Sherman Antitrust Act

The Sherman Antitrust Act is a law of the United States dating from 1890. It prohibits two things. First, companies may not collude with one another to eliminate competition, for example by jointly fixing prices. Second, a company that dominates a market almost entirely may not expand or defend that position through unfair means. The law is remarkably short: the decisive parts fit on a single page. What exactly counts as “unfair” has been determined by courts through rulings over more than 130 years.

A 130-year-old law hits tech giants

When the law was created, it concerned oil, railroads, and sugar. The oil company Standard Oil controlled almost the entire US market at the time. In 1911, it was broken up into 34 separate companies on the basis of the Sherman Act. The very same sentences apply today to search engines, app stores, and cloud services.

That is what makes the Sherman Act important for investors and tech observers. A lost case can destroy a business model, not just cost money. In extreme cases, a court can order a corporation to sell off parts of itself. Even the mere prospect of this moves stock prices.

A common misconception: being big is not prohibited. A company may hold a 90 percent market share if it achieved that simply through a better product. What is prohibited is only the conduct used to artificially hold back competitors.

How a Sherman Act case unfolds

A lawsuit can be filed by the US Department of Justice, the FTC competition authority, an individual state, or an injured company. First, the court must determine which market is even being considered. This question sounds technical, but it often decides the case. Is the market “search engines” or “online advertising as a whole”? In the first case, one provider appears overwhelmingly powerful; in the second, merely large.

After that, the judges examine the conduct. Typical accusations include exclusive contracts that lock out competitors, or the bundling of two products so that one can only be obtained together with the other. Courts usually weigh the matter: does the harm to competition outweigh the benefit to customers?

At the end stands a remedy, as it is called in legal jargon. The mildest form consists of behavioral requirements, such as banning certain contracts. The harshest is the breakup of the company. Such proceedings often drag on for five to ten years, because each instance reviews the case anew.

From Microsoft to today’s AI deals

The best-known modern case is Microsoft around the year 2000. The accusation: the company tied its Internet Explorer browser so tightly to Windows that competitors had no chance. A first-instance court ordered a breakup, but an appeals court overturned that ruling. In the end, only behavioral requirements remained.

In 2024, a US court ruled that Google maintains an illegal monopoly in the field of internet search. Central to the case were billions of dollars in payments to Apple to have Google set as the default search engine on the iPhone. Similar proceedings are underway against Amazon, Apple, and Meta. They all invoke the very same text from 1890.

The term is now also appearing in news about the AI industry. Authorities take a close look when a major cloud provider invests billions in an AI lab, and that lab then spends almost all of the money on computing power from the very same investor. To draw a distinction: pure corporate acquisitions are usually reviewed under a different law, the Clayton Act. The Sherman Act primarily applies to the ongoing conduct of a corporation.