15 companies the U.S. government tried to break up as monopolies
Forty-seven attorneys general are looking at potential antitrust violations of social networking behemoth Facebook in a New York-led investigation launched September 2019 that has expanded significantly since. The proceedings bring to light the unchecked growth of a number of companies some say have gotten too big.
Presidential candidate Elizabeth Warren has taken on this popular position, pointing to companies like Apple and Google and arguing they ought to be broken down into smaller companies that can be more easily regulated. Several of these firms purchased their competitors—such as Facebook’s acquisition of Instagram—driving down marketplace competition and any innovations that such competition may have caused.
This concept manifests itself in different ways. Amazon, for example, has made it difficult for smaller competitors to find equity. If someone was to search for baby products using Amazon, the search engine would likely bring up the company’s AmazonBasics line before that of an outside product, with the Basics line priced below competitors. Sometimes, the product shown is not the best, but the one that best played Amazon’s obscure seller protection scheme.
With Facebook, the social media giant’s inability or unwillingness to protect users’ private data was largely brushed off, as the company has few viable competitors. The company’s recent decision to do nothing against misleading or factually incorrect political ads has many feeling that the company may be dangerously unaccountable.
To help understand how the United States has typically dealt with businesses accused of bad business practices, Stacker has compiled a list of 15 cases the United States government prosecuted for violation of the nation’s monopoly rules. For the sake of this article, a monopoly is defined as a business or cartel of businesses that has—because of its size and/or market position—dominated most or all aspects of an industry, including the ability to compete. Not all of these cases resulted in successful verdicts; however, all 15 are considered significant because they either changed case law or how we came to use the products in question.
In the United States, major federal antitrust legislations include the Sherman Act of 1890, the Clayton Act of 1914, and the Federal Trade Commission Act of 1914. While these laws have not been used to break up a business since the aborted attempt on Microsoft in 2001, they do form the basis of the federal government’s mechanism to handle unfair trade or business practices. The Sherman Act, particularly, bans the practices of price-fixing, business cartels, and collusive anti-trade practices, as well as prohibits monopolistic practices. The Clayton Act bans mergers and acquisitions where the main goal is to limit competition.
Typically, an accused business or cartel must be found guilty of antitrust actions “per se,” or the act is an antitrust act without the need to consider extrinsic circumstances, or by using the “rule of reason.” The “rule of reason” requires that the circumstances surrounding the act must have caused “restraint of trade” through precedent or example. This could be proving that fixing prices restricts competition or that denying broadcasting of a game to drive ticket sales is restricting supply.
Keep reading to learn how antitrust laws saved the movies.
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Standard Oil: 1911
The best place to start this gallery is with a monopoly the United States government successfully broke up. In the late 19th and early 20th centuries, John D. Rockefeller’s Standard Oil was the dominant force in the global oil market. Through horizontal integration in the refining industry—that is, the purchasing and opening of more oil drills, transport networks, and oil refiners—and, eventually, vertical integration (acquisition of fuel pumping companies, individual gas stations, and petroleum distribution networks), Standard Oil controlled every part of the oil business. This allowed the company to use aggressive pricing to push out the competition. Standard Oil in 1911 was broken up into 34 companies. These companies would recombine; today, these companies go by the names of ExxonMobil, Chevron, Amoco, and BP.
From 1977 to 1899, the American telephone industry consisted solely of the American Bell Telephone Company, which—using Alexander Graham Bell’s patents for the telephone—established the first exchanges and the telephone interchanges. Using a franchise model, local and regional exchanges were set up under the Bell model—collectively known as the Bell System. In 1899, American Telephone & Telegraph (AT&T) took over American Bell Telephone Company. In 1913, the federal government tried to break up AT&T. It escaped the attempt on the promise that it would divest from Western Union and allow interconnection to its long-distance network. In 1949, the government tried again, this time limiting AT&T to 85% of the national telephone network. Finally, the 1984 attempt broke AT&T up into US West, Ameritech, NYNEX, BellSouth, and others, while AT&T retained control of its long-distance business. AT&T, Verizon (the result of the merging of NYNEX, GTE, and Bell Atlantic), and CenturyLink would collectively absorb most of the spun-off companies.
The Microsoft antitrust case is a weird episode in legal history in the sense that, although the government won the antitrust case, Microsoft stayed intact. At the center of the case was Microsoft’s practice of packaging its Internet Explorer as a not-uninstallable feature of its Windows operating system. While this did not prevent the installation of other internet browsers, such as Netscape, it forced users to consider IE and to manually change PC settings to avoid automatically using the browser. Additionally, original equipment manufacturers were forced to sign restrictive agreements that prevented the installation of other internet browsers. The United States Court of Appeals for the District of Columbia Circuit found that Microsoft violated antitrust laws. However, the Clinton Administration that prosecuted the case was out of office with the incoming Bush Administration less willing to break up Microsoft. The US Department of Justice dropped the case and accepted a settlement where Microsoft would share its IE application programming interface, making it easier for software designers to use and integrate IE, but not changing the fact that IE (now, Edge) cannot be uninstalled.
