THE MAGNA CARTA AND THE SHERMAN ACT

By David G. Meyer¹

This year marks the 800th anniversary of the Magna Carta. Recent books and articles discussing the history of the influential document are ubiquitous.² Those histories typically explore the ways in which the agreement between King John and his nobles in 1215 influenced America’s founders and contributed to the development of American Constitutional law. A frequent theme is that the idea of the Magna Carta—especially its perceived status as the seminal document establishing the concept of freedom under the rule of law—has been as influential as the actual content of the document (which primarily addressed a list of feudal rights and obligations).³

In light of its special place in our understanding of legal history, it is no surprise that the Supreme Court has referred to the Magna Carta in more than 200 opinions. As one might expect, many of these references occurred in the context of discussing the origin of fundamental Constitutional rights such as due process.⁴ However, it is perhaps a surprise that the Supreme Court has also regularly invoked the Magna Carta in deciding antitrust cases.

A Curious Analogy

Of course the Magna Carta did not address agreements in restraint of trade, and was hardly the precursor to the Sherman Act.⁵ But its image as the seminal charter of freedom has served as an inspiration for the Court’s understanding of the importance of antitrust laws.

In United States v. Topco Associates, Inc., 405 U.S. 596, 610 (1972), the Court declared that "[a]ntitrust laws in general, and the Sherman Act in particular, are the Magna Carta of free enterprise. They are as important to the preservation of economic freedom and our free-enterprise system as the Bill of Rights is to the protection of our fundamental personal freedoms." That comparison to the Magna Carta in Topco built upon the Court’s earlier descriptions of the Sherman Act as a "charter of freedom" (Appalachian Coals, Inc. v. United States, 288 U.S. 344, 359-60 (1933)), and a "comprehensive charter of economic liberty" (Northern Pacific Railway Co. v. United States, 356 U.S. 1, 4 (1958)). These various formulations of the Sherman Act as a charter protecting economic freedom appear in at least fifteen Supreme Court decisions as well as numerous federal circuit court opinions.

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Most recently, the Court reiterated the Topco language in North Carolina State Board of Dental Examiners v. FTC, 135 S. Ct. 1101 (2015), again comparing the role of the antitrust laws in preserving economic freedom to the role of the Bill of Rights in the protection of personal freedom. 135 S. Ct. at 1109. The California Supreme Court has relied upon the analogy as well, citing the U.S. Supreme Court’s "charter" language in cases concerning both the Sherman Act and the Cartwright Act. Rice v. Alcoholic Beverage Control Appeals Bd., 21 Cal. 3d 431, 453 (1978); Oakland-Alameda County Builders’ Exch. v. F.P. Lathrop Constr. Co., 4 Cal. 3d 354, 361 (1971).

Comparing the Sherman Act to the Magna Carta or the Bill of Rights may seem a curious choice to the modern antitrust lawyer or economist who views antitrust laws solely as a practical instrument to enhance economic efficiency and further consumer welfare. A "charter of freedom" is perhaps not the most obvious title for a body of law that has evolved to focus on the efficient delivery to consumers of the goods and services that they want at a competitive price. It is not immediately apparent what individual freedoms these laws are supposed to address—certainly not the freedom of businesses to act collectively in setting prices or allocating markets. Moreover, a "charter" is typically an instrument that grants particular "rights, liberties or powers" to citizens. See Black’s Law Dictionary (2d Ed.). In contrast, the Sherman Act is a statute that proscribes certain conduct by private parties upon pain of criminal punishment. And, unlike the Bill of Rights, antitrust laws restrain the behavior of private actors in the market, not the government in its dealings with citizens. See Mass. Food Ass’n v. Mass. Alcoholic Bev’s Control, 197 F.3d 560, 565 (1st Cir. 1999) ("The Sherman Act is a "charter of economic liberty’ . . . but only as against private restraints") (emphasis in original).

So what did the Supreme Court mean when it compared the Sherman Act to the Magna Carta? And why do courts continue to refer to antitrust laws as a "charter of freedom?" Not surprisingly, different courts at different times have used the analogy to different ends. The variety of references is an interesting study in itself, but it also provides a helpful window into the evolving purposes of the antitrust laws.

