Daniel Hanley, senior legal analyst, details the definition, history, and importance of clear bright-line rules when it comes to antitrust law.

Monopolies dominate the American economy. Last year, House Democrats took the first steps to address this problem by publishing a landmark 450-page report on the exclusionary conduct engaged in by Big Tech over the previous 15 years. Now, Congress has begun a second set of antitrust hearings to determine what remedies it should incorporate into a series of new bills to address the stranglehold of monopolies.

These hearings will continue to catalyze the growing movement against concentrated corporate power in America, but whatever Congress proposes afterward, the legislation must include comprehensive, bright-line rules.

Rules govern most aspects of our daily lives. If someone gets caught jaywalking, a rule determines if they are fined. If a company lies to a federal agency, a rule will decide if corporate executives go to prison. If a bank charges too much interest for a loan, a penalty imposed by a rule is issued.

Rules like these are inherently desirable in a democracy. Rules can simplify the administration of justice against those that have broken the law. The law essentially becomes reduced to an if-then construct for both judges and enforcers, with little leeway for circumvention by either sympathetic members of the judiciary or even powerful parties that can afford prime legal counsel. Rules also can create a predictable environment for everyone to know what behavior is permissible beforehand and what behavior is not. In other words, bright lines ensure that a democratically elected legislature is deciding the rules and conditions for everyone to follow, rather than unelected members of the judiciary. Rules can be constructed that create harmful outcomes, such as mandatory minimums for certain drug offenses. But, if done right, they create a more transparent legal environment, reduce discretion and subjective decision-making, and, in the antitrust context, constrain corporate power.

From the 1940s to the late 1970s, antitrust had many similar rules-based enforcement mechanisms. Mergers were challenged and presumptively illegal if the merging companies had greater than 30 percent market share in total. Contracts that forced a company working with commodities to exclusively work with another were illegal if a firm foreclosed the market by more than 23 percent. And distributors imposing geographic restrictions on suppliers was prohibited outright. There are areas where rules didn’t exist in antitrust enforcement, and the historical antitrust rules were created by the judiciary. But by reading the legislative history of these laws and seeking to effectuate Congress’ desire in the simplest way possible, courts ensured that the antitrust laws were vigorously enforced. This enabled federal, state, and private entities to facilitate Congress’ intention to protect the vitality of independent businesses, workers, and consumers from concentrated corporate power.

In the late 1970s, however, judges began to adopt a malevolent antitrust framework, which they claimed was beneficial to consumers, while actually relishing, praising, and incentivizing the concentration of corporate power. This new consumer welfare standard emerged in large part because of the “rule of reason.”

The rule of reason was initially created by the Supreme Court in 1911 to help the judiciary navigate the vast range of variance in antitrust harms. The rule of reason allows judges to determine whether ostensibly predatory or exclusionary corporate conduct is legal based on the reasonableness of the suspected violator’s behavior.

Exclusionary antitrust conduct analyzed under a rule of reason analysis generally functions by allowing each side of a lawsuit to argue the predatory effects and the justifications for the conduct. Although the rule of reason is perceptually fair by giving each side of the litigation an opportunity to argue about the conduct at issue, in practice it is anything but. Judges began using the ambiguity of the rule of reason to push a standard focused on consumer welfare, one that favors corporate concentration and turns away from strict antitrust rules. Courts initially only applied the rule of reason selectively. After adopting the consumer welfare framework, the Supreme Court now applies the rule of reason to most antitrust violations.

Antitrust is about determining and allocating the rights, privileges, and duties of all economic actors. When Congress originally enacted the Sherman Act, the law was intended to protect consumers, workers, and democracy from excessive concentrations of corporate power. Because of this reality, it is an inherently political area of law. The shift toward rooting it in economics, and making its application substantially more obscure than a bright-line rule, is effectively a means by the judiciary to strip the historical foundations of antitrust from the record and instead substitute its own judgment on what the priorities are for the economy and how it should be structured.

