The Antitrust Division of the Justice Department recently received a guilty plea under Section 2 of the Sherman Antitrust Act of 1890 in a case against a Montana small business owner. It is unclear what this case means for the application of Section 2 in criminal matters.
Nathan Nephi Zito pleaded guilty to one felony, the first conviction of a Section 2 felony. Considering the government’s allegations, Zito’s conduct was clearly anticompetitive and a civil lawsuit against him would not punish him or deter others.
However, the DOJ’s enforcement campaign deserves only one cheer, not the traditional three. While anticompetitive, Zito’s conduct is not clearly illegal, but criminal enforcement must be limited to conduct that Congress has declared a crime
Zito competed for government contracts to seal highway cracks. Many contracts had only one other bidder, and Zito suggested splitting up the deal. Zito would take contracts in Montana and Wyoming, while the other bidder would take those in Nebraska and South Dakota. Zito also offered a cash payment of $100,000.
Statute is vague
Section 2 normally applies to alleged predatory behavior aimed at creating or maintaining a monopoly, and contested behavior usually has ambiguous competitive effects. While Zito’s conduct is exceptional in this regard, it is not clearly unlawful under Section 2.
Had the two companies entered into the proposed agreement, both would have committed serious violations of Section 1 of the Sherman Act, which applies to agreements. But the Sherman Act does not prohibit obtaining agreements it prohibits.
In the absence of an antitrust advertising ban, the government charged Zito under Section 2. The specific charge was attempting to monopolize the sealing of highway cracks in Montana and Wyoming. Although Zito tried to eliminate competition, one might doubt that he threatened to create a monopoly as required by the Sherman Act.
What is monopolistic behavior?
A monopoly under the Sherman Act is a dominant position that confers significant power to control prices. It is durable due to high barriers to entry. A court might reasonably decide that an agreement cannot create a monopoly. Additionally, road resurfacing appears to be an easy industry to break into, and the government has claimed otherwise.
The DOJ persuaded an appeals court in 1984 that an airline price-fixing agreement can, under certain circumstances, create a Sherman Act monopoly, so requiring such an agreement may constitute attempted monopoly. However, this case was not a binding precedent for Zito as it was pending in another district court.
In addition, courts in criminal cases require greater clarity and specificity of prohibitions than in cases without criminal sanctions.
Judge Antonin Scalia dismissed the government’s expansive interpretation of a law, stating: “The rule of leniency requires that ambiguous criminal laws be interpreted in favor of the defendants subject to them. This venerable rule not only affirms the fundamental principle that no citizen should be held accountable for violating a law whose commands are uncertain.”
Citizens need to be warned
The Supreme Court examines the constitutionality of prosecutions through the lenses of the Due Process Clause and the Separation of Powers doctrine. Due process requires criminal laws to provide fair warnings, and the separation of powers ensures Congress defines crimes – not prosecutors and courts.
Three times in the past decade, the court has ruled laws unconstitutionally vague when serious consequences — increased sentences or deportation — depended on whether a person committed a crime that qualifies as a “violent crime” or a “violent crime.”
In the last of these cases, the majority opinion of Justice Neil Gorsuch opened: “In our constitutional order, a vague law is no law at all. Only the popularly elected representatives in Congress have the power to create new federal criminal laws. And when Congress exercises that power, it must enact legislation that gives citizens a fair warning of what the law requires of them.”
Congress did not give Zito fair warning when he enacted the 1974 Sherman Act or when he committed felony violations. And his case is also unlike any of the roughly 2,000 previous Sherman Act prosecutions, each indicting a Section 1 agreement. All but suspected cartel activity which Section 1 was clearly aimed at.
As Gorsuch warned, the Constitution does not allow Congress to delegate its “responsibility for defining criminal behavior to unelected prosecutors and judges.” Congress should amend the Sherman Act to make it a criminal offense to solicit price fixing, bid fixing or market sharing.
Despite strong legal arguments, Zito pleaded guilty. The reason may be that the government declined to pursue other serious charges so the DOJ could claim a Section 2 victory.
This article does not necessarily represent the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
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Gregory J. Will is a Visiting Fellow at the Mercatus Center at George Mason University. Prior to that, he spent more than 40 years as an economist in the DOJ’s Antitrust Division, including as Senior Economic Counsel.