A Variety of Meanings

One practical sense in which the courts have compared the Sherman Act to a "charter" concerns its form rather than its function. For example, in Appalachian Coals, the Supreme Court observed that, "[a]s a charter of freedom, the Act has a generality and adaptability comparable to that found to be desirable in constitutional provisions." 288 U.S. at 359-60. In United States v. E.I. DuPont de Nemours & Co., 366 U.S. 316 (1961), the dissenting justices echoed this theme. They quoted the language in Appalachian Coals while noting that the "sweeping generality of the antitrust laws differentiates them from ordinary statutes." They agreed with the proposition that "'[i]n the antitrust field, the courts have been accorded, by common consent, an authority they have in no other branch of enacted law. . . . ‘" Id. at 363 (quoting United States v. United Shoe Machinery Corp., 110 F. Supp. 295, 348).

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Some judges have also viewed the generality of the Sherman Act’s language, like the broad language in the Bill of Rights, as an expression of fundamental values that should be interpreted in light of the nation’s experience over time. The Supreme Court’s observation in Appalachian Coals about the "generality and adaptability" of the Sherman Act was accompanied by a summary of its purpose that suggests such fundamental values: "The purpose of the Sherman Anti-Trust Act is to prevent undue restraints of interstate commerce, to maintain its appropriate freedom in the public interest, to afford protection from the subversive or coercive influences of monopolistic endeavor." Id. at 359-60.

Occasionally courts have used this quasi-constitutional view of the antitrust laws in a utilitarian way to add to the weight given to antitrust principles when balanced against other rights actually identified in the Constitution. For example, in Cal. Retail Liquor Dealers Ass’ v. Midcal Aluminum, Inc., 445 U.S. 97 (1980), the Court considered whether the Twenty-First Amendment (which reserves to the states certain powers to regulate traffic in liquor) took precedence over the federal antitrust laws with respect to California’s retail price maintenance system for liquor sales. The Court emphasized the importance of the antitrust laws by invoking the Topco Court’s comparison to the Magna Carta and the Bill of Rights, while noting additionally that "[a]lthough the federal interest is expressed through a statute rather than a constitutional provision, Congress ‘[exercised] all the power it possessed under the Commerce Clause when it approved the Sherman Act.’" Id. at 111 (quoting Atlantic Cleaners & Dyers v. United States, 286 U.S. 427, 435 (1932)). Several circuit courts have also relied upon the Supreme Court’s Topco language in upholding the "sham" litigation exception to the Noerr-Pennington doctrine, equating the importance of the antitrust laws to the First Amendment rights protected by Noerr-Pennington. See, e.g., Litton Systems, Inc. v. AT&T, 700 F.2d 785, 813-14 (2d Cir. 1983); Ernest W. Hahn, Inc. v. Codding, 615 F.2d 830, 843 and n.16 (9th Cir. 1980).

But it also seems that Justice Marshall had something more particular in mind in authoring the majority opinion in Topco. In comparing the Sherman Act to the Magna Carta and the Bill of Rights, Justice Marshall appears to have had a quite specific idea of the freedom that the Sherman Act protects. The language that he chose and the holding that the Court reached in Topco both suggest that he intended specifically to address the rights of individual businesses to compete free of restraints imposed by more powerful economic agents.

The particular restraints at issue in Topco were restrictions on the territories in which members of a grocery purchasing collective could sell food under a private label. In finding that particular restriction unlawful, the Court described the nature of the "economic freedom" it thought important to protect: "[T]he freedom guaranteed each and every business, no matter how small, is the freedom to compete—to assert with vigor, imagination, devotion, and ingenuity whatever economic muscle it can muster." 405 U.S. at 610.

The dissent that Justice Marshall authored that same year in Flood v. Kuhn, 407 U.S. 258, 291-92 (1972), provides additional insight into his intent in using the Magna Carta comparison in the Topco majority opinion. Justice Marshall dissented from the Court’s ruling in Flood v. Kuhn that upheld Major League Baseball’s "reserve system." The reserve system imposed a uniform contract term on all professional baseball teams requiring their players to play only for the team for which they were "reserved" unless they were traded to another team. Id. at 260. The liberty interest at stake in that system was obvious. Indeed, the plaintiff, Curt Flood, asserted a Thirteenth Amendment involuntary servitude claim along with his antitrust claims. Although Justice Marshall agreed that the Thirteenth Amendment claim was properly dismissed, he also noted that, "[t]o non-athletes it might appear that petitioner was virtually enslaved by the owners of major league baseball clubs who bartered among themselves for his services." Id. at 289-90. Justice Marshall concluded that the Court’s prior cases upholding the reserve system should be overruled, as they denied the substantial federal right "to compete freely and effectively to the best of one’s ability as guaranteed by the antitrust laws." Id. at 292-93.