American Tobacco: 1911
American Tobacco came to dominate the tobacco world by acquiring more than 250 brands and growers. Among the brands American Tobacco took over included Lucky Strike, with the company producing 80% of all tobacco products in the United States prior to its breakup, including 90% of all cigarettes in 1890. The American Tobacco decision came down the same day as the Standard Oil decision, with the company ordered dissolved and the assets broken up. The spun-off companies would become R. J. Reynolds, Liggett & Myers, and Lorillard. While none of these are currently the largest tobacco manufacturer globally or nationally (Altria, which is the holding company for Philip Morris, is the current industry leader), the constituent companies still yield a significant influence in the industry.
Northern Securities: 1904
In 1904, a bidding war took place for control of the Chicago, Burlington, and Quincy Railroad. The CB&Q controlled key lines in the Midwest, including a connection between the Twin Cities and Chicago. This line was essential for allowing Minneapolis’ flour access to the market. As such, the CB&Q was considered to be highly valuable. Using funding from J.P. Morgan, James Hill entered into a buying spree against Union Pacific’s Edward Harriman, threatening a potential crash of the New York Stock Exchange. Along with Morgan’s Northern Pacific Railroad, Hill would combine the three railroads into one holding company called Northern Securities. As Northern Securities was the largest company at the time and controlled railroad traffic in the West, Theodore Roosevelt pursued antitrust litigation. Northern Securities dissolved, but the three railroads would permanently merge in 1969.
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Swift & Co.: 1905
One of the most important lawsuits regarding food safety in the United States is Swift & Co. v. United States. The case established the “stream of commerce” argument that allows Congress to create laws to regulate monopolies and interstate commerce. The government argued that Swift, a major beef-packing firm, coordinated with other leading meatpackers to fix prices. The cartel would blacklist competitors and suppliers that refused to cooperate. To stop regulations, the meatpackers merged into one big company, the National Packing Company, to conduct coordinating activities internally. The federal decision broke up the National Packing Company and led to the 1906 passage of the Pure Food and Drug Act and the Meat Inspection Act.
Adobe, Apple, Google, Intel, Intuit, and Pixar: 2010
As seen with the Swift & Co. case, coordination between individual companies can trigger an antitrust case. In 2011, Silicon Valley companies Adobe, Apple, Google, Intel, Intuit, Lucasfilm, and Pixar—the last two are now parts of Disney—were ordered to stop acting as a cartel to control “no cold call” agreements.” The original complaint assumed that the defending companies were working together to stop one company from “poaching” another companies’ employees, which could be a problem given that software developers and engineers are in short supply. Cold calling is contacting a potential employee directly who has not previously indicated interest in the advertised position. The challenged “no cold calls” agreements were made between the companies in order to ensure no cold calling took place. It was ruled that these agreements are anticompetitive. A settlement ended the practice without compensating the plaintiffs for any harm; it would take a separate civil lawsuit for damages to be paid.
While some antitrust lawsuits are the response to direct efforts to corner the market—as with American Tobacco—or collusion, some are because of the wild success of products. During the heyday of film photography, Kodak film, photographic paper, and cameras defined the industry. Its Instamatic cameras made it possible to shoot pictures without the need of third-party development, and its roll film made it possible to load and unload film into a camera in open light. At one point, Kodak controlled 96% of the American film market. In 1921, the federal government argued that Kodak’s policy of buying competitors and forcing retailers to sign exclusivity agreements is deceptive. The courts agreed, ordering Kodak to stop the practice and to stop selling “white label” or “private label” film, or film made by Kodak but sold under a different brand. In the 1930s, Kodak came out with Kodachrome, the world’s first color film. As the technique for processing it was different from that of black-and-white film. Kodak maximized this advantage by requiring customers to have the film processed at a Kodak processor. A 1954 decree forced Kodak to divorce Kodacolor film processing from the film itself, forcing the company to license the processing technique to third parties. This opened the film market to competitors like Fuji and Agfa.
United States v. Alcoa is another interesting case in the sense that it took an act of Congress to get it settled. It also helped to define the “per se” rule in antitrust litigation. Alcoa, in the early part of the 20th century, was producing 90% of the aluminum that was first forged by the company (“virgin” aluminum). This was because Alcoa was able to establish public-private partnerships early on to get access to cheap hydroelectricity, as aluminum fabrication is energy intensive. Alcoa argued that, despite the 90% fabrication rate, it did not have a monopoly as it controlled considerably less of the reforged aluminum and aluminum product fabrication markets. In 1942, the U.S. Department of Justice’s case was dismissed. Following an appeal, the U.S. Supreme Court found that, after disqualifying several justices for having links to Alcoa, there were not enough court members to hold quorum. A special act of Congress allowed the case to be assigned to the United States Court of Appeals for the Second Circuit which held that the market affected need not include the whole aluminum market, but just the “virgin” aluminum sector. Alcoa, however, was not broken up or otherwise penalized because, by this time, new aluminum companies like Reynolds have entered the market.
