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Corporate Legal

Antitrust law basics – Section 1 of the Sherman Act

· 7 minute read

· 7 minute read

As we head deeper into 2023, antitrust law is hot.  The current administration is taking an aggressive approach to competition law enforcement.  Consequently, in-house lawyers should have a basic understanding of antitrust laws as it is easy for businesses to cross the line and end up with an expensive government investigation or private litigation (or both).  Worse, damages are tripled, and jail time can be in the cards for executives.  All meaning that if there is one place in-house lawyers can add value it is being part of ensuring compliance with antitrust laws.     

Today we will discuss the Sherman Act, the primary source of competition law regulation in the United States.  The Sherman Act, codified in 15 U.S.C. §§ 1 to 7, is the federal antitrust law prohibiting unreasonable restraints of trade, and is enforced by the Department of Justice. The Sherman Act contains two sections, and we focus on Section 1, which covers agreements: 

Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.

If read literally, Section 1 of the Sherman Act would prohibit every commercial contract because all contracts cause some restraint on trade.  Fortunately, courts have found that only agreements that “unreasonably” restrain trade are prohibited.  Courts have two main standards for analyzing agreements to determine if they unreasonably restrain trade.  The first is the per se standard, i.e., the type of agreement between competitors is so obviously anticompetitive that there is no further analysis needed.  If you did it, you’re in trouble. The second is the “rule of reason” where courts review non per se agreements to determine if the commercial benefits outweigh any competitive harm.  Courts look at the agreement and then (i) define the relevant market, (ii) determine the market power of the defendant, and (iii) look for the existence of anticompetitive effects. If there are such effects, the burden shifts to the defendant to show an objective, pro-competitive justification for the agreement. Courts look at several factors to weigh any such justification: 

  • The intent and purpose in adopting the restriction. 
  • The competitive position of the defendant. 
  • The structure and competitive conditions of the relevant market (including barriers to entry). 
  • The defendant’s “objective” justification for the restriction. 

Most antitrust review falls under the rule of reason which likely means an expensive and prolonged battle between the parties.  Here are some of the most problematic agreements: 

Agreements with Competitors (per se violations) 

  • Price fixing – the king of per se violations is an agreement among competitors to fix prices.  And it does not matter if you want to lower prices.    
  • Joint boycotts – joining together with other competitors to agree not to do business with another business. 
  • Bid Rigging – to join with competitors to “rig” a bidding process. 
  • Dividing customers and/or markets between competitors – just what it says.   

 Agreements with Non-Competitors (rule of reason analysis) 

  • Tying” – a vertical agreement where a party uses market power in one product to require a customer to buy another of its products (or keep them from buying a competitor’s product). 
  • Resale price maintenance – where a manufacturer sells a product to a distributor and then tries to control the price at which the distributor can sell the product to consumers.  
  • Exclusivity provisions –  requiring one party to deal exclusively with another party.  
  • Most Favored Nations” clauses – under an MFN, the other party agrees that it will not pay more to another party than it does to you (or will not sell for a different price than the one charged to you).  

When it comes to the rule of reason, most of the agreements in question are written out, i.e., normal commercial agreements.  When it comes to per se violations, sometimes businesspeople will write out agreements to fix prices, or rig bids, or divide markets but most of the time that doesn’t happen. Unwritten agreements, however, can be proved through circumstantial evidence but it’s something more than evidence that could be equally consistent with lawful behavior (i.e., evidence that tends to exclude the possibility that the parties acted independently).  The classic example of perfectly legal “conscious parallelism” is gas stations located on four corners of an intersection.  Because they all advertise their prices on large signs, the price at each station is almost always the same – even though there is no agreement between them to all charge the same price.  To get over the evidence hurdle, a plaintiff must show something more than simply uniform action by competitors.  These are called “plus factors” – factors that can allow one to conclude that there was something more going on than legal unilateral behavior.  Plus factors include: 

  • The defendants acted contrary to their individual economic interests. 
  • The defendants had meetings or conversations, i.e., opportunities to agree. 
  • The defendants had a motive to collude. 
  • The defendants engaged in abrupt or unprecedented changes in behavior. 
  • The industry is concentrated with few competitors. 

One common myth is that antitrust regulation doesn’t apply to trade associations or joint ventures.  Trade associations are one of the key areas of risk as they usually involve competitors joining together in a room to talk about business.  It is critical that the employees who are involved with a trade association know the ground rules.  Joint ventures that involve competitors joining together are also highly problematic and draw scrutiny from regulators.  

Lastly, in-house counsel also must be wary of Section 1 of the Sherman Act during the merger or acquisition process, when the target is a competitor.  The due diligence process involves the sharing of sensitive competitive data about the target, typically requesting information about customer contracts, financials, projections, strategy documents, employee contracts, tax returns, research and development, intellectual property, and other competitively sensitive documents.  Under normal circumstances sharing this information would land the parties in jail.  Regulators understand that some due diligence is necessary, and the solution is generally four-fold: 

  • The legal teams minimize the data requested/provided. 
  • Reliance on aggregated and “older” data vs. specific and forward-looking data, along with sensitive data. 
  • Strict confidentiality agreements and secure data rooms. 
  • A “clean team” to review the information, i.e., individuals at the acquiring company who are not involved in price setting, customer relationships, or day-to-day operations of that company. 

Section 1 of the Sherman Act continues to apply after the deal is announced but not yet approved by regulatory officials.  While the two companies can engage in integration planning, they cannot act as though the deal is done when it is not, i.e., no reaching out to customers together re contract terms, combining contract forms, and so forth. This is called “gun-jumping.”   


These are the basics of Section 1 of the Sherman Act.  Obviously, antitrust law is highly complex and fact specific.  Fortunately, for in-house counsel with access to Practical Law, you have an incredible array of resources to educate yourself and the business on the rules of the road regarding agreements and Section 1 of the Sherman Act. 


Sterling Miller is a three-time General Counsel who spent almost 25 years in-house.  He has published five books and writes the award-winning legal blog, Ten Things You Need to Know as In-House Counsel. Sterling is a regular contributor to Thomson Reuters as well as a sought-after speaker.  He regularly consults with legal departments and coaches in-house lawyers. Sterling received his J.D. from Washington University in St. Louis. 

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