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A federal law enacted in 1914 as an amendment to the Sherman AntiTrust Act (15 U.S.C.A. § 1 et seq. [1890]), prohibiting undue restriction of trade and commerce by designated methods.

The Clayton Act (15 U.S.C.A. § 12 et seq. [1914]) was originally enacted to exempt unions from the scope of antitrust laws by refusing to treat human labor as a commodity or an article of commerce. Today, it is used primarily to prohibit the suppression of free competition by making illegal four business practices: price discrimination, which is the sale of the same product to comparably situated buyers at different prices; tying and exclusive dealing contracts, which are the sale of products on condition that the buyer stop dealing with the seller's competitors; corporate mergers, the acquisition of competing companies by one company; and interlocking directorates, the members of which are common members on the boards of directors of competing companies.

These practices are illegal when they might substantially lessen competition or tend to create a monopoly in any line of commerce. By making the suppression of free competition unlawful the Clayton Act supplements the provisions of the Sherman Act, which outlaws monopolies.

The political seed for the Clayton Act (38 Stat. 730) was sown in the 1912 presidential election, a three-way contest between William Howard Taft, the incumbent Republican; Woodrow Wilson, the Democrat challenger; and Theodore Roosevelt, running for his old job on the Progressive Party, or "Bull Moose," ticket. All three parties believed that the Supreme Court had been far too lenient to large corporations and that antitrust laws needed to be strengthened. When Wilson won the election, he instructed Congress to work on new legislation, and the Clayton Act emerged two years later in 1914.

The principal provisions of the Clayton Act, which is far more detailed than the Sherman Act, the law it was meant to supplement, include (1) a prohibition on anticompetitive price discrimination; (2) a prohibition against certain tying and exclusive dealing practices; (3) an expanded power of private parties to sue and obtain treble (triple) damages; (4) a labor exemption that permitted union organizing; and (5) a prohibition against anticompetitive mergers.

Price Discrimination

Section 2 of the Clayton Act states that: "It shall be unlawful ... to discriminate in price between different purchasers of commodities ... where the effect of such discrimination may be to substantially lessen competition or tend to create a monopoly." The drafters of the Clayton Act believed that large firms such as Standard Oil perpetuated their monopolies by engaging in selective, or discriminatory predatory pricing. For example, Standard might be charging ten cents per gallon for its fuel oil in towns where it had a monopoly. It might then cut the price to below cost in a competitive town until it drove the competitors out of business, using the high profits from the monopoly towns to finance the below-cost prices in the competitive town. Section 2 was intended to prevent this strategy by forbidding Standard from charging two different prices in the two sets of town if the result was to extend Standard's monopoly.

The provision against predatory pricing was widely used through the 1960s to condemn this type of price discrimination. However, critics increasingly argued that the provision condemned hard competition and actually forced firms to charge more than they otherwise would. In Brooke Group Ltd. v. Brown & Williamson Tobacco Co. (1993), the Supreme Court developed strict standards for proving that price discrimination did in fact "substantially lessen competition." Since then, it has been almost impossible for plaintiffs to win any cases.

Tying and Exclusive Dealing

Section 3 of the Clayton Act provides that: "It shall be unlawful ... to make a sale ... of goods ... on the condition ... that the ... purchaser ... shall not use or deal in the goods ... of a competitor ... where the effect ... may be to substantially lessen competition or tend to create a monopoly...." This provision of the Clayton Act was passed in response to the Supreme Court's decision in Henry v. A.B. Dick & Co. (1912). The Court had found no violation when A. B. Dick required users of its mimeograph machines (an early form of copy machine) to purchase all their paper and ink from that company as well. Congress believed that firms like A.B. Dick used such "tying arrangements" to expand one monopoly into two. In this case, the company already had a monopoly on its patented mimeograph machine. By requiring everyone who used the machine to use its paper and ink, the company could also monopolize the market for paper and ink used in those machines.

