Rule of reason

Is a standard courts use in testing the legality of business conduct under section 1 of the Sherman Antitrust Act (1890), which prohibits “every contract, combination … or conspiracy, in restraint of trade.”

At first, the Supreme Court read the act as condemning every restraint of trade. The Court then began moving away from literalness, and in 1911 Chief Justice Edward D. White, writing for the majority in Standard Oil Co. of New Jersey v. United States and United States v. American Tobacco Co., explained that the act condemned only those practices “which operated to the prejudice of the public interests” by unduly restraining trade (p. 179). He stated that Congress intended that the courts apply the “standard of reason” in determining whether the Act had been violated (p. 60). Although the Court ordered the oil trust dissolved, the rule of reason's factual evaluation of business practices on a case‐by‐case basis was widely viewed as “protrust.”

In Chicago Board of Trade v. United States (1918), Justice Louis D. Brandeis listed some factors to be considered in applying the rule of reason: “the facts peculiar to the business to which the restraint is applied; its condition before and after the restraint was imposed; the nature of the restraint, and its effect, actual or probable. The history of the restraint, the evil believed to exist, the reason for adopting the particular remedy, the purpose or end sought to be attained, are all relevant facts” (p. 238).

The rule of reason was the dominant approach in antitrust cases for about two decades. After 1937, as the power of the national government expanded, the Court increasingly declared that various business agreements or practices were conclusively presumed to be unreasonable without elaborate inquiry about the harm caused or the business justification. These activities were per se illegal “because of their pernicious effect on competition and lack of any redeeming virtue” (Northern Pacific Railway Co. v. United States, 1958, p. 5). The per se approach dominated antitrust litigation from the 1940s through the 1960s. Per se rules proscribed a range of restrictive agreements that included price fixing and market allocations.

With an increasing emphasis on deregulation and a free market in the 1970s and 1980s, the Court began to abolish or modify per se rules, returning to the rule of reason as the prevailing standard to test many business practices (e.g., Continental T.V., Inc. v. GTE Sylvania, Inc., 1977). Per se rules retain some vitality, however, particularly when applied to restraints among competitors. In 1978 the Court declared in National Society of Professional Engineers v. United States that “the inquiry mandated by the Rule of Reason is whether the challenged agreement is one that promotes competition or one that suppresses competition. … [The] purpose of the analysis is to form a judgment about the competitive significance of the restraint” (pp. 691–692).

Although the rule of reason and the per se illegality rule are sometimes viewed as dichotomous, they can also be viewed as complementary categories and converging methods of antitrust analysis. Several Court cases in the 1980s reflect a methodological overlap between the two standards, with some justices advocating a quick threshold examination of a business practice for competitive impact before applying a per se or rule of reason approach.

Debate over the rule of reason remains lively. Some commentators view the Court's renewed emphasis on the rule of reason as part of a free market, probusiness, antigovernment philosophy and as fostering increased economic concentration. Others welcome the diminishing influence of per se rules they consider to be based on unsound economic theory. Several commentators criticize the rule of reason as lacking substantive content, asserting that it establishes a lengthy list of unweighted factors, allowing an unlimited, freewheeling, high‐cost judicial inquiry without providing sufficient guidance to trial courts or businesses. Others propose that the Court adopt “per se rules of legality,” declaring lawful certain business practices that are probably beneficial, with the rule of reason applying only to practices with significant risk of competitive injury.

In the first century of antitrust law, the courts have given shape to the Sherman Act's broad mandate. The interpretation and application of the act have varied over the years, and the rule of reason has provided the means for accommodating changes in economic theory with changing political and social concerns about business practices and the concentration of economic power.

See also Antitrust.

Bibliography

• Phillip E. Areeda, Antitrust Law, vols. 7 and 8 (1986)

— Shirley S. Abrahamson and Charles G. Curtis, Jr.

Rule of Reason, a judicial principle applicable when the purpose and intent of legislation are open to serious question. Application of the principle has been largely restricted to the interpretation of the Sherman Antitrust Act of 1890. This measure, if taken literally, would be unenforceable, and possibly unconstitutional. To evade the issue of the law's constitutionality, the Supreme Court, in the 1911 cases Standard Oil Company v. United States and United States v. American Tobacco Company, enunciated the rule of reason and used it to conclude that the statutory prohibition of "all combinations in restraint of trade" set forth in the act actually meant "all unreasonable combinations in restraint of trade."

Bibliography

Letwin, Willam. Law and Economic Policy in America: The Evolution of the Sherman Antitrust Act. Chicago: University of Chicago Press, 1981 [1965].

In antitrust law, the principle first enunciated by the Supreme Court in 1911 that the law is to be applied only to "unreasonable" restraints of trade, 221 U.S. 1. Since then, the rule of reason has evolved into a complex set of factors that may be considered in resolving an antitrust case. Givens, Antitrust: An Economic Approach, App. D (1983). The rule of reason has been rejected for certain types of business conduct such as price fixing agreements, which have been found to be illegal per se, that is, likely to harm competition and so lacking in potential benefit that they are illegal in and of themselves. 273 U.S. 392. See Sherman Antitrust Act.

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The rule of reason is a doctrine developed by the United States Supreme Court in its interpretation of the Sherman Antitrust Act. The rule, stated and applied in the case of Standard Oil Co. of New Jersey v. United States, 221 U.S. 1 (1911), is that only combinations and contracts unreasonably restraining trade are subject to actions under the anti-trust laws and that size and possession of monopoly power are not illegal.