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Consistent with this focus on the freedom to compete, a number of subsequent cases employed the language characterizing antitrust laws as a "charter" or the "Magna Carta" of freedom in the context of considering various restraints on the freedom of competitors. See, e.g., Cmty. Commc’ns Co., Inc. v. City of Boulder, 455 U.S. 40, 56-57 (1982) (quoting Magna Carta language in holding that the state action defense did not apply to municipality’s moratorium on competition by a cable company); Lafayette v. La. Power & Light, 435 U.S. 389, 398 n.16 (1978) (holding that city owned electric utilities that allegedly excluded competitors were not immune from antitrust liability); Hecht v. Pro-Football, Inc., 444 F.2d 931, 935 (D.C. Cir. 1971) (challenging covenant in lease agreement for Robert F. Kennedy stadium precluding any professional football team other than the Washington Redskins from using the stadium).

This characterization of the Sherman Act as a quasi-constitutional charter guaranteeing the freedom to compete has also provided ammunition for some judges’ defense of the perceived original purpose of the Sherman Act to protect small business concerns against larger rivals. For example, Justices White and Stevens cited this interpretation in dissenting from the Court’s holding in Atlantic Richfield Co. v. USA Petroleum Co., 495 U.S. 328 (1990). The Court in that case held that an independent gasoline distributor could not challenge a vertical agreement between ARCO and its dealers establishing a maximum, non-predatory resale price for gasoline, because the agreement did not cause antitrust injury. The Court firmly linked the concept of antitrust injury to consumer welfare: "Low prices benefit consumers regardless of how those prices are set, and so long as they are above predatory levels, they do not threaten competition." Id. at 340. On the other hand, the dissenters warned that the Court’s decision "cast aside a century of understanding that our antitrust laws are designed to safeguard more than efficiency and consumer welfare. . . ." Id. at 360. In support of that understanding, they cited the "charter of freedom" language in Appalachian Coals and the Magna Carta comparison in Topco, along with Judge Learned Hand’s observation in United States v. Aluminum Co. of America, 148 F. 2d 416, 428-29 (2d Cir. 1945), that Congress intended through the Sherman Act to "strengthen small business concerns and to ‘put an end to great aggregations of capital because of the helplessness of the individual before them.’" Id. at 360, n.19.

In contrast to this interpretation of the "charter of freedom" as a bill of rights for the individual competitor, some courts have taken a broader view of the charter analogy. Rather than protecting small competitors, that view focuses on protecting the system of free enterprise itself.

For example, in Board of Regents of the Univ. of Wis. Sys. v. Phoenix Int’l Software, 653 F.3d 448 (7th Cir. 2011), the Seventh Circuit cited the Topco Magna Carta language:

Capitalism and private ownership have served the United States well. Even though there is no clause in the Constitution explicitly committing the country to such an economic system (although the Takings Clause of the Fifth Amendment may come close), the antitrust laws have been called quasi-constitutional, and there seems little doubt that economic freedom is high on the list of cherished rights.

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Id. at 477. The court thus equated the economic freedoms protected by the antitrust laws with the freedoms that are fundamental to a capitalist free enterprise system.

This broader interpretation of the "charter of freedom" also has deep roots. As early as 1940, the Supreme Court used the phrase to explain the importance of antitrust laws to the free enterprise system. In United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 220-21 (1940), the Court held that the reasonableness of fixed prices could not be a defense in price fixing cases. The Court explained that, if the defense were allowed, "the Sherman Act would soon be emasculated; its philosophy would be supplanted by one which is wholly alien to a system of free competition," and it would not be the "charter of freedom" that its "framers intended."

The Broader View Prevails

Two cases decided in different courts years apart illustrate these contrasting interpretations of the "Magna Carta of free enterprise" as a bill of rights for the small entrepreneur and as a "charter" protecting the system of free enterprise itself. In Redwood Theatres, Inc. v. Festival Entertainment Enterprises, Inc. , 200 Cal. App. 3d 687 (1988), the California Court of Appeal held that the plaintiff, a film exhibitor, could maintain a claim under California’s Cartwright Act against several film distributors for allegedly entering into "unwritten" agreements with a larger film distributor to provide that distributor with the valuable first-run films that distributors need to be profitable.⁶ The court analyzed the issue under both boycott and exclusive dealing theories, and ultimately concluded that the challenged arrangement, if proved, could unreasonably "entrench the position of established motion picture exhibitors and pose formidable barriers to entrepreneurs seeking to enter (or expand) operations in the theatre business." Id. at 708.