Today most economists and others interested in antitrust law believe this practice is rarely competitively harmful. In fact, A.B. Dick may have had good reasons to tie paper and ink. For example, its machine might work better when its own paper and ink are used, making consumers happier. In its 1984 decision in Jefferson Parish Hospital v. Hyde, the Supreme Court made unlawful tying more difficult to prove. That case approved an arrangement under which the hospital required all surgical patients to use its own approved anesthesiology firm. Competition was not harmed, the Supreme Court concluded, because the hospital admitted only 30 percent of the patients in the area, meaning there was ample room for other anesthesiologists to practice their profession.

The other practice that section 3 of the Clayton Act occasionally condemns is exclusive dealing, which occurs when a firm insists that retailers handle its brand exclusively. In Standard Oil of California v. United States (1949), the Supreme Court found it unlawful for Standard to require its gasoline stations to sell Standard's gasoline exclusively. In more recent years we are inclined to think decisions like this are harmful, because they limit a manufacturer's power to control the quality of its products. For example, in Krehl v. Baskin-Robbins Ice Cream Co. (1982), the court held that Baskin-Robbins could require its stores to sell only Baskin-Robbins ice cream. Otherwise, customers might be deceived into buying cheaper brands when they thought they were getting the real thing. Today most, but not all, exclusive dealing is legal.

Private Lawsuits

Both the United States government and individual states have the power to enforce antitrust laws. Yet 90 percent of lawsuits are brought by private parties such as consumers or business firms. Section 4 of the Clayton Act states: "any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue therefore in any district court of the United States ... and shall recover threefold the damages by him sustained, and the cost of suit, including a reasonable attorney's fee." This provision creates a major inducement to sue because it means that a private plaintiff can obtain a damage award three times as large as the actual loss. Further, if the plaintiff wins, the defendant will have to pay the plaintiff's attorneys' fees.

For example, suppose that compact disc (CD) manufacturers fix the price of music CDs, including those that you buy, at $18. Price fixing is an automatic violation of section 1 of the Sherman Act. The lawyer managing this suit would probably bring a "class action" on behalf of thousands of people who paid too much for CDs. The lawyer would also hire an expert economist who would testify about the price of CDs in a competitive market. Suppose the jury accepted this expert's testimony that if the price fixing had not occurred the price of CDs would have been $15. In that case you are the victim of an "overcharge" equal to the difference between the cartel price and the competitive price, or $3. At that point you would have to show how many CDs you purchased during the cartel period. Suppose you had purchased twelve. Your "actual" injury would then be $3 times 12, or $36. However, under the antitrust laws this number would be trebled to $108.

Damages awards in antitrust cases can be very high, sometimes as much as $1 billion. This makes antitrust litigation very attractive to lawyers and explains why so many antitrust cases are filed. By some estimates there are as many as 700 antitrust cases filed in the United States every year.

The Labor Exemption

Section 6 of the Clayton Act provides that: "The labor of a human being is not a commodity or article of commerce. Nothing contained in the antitrust laws shall be construed to forbid the existence and operation of labor ... organizations?; nor shall such organizations, or the members thereof, be held or construed to be illegal combinations or conspiracies in restraint of trade, under the antitrust laws."

One thing that surprised many Progressives in the United States was the degree to which the Supreme Court permitted use of the antitrust laws to break labor strikes. A labor strike is an agreement among laborers that they will not work unless they get paid a certain wage. Economically, this agreement is identical to a price fixing agreement in a product such as a CD. Because section 1 of the Sherman Act did not distinguish between price fixing in goods and price fixing in labor, the Supreme Court held that labor strikes were just as unlawful as cartels. (An example can be found in Loewe v. Lawlor [1908], known as the Danbury Hatters case.)

Section 6 was intended to change these outcomes by immunizing labor strikes from antitrust suits. The statute had to be strengthened by other legislation passed during the New Deal and after, but the ultimate outcome was that labor unions are free to organize and agree on a wage without violating the antitrust prohibition against price fixing.