When combined with the rule of reason, the judiciary’s consumer welfare framework effectively erases Congress’ intent for the antitrust laws to operate as a “comprehensive charter of economic liberty” that “does not confine its protection to consumers, or to purchasers, or to competitors, or to sellers.” Such values are best determined by members of the elected legislature rather than unelected judges, a point ironically acknowledged by the Supreme Court in 1972.

Lower federal courts today continue to push the consumer welfare standard even further by, in violation of controlling Supreme Court precedent, weighing the competitive harms of a dominant firm’s conduct against one group to the benefits provided to another group. In ongoing litigation against the NCAA that was heard by the Supreme Court last week, the district court judge ruled that the NCAA’s compact with universities to set a ceiling on the amount of compensation that student-athletes can receive is legal because of the reputed benefit consumers derive from watching athletes knowing there is a cap on their compensation. The court employed the rule of reason to arrive at this result. In an alternative enforcement regime, the NCAA would be a per se illegal employer cartel that is suppressing workers’ wages.

Comprehensive empirical analysis has revealed that the rule of reason has been a rubber stamp for even the most egregious antitrust conduct. A 2009 analysis revealed that 97 percent of cases analyzed under the rule of reason result in victories for defendants. That means corporations are effectively shielded from most antitrust violations.

Part of the reason for such a skewed result in favor of antitrust defendants is that dominant firms have access to high-salaried economists that are able to manipulate analyses to mask the corporation’s conduct to look like it is operationally efficient instead of engaging in predatory practices. Such a situation also deters antitrust litigation because a plaintiff will also have to incur the cost of an economist—which can cost several thousand dollars and, in some cases, several hundred thousand dollars. Thus, the battle over the legality of a business tactic under a consumer welfare framework and rule of reason legal analysis depends on access to immense financial capital and judicial appeasement of policies that favor corporate integration rather than common notions of fairness, equity, and deconcentrated markets—which was the original purpose of the antitrust laws.

Despite controlling Supreme Court precedent prohibiting the use of economics in certain antitrust violations, courts now routinely use it to justify corporate consolidation. For example, in the context of merger analysis, the economization of antitrust has led courts to believe and depend on theoretical assumptions on how mergers are beneficial for society and consumers. In the case of AT&T and its pursuit of acquiring Time Warner in 2018, the corporation stated its merger would produce efficiencies and save customers money. District Court Judge Richard Leon was persuaded by AT&T’s statements holding that vertical integration is able to shrink its costs and will “lead to lower prices for consumers.” But such assumptions have been categorically repudiated by researchers. In one example, the economist John Kwoka found that 80 percent of studied mergers led to high prices and even reduced output. Other studies have found equivalent results. In the context of AT&T, subsequent evidence showed that AT&T did raise prices on consumers.

As Congress considers enacting new legislation, it must start by reclaiming control over antitrust by enacting laws with clear rules that could deter exclusionary conduct and greatly simplify the litigation process for plaintiffs. Moreover, instead of just restoring many of the historical bright-line rules that the judiciary has eroded over the last 60 years, new laws should go further to ensure that markets remain deconcentrated and to promote economic fairness. For example, Congress could enact strict prohibitions on firms entering certain lines of business, such as AT&T being prohibited from entering the computer industry in 1956, or ban the use of specific competitive practices outright, such as noncompetes that restrict the mobility of workers. Rules like these ensure the markets are structured by publicly accountable institutions to incentivize socially beneficial corporate conduct, such as investments in research and development and product quality.

Importantly, rules-based laws would also ensure the judiciary is adhering to Congress’ directive to keep markets deconcentrated and acknowledge that the judiciary is not a reliable safeguard for smaller independent firms and workers who often do not have access to significant amounts of capital to litigate an antitrust lawsuit. In fact, in commonly applied rules for how judges interpret Congress’ laws, the judiciary views ambiguity as an opportunity to fill any legal gaps with its interpretation and ideology.

History has consistently shown that only bright-line rules will lead to an effective and vigorous enforcement environment, as they do in other areas of law, and prevent the judiciary from favoring dominant economic enterprises and distorting the antitrust laws to preference increased concentration. The Supreme Court’s original development of the rule of reason and its subsequent gutting of the enforcement of the Clayton Act in the 1930s is particularly illustrative of why bright-line rules are necessary.