Paramount Pictures: 1948
In the early years of motion pictures, it was common for movie studios to own their own movie theaters. This created a vertical market where a studio controlled the production, distribution, marketing, and pricing of its own films. This created a firewall against independent studios, not only stunting the possibility of movies made by those outside the Big Five (Loew’s, Warner Bros., 20th Century Fox, RKO Pictures, and Paramount) or the Little Three (Universal Studios, Columbia, and United Artists) or by those with costly distribution deals, but effectively forcing actors and directors to deal with the “studio system.” Non-studio theaters would be forced to “block book” films, or buy and show several smaller-budget films with a feature film as a single unit. The films in the block would not be known until the block was delivered. After several attempts to come up with a compromise, the U.S. Supreme Court ruled that studios cannot own its own theaters, cannot charge different rates for different theaters, and cannot compel a theater to buy its films. This did not, however, end block booking; this was dealt with in United States v. Loew’s, Inc. This created the modern era of American cinema, where independent studios came into prominence, the major studios stopped making “filler” movies, the Production Code was weakened, and the studio system was abandoned.
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There has not been a successful monopoly prosecution in the United States since the Microsoft case in 2001. However, the antitrust laws have been successfully used to push back on consumer-unfriendly corporate practices. One such case was United States v. Apple, where the government argued that the computer manufacturer conspired with book publishers to fix the prices of e-books on its App Store. The case centered around Apple’s attempts to break Amazon’s dominance of the e-book market. Amazon’s price of $9.99 made it difficult for the publishers to push more profitable (and costlier) hardcover books. Apple approached the publishers, offering to sell e-books for more, but letting the publishers get a bigger cut of the profits. Amazon would counter, but the publishers shared notes about the negotiations among themselves and Apple, undermining the deal. Many of the publishers would raise the prices of their e-books, only to drive down sales and use the opportunity to join Apple’s iBookstore. Apple was found guilty of conspiracy, forcing Apple to pay $450 million in damages.
Glaxo Group: 1973
In the 1970s, drug manufacturer Glaxo joined up with Imperial Chemical Industries. Each company had a patent regarding the dosing and manufacturing specifications for the drug griseofulvin. Recognizing that they needed each other, they agreed to cross-license their patents for the purposes of producing a commercial product. The caveat is that this product could not be sold in bulk form, as the companies were fearful of the emergence of a generic version of the drug. The U.S. Justice Department argued, based on the company’s alleged violations of the Sherman Act, the patents were invalid. The district court hearing the case rejected the invalidity claim but acknowledged the two companies were in violation of antitrust laws. In 1973, the U.S. Supreme Court, on appeal, ruled that the government can invalidate patents to ensure competition in the marketplace.
Federal Baseball Club: 1922
Antitrust laws have traditionally had a blindspot: professional sports leagues. While it is clear that sports leagues control every aspect of the game—from who gets to own a team, the requirements for playing, ticket prices, broadcasting rights, and marketing, to how competing leagues are dealt with—it is an open question if the leagues themselves are businesses or business associations. In 1913, the Federal Baseball Club was opened as a third baseball league to the National and American Leagues. The Club failed in 1915, but the league owners were allowed compensation from the other leagues. When the Baltimore Terrapins owner did not receive a buy-out offer, he claimed the American League and National League were in violation of antitrust laws. While the district courts originally found the leagues liable, the U.S. Supreme Court—finding that the leagues’ products are baseball exhibitions and that there is no product applicable to the antitrust laws that are being sold improperly—sided with the leagues. This case would define successor leagues, like MLB and the NFL, and their immunity from monopoly laws.
Sometimes, antitrust litigation can be political. This case has yet to reach the courts, but the Justice Department is reportedly investigating Google for antitrust violations. Google is responsible for 70% of all the searches on the internet. In 2013, the company entered a consent decree with the Federal Trade Commission to allow competitors access to “critical standardized technologies” with its Android operating system, while streamlining the process to allow simultaneous ad campaigns on Google’s AdWords and rival advertising platforms. Recent pressures from the White House—alleging that Google and YouTube favor Democrats over Republicans—have led the Justice Department to launch an investigation. It is unclear if this investigation will lead to prosecution.
Following United States v. Paramount, studios continued block booking. This typically followed a feature film being booked with several short films, or two or more feature films being booked together. These were typically played in “double-header” matinees or in grindhouse theaters, where back-to-back films were shown. While this was economical for some theaters, such as drive-ins, it made theater owners purchase films they would not otherwise want, such as low-budget and B films. The U.S. Supreme Court found in United States v. Loew’s that any product bundling—not only film—is price discrimination and is therefore unlawful.
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