Mergers

Probably the most often used section of the Clayton Act is the prohibition of anticompetitive mergers. A merger occurs when one company buys another and the two firms become one. For example, Chrysler Motors at one point acquired Jeep, Inc. Later, Chrysler was itself acquired by Daimler-Benz, the maker of Mercedes-Benz automobiles. As a result, Mercedes-Benz cars, Jeeps, and Chrysler cars such as Dodge and Plymouth are all manufactured today by the same very large company.

Most mergers are legal, and in general economists think they benefit the economy by enabling manufacturers to produce or distribute goods more cheaply. A few mergers are anticompetitive, however. They might create a monopoly or make price fixing much easier than it was before the merger occurred. Section 7 of the Clayton Act provides: "No person engaged in commerce ... shall acquire ... the whole or any part of ... another person engaged also in commerce ... where in any line of commerce or in ... any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly." The term "person" in this provision refers to a "legal" rather than a biological person. Legally, corporations are also treated as persons. As a result, the provision applies both to firms owned by a single person but also to very large corporations. Only acquisitions involving fairly large firms, however, are typically found to be unlawful.

Mergers are unlawful when they either create a monopoly or make it much easier for the remaining firms in the market to fix prices. A good example is Federal Trade Commission v. Heinz, Inc. (2001), which prohibited a merger between two manufacturers of baby food. Gerber, Heinz, and Beech-Nut were the three major producers of baby food in the United States. Heinz offered to purchase Beech-Nut so the two would become a single firm. Under the law, large mergers have to be reported to the Department of Justice or the Federal Trade Commission, the two federal agencies that enforce the antitrust laws. In this case the Federal Trade Commission challenged the merger. The court accepted its evidence that with three firms in the market there was a significant amount of competition in the baby food market, and this tended to keep prices low. If the merger were permitted, the market would have only two firms and these would not compete as fiercely as firms in a three-firm market. As a result of the court's decision, Heinz abandoned the merger plans and the market continued to have three major baby food producers.

Bibliography

Chamberlain, John. The Enterprising Americans: A Business History of the UnitedStates. New York: Harper & Row, 1974.

Faulkner, Harold U. American Economic History. New York: Harper, 1960.

Hovenkamp, Herbert. Federal Antitrust Policy: The Law of Competition and Its Practice, 2d ed. St. Paul, MN: West Group, 1999.

Sklar, Martin J. The Corporate Reconstruction of American Capitalism, 1890–1916. Cambridge, UK: Cambridge University Press, 1988.

An amendment passed by the U.S. Congress in 1914 that provides further clarification and substance to the Sherman Antitrust Act of 1890. The Clayton Antitrust Act attempts to prohibit certain actions that lead to anti-competitiveness.

Investopedia Says:
The Clayton Antitrust Act provides barriers to a broad range of anti-competitiveness issues. For example, topics such as price discrimination, price fixing and unfair business practices are addressed in the Act. They are enforced by the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice.

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Competition law
Basic concepts
History of competition law Monopoly Coercive monopoly Natural monopoly Barriers to entry Herfindahl–Hirschman Index Market concentration Market power SSNIP test Relevant market Merger control
Anti-competitive practices
Monopolization Collusion Formation of cartels Price fixing Bid rigging Product bundling and tying Refusal to deal Group boycott Essential facilities Exclusive dealing Dividing territories Conscious parallelism Predatory pricing Misuse of patents and copyrights
Enforcement authorities and organizations
International Competition Network List of competition regulators
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The Clayton Antitrust Act of 1914 (Pub.L. 63-212, 38 Stat. 730, enacted October 15, 1914, codified at 15 U.S.C. §§ 12–27, 29 U.S.C. §§ 52–53), was enacted in the United States to add further substance to the U.S. antitrust law regime by seeking to prevent anticompetitive practices in their incipiency. That regime started with the Sherman Antitrust Act of 1890, the first Federal law outlawing practices considered harmful to consumers (monopolies, cartels, and trusts). The Clayton Act specified particular prohibited conduct, the three-level enforcement scheme, the exemptions, and the remedial measures.