In reaching that decision, the court interpreted the Supreme Court’s invocation of the Magna Carta in Topco as a desire to protect "the entrepreneur’s right to freely compete in new or expanded markets." Id. at 711-12. The court grounded this concern for the "entrepreneur’s right to compete" in Congress’ historical distrust of monopoly power, observing that "[w]ithin American political traditions, monopoly has long been perceived as a threat to individual liberties."⁷ Id. at 708. The court even characterized the "central purpose" of the Sherman Act as "assuring freedom of opportunity in the face of accumulations of corporate wealth. . . ." Id. at 708, n.10.

Sixteen years later, the Supreme Court took a different approach to the Magna Carta analogy in Verizon Communications, Inc. v. Trinko, 540 U.S. 398, 415-16 (2004). In Trinko, the Court rejected the claim that traditional antitrust principles imposed an obligation on the defendant, Verizon, to share its network with its competitor, AT&T, in the newly deregulated market for local telephone service. In doing so, the Court quoted Topco, not to emphasize the rights given to upstart competitors by the "Magna Carta of free enterprise," but to point out the Sherman Act’s limitations: "The Sherman Act is indeed the ‘Magna Carta of free enterprise’ . . . but it does not give judges carte blanche to insist that a monopolist alter its way of doing business whenever some other approach might yield greater competition." Id. at 415-16. Indeed, the Court explained the potentially beneficial effects of a monopoly in a free enterprise system:

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The mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system. The opportunity to charge monopoly prices—at least for a short period—is what attracts "business acumen" in the first place; it induces risk taking that produces innovation and economic growth. To safeguard the incentive to innovate, the possession of monopoly power will not be found unlawful unless it is accompanied by an element of anticompetitive conduct.

Id. at 407 (emphasis in original).

Whatever meaning the Court ascribed to the "Magna Carta of free enterprise" in Trinko, it is clear that the analogy does not stand for the rights of the small competitor or new entrant against the competitive force of a monopoly simply because the monopolist has more power. This, of course, is in accord with the state of Section 2 law as it has evolved since the early days of the Sherman Act.

IV. The Magna Carta Lives On

In light of the evolution of the Sherman Act toward its modern focus on enhancing consumer welfare, it is difficult to imagine the Supreme Court again using the Magna Carta analogy as Justice Marshall apparently intended in Topco in defense of the right of individuals to compete free of restraints imposed by more powerful economic actors.⁸ It is even more difficult to envision the Court using the comparison as in Redwood Theatres in support of the purpose of the antitrust laws "to perpetuate and preserve, for its own sake and in spite of possible cost, an organization of industry in small units which can effectively compete with each other." 200 Cal. App. 3d at 710-11 (quoting United States v. Aluminum Co. of Am., 148 F.2d 416, 429 (2d Cir. 1945)).

However, the description of the Sherman Act as a charter of freedom is far from dead. The Supreme Court’s reference to the Topco Court’s Bill of Rights language just this year in North Carolina State Board of Dental Examiners shows that it continues to provide inspiration for the importance of the antitrust laws.

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But the Court’s opinion in Dental Examiners (as well as the discussion in Trinko discussed above) suggest that the idea for which the Magna Carta or the Bill of Rights is likely to be invoked in the future is the importance of protecting the free enterprise system itself, not the rights of any particular competitors. Even though Dental Examiners dealt with a foreclosure of competition (it concerned the ability of non-dentists to compete in providing tooth whitening services), the Court’s language certainly suggests this broader focus:

Federal antitrust law is a central safeguard for the Nation’s free market structures. In this regard it is "as important to the preservation of economic freedom and our free-enterprise system as the Bill of Rights is to the protection of our fundamental personal freedoms." [quoting Topco]. The antitrust laws declare a considered and decisive prohibition by the Federal Government of cartels, price fixing, and other combinations or practices that undermine the free market.

135 S. Ct. at 1109.

There is another, rhetorical, reason why references to the Magna Carta and the Bill of Rights are likely to continue in antitrust cases. It arises from the same challenge that trial lawyers face in explaining the purpose of the antitrust laws to a jury, and that the government faces in communicating that purpose to the public. It can be difficult to explain to a jury that the antitrust laws generally promote competition, not cooperation, even when business documents use aggressive language about inflicting damage on a competitor. And it is much easier and more compelling for the U.S. Department of Justice to describe price fixing cartels as a form of "theft" from consumers than to explain the ways in which price fixing agreements inhibit the functioning of free market forces.⁹ More than ever, antitrust laws import the principles of economics, which are not always easily expressed as intuitive moral concepts.