A critical weakness of the Sherman Act when it was passed in 1890 was that it did not incorporate bright-line rules and left the interpretation of the act almost entirely to the judiciary. Despite its broad moral intentions, the first 15 years of its enforcement were anemic against concentrated private power and even hostile to organized labor. Eventually the federal government would obtain its first significant victory in 1904, but the legal standard that the court would use to determine the legality of antitrust violations was not fully decided until the 1911 Standard Oil case, in which the Supreme Court codified the rule of reason.

Standard Oil v. United States is widely known for breaking up the company. However, the case was actually a pyrrhic victory for antitrust enforcers. In the case, the court created the foundation for the rule of reason by declaring that only “unreasonable” trade practices (known as restraints of trade) were illegal under the Sherman Act. In other words, the judiciary in Standard Oil anointed itself with unilateral discretionary power to manage and organize the economy and neutered the Sherman Act’s application. Outrage from Congress and the public over the judiciary’s seizure of power resulted in swift action. Less than three years later, Congress would try to reassert its position to ensure a deconcentrated marketplace with the Clayton Act.

When Congress enacted the Clayton Act in 1914, its primary goal was to supplement the Sherman Act by bolstering a plaintiff’s ability to arrest certain enumerated conduct in its incipiency—to nip monopolistic behavior in the bud. The Clayton Act explicitly lessened the litigation burden on plaintiffs for certain exclusionary practices, including certain forms of tying (conditioning the purchase of a product on the purchase of another product), price discrimination, and exclusive dealing (contracts or coercive behavior that prevents suppliers or distributors from engaging with a firm’s rivals). Most importantly, Congress included in the Clayton Act a highly deferential and plaintiff-friendly legal standard meant to prohibit mergers (although only limited to acquisitions of assets and not for stock) that only “may be to substantially lessen competition” or “tend to create a monopoly.”

The Clayton Act made clear that Congress was trying to arrest certain antitrust violations such as mergers as a means to grow corporate operations, and to reverse the Supreme Court’s declaration in Standard Oil. However, the Supreme Court would instead successfully hijack this antitrust law too, in order to favor its own prescription for managing the economy.

In a 1930 case known as International Shoe, the Supreme Court decided to interpret the Clayton Act’s directive on mergers, despite its explicit purpose and statutory language, in an equivalent way to the Sherman Act. The court said the Clayton Act also deemed the indicator of an illegal merger to be whether it “injuriously affect[ed] the public”—yet again, a gutting of Congress’ intentions for a robust antitrust law. After the court’s holding in International Shoe, almost no merger cases were brought either by the Federal Trade Commission or the Department of Justice between 1930 and 1950. Even though the New Deal during the 1930s invigorated antitrust enforcement for violations of the Sherman Act targeting cartels and monopolies, it still took decades of advocacy for the Clayton Act to be significantly amended in 1950 to undo the Supreme Court’s damage. Even then, however, Congress did not impose a bright-line rule for mergers. And although the 1950 amendments to the Clayton Act did lead to vigorous enforcement, it would last only for another decade until the Supreme Court would, in a series of decisions, invent two doctrines, known as antitrust injury and antitrust standing. These doctrines would again erode significant aspects of antitrust enforcement of both the Sherman Act and Clayton Act to the present day.

The implementation of the consumer welfare framework since the 1970s is additional evidence from more than a century of consistent judicial mismanagement and hostility toward Congress’ desire to stop corporate concentration. Simply put, the courts cannot be trusted to adequately enforce antitrust laws without bright-line rules. If Congress is going to amend the antitrust laws to ensure they are effectively administered, rules that ban big mergers and the monopolization of markets, prohibit coercive contracts against small suppliers and distributors, and protect workers from dominant corporations must be imposed. Anything less leaves the door open for the judiciary to continue subverting Congress’ economic agenda, as dictated by the voting public, and instead substitute its own. Without bright-line rules, the current reform efforts will be in vain.

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