WTF is The Sherman Act?

Unlike the word “Google,” the term “Sherman Act” isn’t a household name. According to Google Trends data, only 61 people searched for “Sherman Act” the last week of August — just a few dozen searches less than the week the DOJ brought a second antitrust case against Google in late January. (The one that goes to trial this week was originally filed under the Trump Administration in 2020.)

The DOJ’s case hinges on Section 2 of the Sherman Act, which prohibits monopolizing, attempting to monopolize or conspiring with others to monopolize “any part of the trade or commerce” in the U.S. or with other countries.

For the government to make its case, experts say it will first have to prove Google has a monopoly on the search market. However, it will also have to prove whether the tech giant has used its dominance to block out the competition and harmed advertisers and consumers in the process. (That’s where Google’s exclusivity deals with device makers like Apple and Samsung as well as various wireless providers come into play.)

“The case isn’t a monopolization case, but a monopoly maintenance case,” said Adam Kovacevich, Founder and CEO of the think tank Chamber of Progress.

The case’s outcome could have implications far beyond Google. If the court’s decision leads to a ruling that breaks up Google’s ad-tech stack, a 2023 paper written by an economics professor at Dartmouth suggests it could result in reduced fees for intermediary services, more revenue for publishers and lower costs for advertisers.

A brief history of antitrust cases

Since becoming law, the Sherman Act has been used to break up Standard Oil in 1911 and AT&T in the 1984. However, it’s also been used in other cases including unsuccessful attempts to break up American Tobacco, U.S. Steel, IBM and, most recently, Microsoft.

The Microsoft trial from the late 1990s is particularly noteworthy, both because it’s the most recent antitrust case of this size and because of the similarities to the case against Google. (In that case, the government accused Microsoft of illegally maintaining a monopoly on the PC market.)

In the 130 years since becoming law, the Sherman Act has only been amended a few times, most notably in 1914 with the creation of the Clayton Act. Until the 1970s, it was hard to predict how the courts would act in relation to antitrust cases, said Harold Furchtgott-Roth, a former commissioner of the Federal Communications Commission, who is now a senior fellow at the Hudson Institute. Antitrust law has “evolved over time in dramatically different ways,” he said. Until 50 years ago, there was an element of “‘big is bad,’ but not uniformly,” adding that courts have taken a more economically-driven approach to cases since then.

According to Furchtgott-Roth, economists use something called the “no economic sense test” to examine if anticompetitive conduct makes sense beyond harming competition. Although the statutory language in Section 2 of the Sherman Act says a company’s intent to harm competition could be sufficient enough to violate antitrust law, he also noted there’s “a lot of court history that goes the other way.”

To illustrate this point, the former chief economist for the House Commerce Committee gave an analogy of four gas stations at the same intersection. If one station raises or lowers prices by 5 cents and sends an e-mail about wanting to harm competition, that wouldn’t necessarily warrant an antitrust violation.

“Ultimately, I am delusional because as one of four gas stations at the same intersection, I actually have no way harming competition no matter what I do,” Furchtgott-Roth said.

How The Sherman Act has come up so far 

Although Republican and Democratic attorneys generally have differing views in the courtroom, Bill Cavanaugh — an attorney representing the coalition of state Attorneys General — said in his opening statement on Tuesday that the Google trial has led many to “speak with one voice” in their allegation of Google violating section two of the Sherman Act.

Google’s massive market share of 90% of search compared to the 3% held by Microsoft Bing is also part of the government’s case. According to Cavanaugh, Google has been advertisers’ “only real avenue” for seeking new customers. However, he said that’s led Google to have conflicts of interest with some competitors like Expedia and others that advertise on the search giant. 

“Google’s ability to give its back of the hand to some of its largest customers, yet maintain their business and actually increase it is direct evidence from monopoly power,” Cavanaugh said. “And by raising [advertisers costs], Google bolstered its enormous monopoly profits.”

In another opening statement on Tuesday, DOJ attorney Kenneth Dintzer said the government has evidence showing wireless carriers and smartphone makers thought Google’s terms were too restrictive. However, he said they took the money anyway “because it was the only option,” adding that the search giant use exclusivity to “block potential future rivals.” 

How both sides paint a picture of the market will also be a key issue. The DOJ and state AGs define it as search specifically, but Google’s case includes broadening it to include more of the overall advertising ecosystem, including TikTok and Amazon. If the judge sides with Google’s attorneys, the case might become more difficult to prove.

There’s also the question of who the customer is as it’s defined in The Sherman Act. Since consumers can use Google for free, the government’s case is that advertisers are the real customers in the case, which is why the topic of ad price inflation will be key. Jason Kint, CEO of Digital Context Next, said this gets to a modern antitrust question of whether consumer price increases is still the only important factor.

“We’ve thought about it for the past three or four decades as, if price doesn’t go up then everything’s all good,” Kint said. “That’s all been rethought in the last number of years … If the consumer doesn’t really have the best experience they could have and there’s not innovation happening or privacy happening, even if the product’s free, there could be harmful effects for the consumer. The same is true for the advertiser.”

Litigation’s ‘long slog’ and what comes next

That this case is taking place amid the ongoing AI race represents another major factor, alongside other ongoing shakeups in the search market and other shifts across digital advertising overall.

Although the trial is expected to last 10 weeks, it could drag on much longer, leading some to wonder if the Google case will either be moot if the speed of innovation outpaces litigation. The pace of innovation was also an issue in the antitrust case against IBM, which was filed in 1969 and dropped in 1982, rendering some of the foundational elements of the argument against IBM meaningless because tech had advanced so much over that span of time.

If Google’s trial takes anywhere near as long as IBM’s, the market could change enough in another decade that the case could lose relevance, noted Thomas Lenard, senior fellow & president emeritus at the Technology Policy Institute. 

“All of these are long slogs,” Lenard said. “Look at how these cases have dragged on and if they’ve benefited consumers or just handicapped the companies by having companies’ attention diverted.”