Legal Definitions - Clayton Act

The Clayton Act is a United States federal law enacted in 1914. It was passed to strengthen existing antitrust laws, particularly the Sherman Act, by targeting specific business practices that could harm competition before they fully develop into monopolies. The Act prohibits certain actions when their likely effect is to significantly reduce competition or create a monopoly in any market.

Specifically, the Clayton Act addresses:

• Price discrimination: Selling the same product to different buyers at different prices without justification, with the intent to disadvantage competitors.
• Tying arrangements: Requiring a customer to purchase an unwanted product or service (the "tied" product) in order to buy a desired product or service (the "tying" product).
• Exclusive-dealing contracts: Agreements where a seller requires a buyer to purchase products exclusively from them, or a buyer agrees to sell only one manufacturer's products.
• Mergers: The combining of two or more companies. The Clayton Act scrutinizes mergers that could lead to less competition.
• Interlocking directorates: Situations where the same person serves on the boards of directors for two competing companies.

These practices are prohibited if their effect might substantially lessen competition or create a monopoly in any line of commerce.

Here are some examples illustrating the application of the Clayton Act:

• Example 1: Merger of Major Airlines

  Imagine two of the largest national airline carriers announce plans to merge. These airlines currently operate numerous overlapping routes and compete directly for millions of passengers. The government, through agencies like the Department of Justice or the Federal Trade Commission, would investigate this proposed merger under the Clayton Act. They would assess whether combining these two companies would significantly reduce competition on key routes, potentially leading to higher ticket prices, fewer flight options, or reduced service quality for consumers. If the investigation concludes that the merger would substantially lessen competition, the Clayton Act could be used to block the merger or require the airlines to divest certain routes or assets to ensure competition is preserved.

• Example 2: Software Tying Arrangement

  Consider a dominant technology company that produces a widely used operating system for personal computers. This company then releases a new, less popular productivity suite (e.g., word processor, spreadsheet software) and begins requiring all computer manufacturers who pre-install its operating system to also pre-install its productivity suite. If the operating system holds significant market power, this could be considered a tying arrangement. The Clayton Act would apply if this practice makes it unreasonably difficult for competing productivity software developers to reach customers, thereby stifling innovation and substantially lessening competition in the productivity software market.

• Example 3: Exclusive Dealing in Retail

  A major manufacturer of high-end athletic footwear enters into agreements with the top five largest sports retail chains in a particular region. These agreements stipulate that the retail chains can only sell that manufacturer's brand of athletic footwear and are prohibited from stocking any competing brands. If these exclusive dealing contracts collectively cover a substantial portion of the retail market for athletic footwear in that region, they could make it extremely difficult for new or smaller footwear manufacturers to gain shelf space and reach consumers. The Clayton Act would be invoked to challenge these agreements, as they could substantially lessen competition by effectively locking out competitors and limiting consumer choice.