?

The Clayton Antitrust Act and its amendments gave the federal government authority to both allow and prevent the potential growth of companies that could stifle competition. An example is the mergers and acquisitions within the big-box office supply market.

In 1997, the government prevented the proposed merger of the two largest office supply chains, Staples and Office Depot. A federal district court ruled that the merger would violate antitrust laws by severely reducing competition.

However, in 2013, the government did allow Office Depot to acquire OfficeMax, then the market’s third-largest chain. The competitive landscape had changed with the ascendance of online giant Amazon. The government didn’t feel that the acquisition would harm consumers.

In 2015, Staples announced plans to attempt once again to merge with Office Depot. The retailers claimed that they needed more than ever to combine to save their businesses. Nevertheless, in 2016, the government again ruled against the merger, citing similar concerns about reducing competition. The FTC argued that a merger would likely result in higher prices.

What did the Clayton Antitrust Act make illegal?

The Clayton Antitrust Act addresses the illegality of improper price discrimination and monopolies. It also covers unfair mergers and acquisitions — as well as something called interlocking directorates.

Price discrimination

Price discrimination involves selling the same product at different prices to different people. Not all price discrimination is illegal. For example, if your extended family goes to the movies, the seats will not cost the same for everyone. The children, students, and the elderly may pay less for their tickets than will regular adults.

But the kind of price discrimination attacked by the Clayton Act unfairly seeks to drive competitors out of the marketplace. A supplier might give favorable rates to some businesses that purchase their product while giving unfavorable prices to others. The suppliers set their prices so that only large businesses could afford to compete.

In 1936, Congress passed the Robinson-Patman Act as an amendment to the Clayton Act. The amendment outlawed specific discriminatory merchant-to-merchant allowances, services, and pricing.

Monopolies

The Clayton Act can help prevent the rise of monopolies by blocking certain business practices that might eventually lead to monopolies. Under section three, companies can’t enter into exclusive dealing contracts that would dangerously reduce the competition in a particular industry.

Unfair mergers and acquisitions

The Clayton Act doesn’t allow businesses to purchase rivals if the acquisition would severely limit competition. Competitors also cannot merge if the resulting enterprise would unfairly dominate the industry.

The Clayton Act received an amendment in 1976 with the Hart-Scott-Rodino Antitrust Improvements Act that strengthened its stance against mergers. Businesses have to report to the federal government any plans for a large-scale merger or acquisition.

Interlocking directorates

The Clayton Act forbids one person from making business decisions at two or more rival companies. For example, someone cannot sit on the board of directors for competing car manufacturers.

What are the amendments to the Clayton Antitrust Act?

The Clayton Antitrust Act is an amendment to the Sherman Antitrust Act. In turn, the Clayton Act has also received amendments.

The Robinson-Patman Act of 1936 reinforces the pricing discrimination rules of the Clayton Act. The Robinson-Patman Act pertains to commodities and purchases. The act disallows a seller giving preferential treatment to a buyer if such treatment might result in the buyer gaining an unfair advantage over competitors.

The Celler-Kefauver Act of 1950 strengthens the merger rules in the Clayton Act. It covers not only horizontal mergers (companies that are direct competitors) but also vertical mergers (companies that don’t compete but may supply goods to each other).

The Hart–Scott–Rodino Antitrust Improvements Act of 1976 requires companies to file a notice with the Federal Trade Commission (FTC) when considering a merger. The FTC investigates the matter and determines if the merger would create an undesirable monopoly or significantly lessen competition in that industry before granting approval.

What are the major provisions of the Clayton Antitrust Act?

Under the Clayton Act, businesses and individuals who suffer harm as the result of a company violating the act can file lawsuits. Plaintiffs, both individuals and groups, can sue for up to three times the amount of their damages. The act empowers courts to order companies who lose an antitrust case to pay their accuser — even if it requires selling assets.

In 1914, the same year as the Clayton Act, Congress passed the Federal Trade Commission Act, which banned “unfair methods of competition” and established the Federal Trade Commission (FTC). One of the FTC’s express purposes is to make businesses adhere to existing antitrust laws.

The U.S. Department of Justice (DOJ) Antitrust Division also enforces antitrust laws. The FTC and the DOJ communicate regarding investigations so that one agency doesn’t duplicate the research of the other.

The FTC tends to concentrate on cases involving consumer spending such as food and healthcare. The FTC is also responsible for reviewing two or more companies’ requests to merge. The DOJ handles cases in specific industries such as banking or telecommunications.

The U.S. can order the dismantling of a monopoly if its existence harms the public. Not all monopolies, though, are illegal. Your local natural gas company is probably a monopoly. For utilities, in particular, it is not always practical or possible to have multiple competitors in the same geographic region — such as in a city or town.

However, the government has safeguards in place to prevent these types of monopolies from taking advantage of their position. One such precaution is the government’s regulation of how much your gas or electric company can charge for its products and services.

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