On the other hand, freedom is a concept that we can all grasp and embrace. Whatever its precise meaning in any particular antitrust case, courts are likely to continue to use the concept of a charter of freedom to communicate the fundamental importance of antitrust laws. Economic efficiency may be the Sherman Act’s modern goal, but its rhetoric will likely continue to include the language of liberty.

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Notes:

^1. Mr. Meyer is a partner at Jones Day. The views expressed in this article do not necessarily reflect the views of Jones Day, its attorneys or its clients.

^2. See, e.g., Podgers, J., Americas’s Magna Carta, ABA Journal, v. 101, n. 6 (June, 2015); Clancy, M., Magna Carta 2015: The Eight Hundredth Anniversary of Liberty, 41 San Francisco Att’y 36 (Spring, 2015); Landau, J., Magna Carta Turns 800: An Anniversary Worth Remembering, 75 Or. St. B. Bull. 17 (June, 2015); Holt, Garnett & Hudson, Magna Carta (3d ed. 2015).

^3. For example, the 1215 document contains impenetrable directives such as: "If a man holds land of the Crown by ‘fee-farm,’ ‘socage,’ or ‘burgage,’ and also holds land of someone else for knight’s service, we will not have guardianship of his heir, nor of the land that belongs to the other person’s ‘fee,’ by virtue of the ‘fee-farm,’ ‘socage,’ or ‘burgage,’ unless the ‘fee-farm’ owes knight’s service." See British Library translation, available at http://www.bl.uk/magna-carta/articles/magna-carta-english-translation.

^4. See, e.g., Kerry v. Fauzia, 135 S. Ct. 2128, 2132 (2015) ("The Due Process Clause has its origin in Magna Carta"); Boumediene v. Bush, 553 U.S. 723, 740 (2008) ("[G]radually the writ of habeas corpus became the means by which the promise of Magna Carta was fulfilled"); Den v. The Hoboken Land and Improvement Company, 59 U.S. 272, 276 (1856) ("The words, ‘due process of law,’ were undoubtedly intended to convey the same meaning as the words, ‘by the law of the land,’ in Magna Charta").

^5. However, the Magna Carta did address some trade issues that modern competition lawyers will recognize, such as the requirement that "[T]here shall be standard measures of wine, ale, and corn (the London quarter), throughout the kingdom." Den, 59 U.S. at 276.

^6. The case was decided before the California Supreme Court clarified in State ex rel. Van de Kamp v. Texaco, 46 Cal. 3d 1147, 1165 (1988) that the Cartwright Act was not derived from the Sherman Act, but from the law of other states, and that decisions interpreting the Sherman Act therefore are not necessarily probative of the intent underlying the Cartwright Act. The court in Redwood Theatres therefore relied on federal cases interpreting the Sherman Act in making its decision, concluding that they are "applicable to problems arising under the Cartwright Act." 200 Cal. App. 3d at 694.

^7. In this context, the court noted that "Jefferson had proposed that a prohibition against monopoly be included in the Bill of Rights." Id. at 708. See Thomas Jefferson to James Madison (Dec. 20, 1787), in I The Founders’ Constitution Ch. 14, Document 30 (University of Chicago Press) (available at http://press-pubs.uchicago.edu/founders/documents/v1ch14s30.html) ("I will now add what I do not like. First the omission of a bill of rights providing clearly and without the aid of sophisms for freedom of religion, freedom of the press, protection against standing armies, restriction against monopolies. . . .").

^8. Several cases have noted that the holding in Topco—at least in its broadest interpretation—also may not have stood the test of time. See Rothery Storage & Van Co. v. Atlas Van Lines, 792 F.2d 210, 226 (D.C. Cir. 1986) ("to the extent that Topco and Sealy stand for the proposition that all horizontal restraints are illegal per se, they must be regarded as effectively overruled"); Guild Wineries and Distilleries v. J. Sosnick & Son, 102 Cal. App. 3d 627, 645 (1980) ("The Topco court referred to the antitrust laws as ‘the Magna Carta of free enterprise" . . . which guaranteed every business the freedom to compete in every section of the economy, whether intrabrand or interbrand. . . . This is contrary to the Sylvania court’s explicit sanctioning of limits on wholesale and retail dealer autonomy").

^9. Scott D. Hammond, Director of Criminal Enforcement, Antitrust Division, U.S. Department of Justice, The Fly On The Wall Has Been Bugged: Catching An International Cartel In The Act, Address at International Law Congress, Dublin, Ireland (May 15, 2001) (available at www.justice.gov/atr/speech/fly-wall-has-been-bugged-catching-international-cartel-act) ("Price fixing is nothing less than theft by well-dressed thieves.").