Some of Standard Oil's critics, including the lone dissenter Justice John Marshall Harlan, argued that Standard Oil and its Rule of Reason was a departure from previous Sherman Act case law, which purportedly had interpreted the language of the Sherman Act to hold that all contracts restraining trade were prohibited, regardless of whether the restraint actually produced no ill effects. These critics emphasized in particular the Court's decision in United States v. Trans-Missouri Freight Ass'n, 166 U.S. 290 (1897), which contains some language suggesting that a mere restriction on the autonomy of traders would suffice to establish that an agreement restrained trade within the meaning of the Act. Others, including William Howard Taft and Robert Bork, argued that the decision and the principle it announced was entirely consistent with earlier case law. These scholars argue that much language in Trans-Missouri Freight was dicta, and also emphasized the Court's decision in United States v. Joint Traffic Association, 171 U.S. 505 (1898), in which the Court announced that "ordinary contracts and combinations" did not offend the Sherman Act, because they merely restrained trade "indirectly." Indeed, in his 1912 book on Antitrust Law, Taft reported that he had challenged Standard Oil's critics to articulate one scenario in which the "Rule of Reason" would produce a result different from that produced under prior case law. According to Taft, no critic of Standard Oil was able to answer this challenge. Just seven years later, the Court unanimously reaffirmed the Rule of Reason in an opinion by Justice Louis Brandeis, Chicago Board of Trade v. United States, 246 U.S. 231 (1918). The decision found that an agreement between rivals limiting rivalry on price after an exchange was closed was reasonable and thus did not violate the Sherman Act.

On the same day the Supreme Court announced Standard Oil, it also announced United States v. American Tobacco Co., 221 U.S. 106 (1911). That decision held that Section 2 of the Sherman Act, which bans monopolization did not ban the mere possession of a monopoly, but instead banned only the unreasonable acquisition and/or maintenance of monopoly.

The rule was narrowed in later cases that held that certain kinds of restraints, such as price fixing agreements, group boycotts, and geographical market divisions, were illegal per se. These decisions followed up on Standard Oil's suggestion that courts can determine that certain restraints are unreasonable based simply upon the "nature and character" of the agreement. More recently, the United States Supreme Court has narrowed the category of restraints deemed unlawful per se, thereby subjecting a greater number of restraints to fact-based rule of reason analysis. See, e.g., Continental TV v. GTE Sylvania, 433 U.S. 36 (1977) (holding that courts should analyze non-price vertical restraints under the Rule of Reason); State Oil v. Khan, 522 U.S. 3 (1997) (holding that courts should evaluate maximum resale price maintenance under the Rule of Reason); Leegin Creative Leather Products, Inc. v. PSKS, Inc., 127 S. Ct. 2705 (2007) (overturning the per se restriction on minimum retail price maintenance agreements). See also Polk Brothers, Inc. v. Forest City, 776 F.2d 185 (7th Cir. 1985). Moreover, the U.S. Supreme Court has reaffirmed Standard Oil's conclusion that analysis under the Rule of Reason should focus on the economic, and not social, consequences of a restraint. See National Society of Professional Engineers v. United States, 435 U.S. 679 (1978). Moreover, the Court has retained the per se rule against tying contracts, although it has raised the threshold showing of market power that plaintiffs must make to satisfy the rule's requirement of "economic power." See Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2 (1985)

The European Court of Justice (ECJ) has adopted the concept in its own jurisprudence concerning the free movement of goods within the European Common Market. The rule has arisen in the context of Article 28 (ex 30) of the Treaty of Rome, which prohibits quantitative restrictions on imports (or measures having equivalent effect). In Cassis de Dijon the ECJ drew a distinction between measures in breach of Article 28 which were indistinctly applicable as opposed to distinctly applicable. Indistinctly applicable measures are ones that, prima facie, do not favour domestic producers over importers, and whose effects are equal on both. The ECJ argued that indistinctly applicable measures that favoured domestic traders over importers were not necessarily in breach of Article 28. They could be justified if they satisfied 'mandatory' requirements - namely that the measure is necessary for protecting the public or the consumer. The rule of reason is essentially the proposition that a proportionality exercise must be performed by the Court to determine whether the effects of Member State legislation on the free movement of goods is justified in light of the legislation's stated goals.

This proportionality exercise has itself been applied by the ECJ further than the boundaries of Article 28 would initially allow.

See also: United States Government, U.S. history

Bibliography

• William Howard Taft, The Antitrust Acts And The Supreme Court (1914)
• Robert H. Bork, The Rule of Reason and the Per Se Concept: Price Fixing and Market Division, 74 Yale L. J. 775 (1965) (Part I)
• Rudolph Peritz, Competition Policy in America, 1888-1992 (1996)
• Albert H. Walker, The Unreasonable Obiter Dicta of Chief Justice White in the Standard Oil Case: A Critical Review (1911)
• Alan Meese, Price Theory, Competition, and the Rule of Reason, 2003 Illinois L. Rev. 77
• William Page, Ideological Conflict and the Origins of Antitrust Policy, 66 Tulane L. Rev. 1 (1991)
• William Letwin, Law and Economic Policy in America (1965)
• Martin Sklar, The Corporate Reconstruction of American Capitalism, 1890-1916 (1988)
• Thomas A. Piraino, Reconciling the Per Se and Rule of Reason Approaches to Antitrust Analysis, 64 S. CAL. L. REV. 685 (1991)
• Frank H. Easterbrook, The Limits of Antitrust, 63 Texas L. Rev. 1 (1984).

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