Liberty and Antitrust in the Formative Era
92 Pages Posted: 2 Sep 2013 Last revised: 3 Sep 2013
Date Written: February 1, 1999
This article examines the role that liberty of contract played in the development of antitrust doctrine, particularly case law implementing Section 1 of the Sherman Act, during antitrust’s “formative era,” 1890-1910. The article rejects the claim that formative era case law read the Sherman Act broadly, so as to protect “liberty from contract,” that is, the “freedom” of private firms to ignore cartel agreements they had voluntarily entered. The article also takes issue with the related claim that formative era decisions allowed the commerce power to trump liberty of contract.
As the article explains, Rufus Peckham, who had previously condemned price regulation of private cartels as “vicious” , “communistic,” and contrary to the due process clause, authored five major Sherman Act opinions between 1897 and 1899, including United States v. Trans Missouri Freight Association, 166 U.S. 290 (1897), United States v. Joint Traffic Association, 171 U.S. 505 (1898), and United States v. Addyston Pipe and Steel Company, 175 U.S. 211 (1899). While Peckham rejected the liberty of contract challenges mounted by defendants in Joint Traffic and Addyston Pipe, he did so without holding that the Commerce Clause extinguished liberty of contract or relying upon the argument, made by counsel, that antitrust regulation was necessary to protect carte lists’ liberty from contract. Instead, Peckham read the Sherman Act narrowly, so as only to ban “direct restraints” and not indirect restraints or “ordinary contracts and combinations” of the sort sheltered by liberty of contract recently recognized in his unanimous opinion in Allgeyer v. Louisiana, 165 U.S. 578 (1897). Moreover, Peckham defined as “direct” only those restraints that destroyed competition and raised prices about the natural, ordinary level, thereby resulting in public harm and falling outside the protection of liberty of contract. In Joint Traffic, for instance, Peckham reaffirmed Allegyer but also held that the railroads had received special advantages from various states, including the delegated power of eminent domain. Such advantages, he said, rendered cartelization by incumbent firms a direct restraint beyond the protection of liberty of contract. While the Addyston Pipe defendants had received no such special benefits that conferred advantages over potential rivals, the record below established that they had nonetheless maintained prices well above the competitive level. This factual conclusion informed Peckham’s determination that the challenged agreement restrained interstate commerce (and not merely the parties to it) directly.
By validating the regulation of purely private cartels, Peckham exposed himself and the Court to the charge that both had abandoned any commitment to liberty of contract in the antitrust context. Indeed, some have even claimed that Addyston Pipe held that Congress could, by exercising its commerce power, trump liberty of contract altogether. Closer examination, however, suggests that Addyston Pipe did not repudiate liberty of contract or hold that Congress could extinguish liberty of contract by exercising its commerce power. After all, Peckham’s previous opposition to price regulation rested upon the assumption that purely private cartels could not maintain prices above the competitive level, given the supposed propensity of capital to flow quickly into markets characterized by supra-competitive prices. However, the facts of Addyston Pipe illustrated what political economists were beginning to understand, namely, that purely private cartels could drive prices above the competitive level for a significant period of time, without state assistance or private restraints on third parties. These changing facts required a new application of an unchanged principle, namely, that liberty of contract did not include the liberty to impose social harm in the form of supra-competitive prices. State power expanded accordingly, but not because the Sherman Act protected liberty from contract or trumped the contractual liberty recognized by Allgeyer. Instead, the same factual conclusion that drove the Court’s determination that the Addyston Pipe cartel was a “direct” restraint established the sort of public harm that deprived such agreements of liberty of contract protection. Thus, liberty of contract survived the formative era entirely intact, unrestrained by the Sherman Act.
Keywords: Sherman Act, liberty of contract, antitrust, formative era, Rufus Peckham
JEL Classification: B12, B13, K21, L41, L50, L51, P16
Suggested Citation: Suggested Citation