Passed during the Wilson administration, the legislation was first introduced by Alabama Democrat Henry De Lamar Clayton, Jr. in the U.S. House of Representatives, where the act passed by a vote of 277 to 54 on June 5, 1914. Though the Senate passed its own version on September 2, 1914 by a vote of 46-16, the final version of the law (written after deliberation between Senate and the House), did not pass the Senate until October 5 and the House until October 8 of the same year.

Like the Sherman Act, much of the substance of the Clayton Act has been developed and animated by the U.S. courts, particularly the Supreme Court.

Contents 1 Provisions 1.1 Comparisons to other acts 1.2 Section 7 1.3 Pre-merger notification 1.4 Section 8 1.5 Other 2 Exemptions 3 Enforcement 4 Legacy 5 See also 6 Notes 7 External links

Provisions

The Clayton Act made both substantive and procedural modifications to federal antitrust law. Substantively, the act seeks to capture anticompetitive practices in their incipiency by prohibiting particular types of conduct, not deemed in the best interest of a competitive market. There are 4 sections of the bill that proposed substantive changes in the antitrust laws by way of supplementing the Sherman Act of 1890. In those sections, the Act thoroughly discusses the following four principles of economic trade and business:

• price discrimination between different purchasers if such a discrimination substantially lessens competition or tends to create a monopoly in any line of commerce (Act Section 2, codified at 15 U.S.C. § 13;
• sales on the condition that (A) the buyer or lessee not deal with the competitors of the seller or lessor ("exclusive dealings") or (B) the buyer also purchase another different product ("tying") but only when these acts substantially lessen competition (Act Section 3, codified at 15 U.S.C. § 14);
• mergers and acquisitions where the effect may substantially lessen competition (Act Section 7, codified at 15 U.S.C. § 18) or where the voting securities and assets threshold is met (Act Section 7a, codified at 15 U.S.C. § 18a);
• any person from being a director of two or more competing corporations, if those corporations would violate the anti-trust criteria by merging (Act Section 8; codified at 15 U.S.C. § 19).

Comparisons to other acts

Unilateral price discrimination is clearly outside the reach of Section 1 of the Sherman Act, which only extended to "concerted activities" (agreements). Exclusive dealing, tying, and mergers are all agreements, and theoretically, within the reach of Section 1 of the Sherman Act. Likewise, mergers that create monopolies would be actionable under Sherman Act Section 2.

Section 7 of the Clayton Act allows greater regulation of mergers than just Sherman Act Section 2, since it does not require a merger-to-monopoly before there is a violation. It allows the Federal Trade Commission and Department of Justice to regulate all mergers, and gives the government discretion whether to give approval to a merger or not, which it still commonly does today. The government often employs the Herfindahl-Hirschman Index (HHI) test for market concentration to determine whether the merger is presumptively anticompetitive; if the HHI level for a particular merger exceeds a certain level, the government will investigate further to determine its probable competitive impact.

Section 7

Section 7 elaborates on specific and crucial concepts of the Clayton Act; "holding company" defined as a "common and favorite method of promoting monopoly",^[1] but more precisely as "a company whose primary purpose is to hold stocks of other companies"^[2] which the government saw as an abomination and a mere corporated form of the 'old fashioned' trust.

Another important factor to consider is the amendment passed in Congress on Section 7 of the Clayton Act in 1950. This original position of the US government on mergers and acquisitions was strengthened by the Celler-Kefauver amendments of 1950, so as to cover asset as well as stock acquisitions.

Pre-merger notification

Section 7a, 15 U.S.C. § 18a, requires that companies notify the Federal Trade Commission and the Assistant Attorney General of the United States Department of Justice Antitrust Division of any contemplated mergers and acquisitions that meet or exceed certain thresholds. Pursuant to the Hart–Scott–Rodino Antitrust Improvements Act, section 7A(a)(2) requires the Federal Trade Commission to revise those thresholds annually, based on the change in gross national product, in accordance with Section 8(a)(5) and take effect 30 days after publication in the Federal Register. (For example, see 74 F.R. 1687 and 16 C.F.R. 801.)

Section 8

Section 8 of the Act refers to the prohibition of one person of serving as director of two or more corporations if the certain threshold values are met, which are required to be set by regulation of the Federal Trade Commission, revised annually based on the change in gross national product, pursuant to the Hart–Scott–Rodino Antitrust Improvements Act. (For example, see 74 F.R. 1688.)

Other

Because the act singles out exclusive dealing and tying arrangements, one may assume they would be subject to heightened scrutiny, perhaps they would even be illegal per se. That is not the case. When exclusive dealings or tying arrangements are challenged under Clayton-3 (or Sherman-1), they are treated as rule of reason cases.

Under the 'rule of reason', the conduct is only illegal, and the plaintiff can only prevail, upon proving to the court that the defendants are doing substantial economic harm. Despite what the statute may suggest, the regime makes sense. The reason for the per se rule in Sherman-1 price fixing cases is the overwhelming likelihood that price fixing is harmful. It is a recognizable fact that exclusive dealings and tying arrangements are quite common, and potentially beneficial to consumers, and the economy. Therefore, the Court has seen fit not to apply a per se rule to Clayton-3 conduct.

Exemptions

An important difference between the Clayton Act and its predecessor, the Sherman act, is that the Clayton Act contained safe harbors for union activities. Section 6 of the Act (codified at 15 U.S.C. § 17) exempts labor unions and agricultural organizations, saying ‘that the labor of a human being is not a commodity or article of commerce, and permit[ting] labor organizations to carry out their legitimate objective’. Therefore, boycotts, peaceful strikes, peaceful picketing, and collective bargaining are not regulated by this statute. Injunctions could be used to settle labor disputes only when property damage was threatened.

Major League Baseball is another company exempt from the Clayton Antitrust Act due to the national heritage associated with it.^{[citation needed]}

Enforcement

Procedurally, the Act empowers private parties injured by violations of the Act to sue for treble damages under Section 4 and injunctive relief under Section 16.

Under the Clayton Act, only civil suits could be brought to the court's attention and a provision "permits a suit in the federal courts for three times the actual damages caused by anything forbidden in the antitrust laws",^[3] including court costs and attorney's fees.

The Act is enforced by the Federal Trade Commission, which was also created and empowered during the Wilson Presidency by the Federal Trade Commission Act, and also the Antitrust Division of the U.S. Department of Justice.

Legacy

The Clayton Act of 1914 reformed and emphasized certain concepts of the Sherman Act of 1890 that are still active today in a growing interconnected market and merging of the industries.

See also

• Celler-Kefauver Act
• Hart–Scott–Rodino Antitrust Improvements Act
• Internet Freedom and Nondiscrimination Act of 2006
• Robinson-Patman Act
• Sherman Antitrust Act
• United States v. Continental Can Co.

Notes

1. ^ Martin, David Dale, Mergers and the Clayton Act, University of California, Berkeley and Los Angeles, 1959
2. ^ Martin, David Dale, Mergers and the Clayton Act, University of California, Berkeley and Los Angeles, 1959
3. ^ Kintner & Joelson, An International Antitrust Primer, New York, 1974,p.20

External links

• Brief History of the Federal Trade Commission (PDF)
• "Clayton Antitrust Act". Pearson Education. http://www.infoplease.com/ce6/history/A0812484.html. Retrieved 19 January 2012. 
• Why Did The Clayton Act Pass? An Analysis of the Interest Group Hypothesis (PDF)
• Full Text of the Clayton Antitrust Act

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