Rule of reason

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The rule of reason is a legal doctrine used to interpret the Sherman Antitrust Act, one of the cornerstones of United States antitrust law. While some actions like price-fixing are considered illegal per se , other actions, such as possession of a monopoly, must be analyzed under the rule of reason and are only considered illegal when their effect is to unreasonably restrain trade. William Howard Taft, then Chief Judge of the Sixth Circuit Court of Appeals, first developed the doctrine in a ruling on Addyston Pipe and Steel Co. v. United States, which was affirmed in 1899 by the Supreme Court. The doctrine also played a major role in the 1911 Supreme Court case Standard Oil Company of New Jersey v. United States.

Contents

History

Upon its development some critics of Standard Oil, including the lone dissenter Justice John Marshall Harlan, argued that Standard Oil and its rule of reason were 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 ill effects. These critics emphasized in particular the Court's decision in United States v. Trans-Missouri Freight Association , 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 restrained trade only "indirectly". Indeed, in his 1912 book on antitrust law, Taft reported that no critic of Standard Oil could succeed in Taft's challenge: to articulate one scenario in which the rule of reason would produce a result different from that produced under prior case law. In 1911, the Supreme Court 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 banned only the unreasonable acquisition or maintenance of monopoly. This reflects a long-standing view that one can have a monopoly just by having a superior product and that it violates no law to produce such a product.

In 1918, seven years later, the Court unanimously reaffirmed the rule of reason in Chicago Board of Trade v. United States . In an opinion written by Justice Louis Brandeis, the Court held that an agreement between rivals limiting rivalry on price after an exchange was closed was reasonable and thus did not violate the Sherman Act. The Court rejected a strict interpretation of the Sherman Act's language: "The true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition." The Court did so mostly because the agreement was regulatory rather than anticompetitive.

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 the suggestion in Standard Oil that courts can determine that certain restraints are unreasonable based simply upon the "nature and character" of the agreement.

More recently, the Supreme Court has removed a number of restraints from the category deemed unlawful per se and instead subjected them to fact-based rule of reason analysis. These include non-price vertical restraints in 1977's Continental Television v. GTE Sylvania , maximum resale price maintenance agreements in 1997's State Oil v. Khan , and minimum resale price maintenance agreements in 2007's Leegin Creative Leather Products, Inc. v. PSKS, Inc.

Moreover, the Supreme Court has reaffirmed the conclusion in Standard Oil that analysis under the rule of reason should focus on the economic but not the social consequences of a restraint (National Society of Professional Engineers v. United States, 435 U.S. 679 (1978)). [1] Further, the Court retained the per se rule against tying contracts but 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). [2]

Several authors [3] have worked on the creation of a "structured rule of reason" so as to avoid the flaw in terms of the legal certainty surrounding a pure rule of reason.

In EU

A rule of reason does not exist in EU competition law (see e.g. T-11/08, [4] T-112/99, [5] T-49/02, [6] T-491/07, [7] T-208/13, [8] etc.).

It does, however, exist in the EU's substantive law, as developed in the European Court of Justice's Cassis de Dijon -ruling.

See also

Related Research Articles

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Addyston Pipe and Steel Co. v. United States, 175 U.S. 211 (1899), was a United States Supreme Court case in which the Court held that for a restraint of trade to be lawful, it must be ancillary to the main purpose of a lawful contract. A naked restraint on trade is unlawful; it is not a defense that the restraint is reasonable.

Texaco Inc. v. Dagher, 547 U.S. 1 (2006), was a decision by the Supreme Court of the United States involving the application of U.S. antitrust law to a joint venture between oil companies to market gasoline to gas stations. The Court ruled unanimously that the joint venture's unified price for the two companies' brands of gasoline was not a price-fixing scheme between competitors in violation of the Sherman Antitrust Act. The Court instead considered the joint venture a single entity that made pricing decisions, in which the oil companies participated as cooperative investors.

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it is the privilege of a trader in a free country, in all matters not contrary to law, to regulate his own mode of carrying it on according to his own discretion and choice. If the law has regulated or restrained his mode of doing this, the law must be obeyed. But no power short of the general law ought to restrain his free discretion.

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<i>Mitchel v Reynolds</i>

Mitchel v Reynolds (1711) 1 PWms 181 is decision in the history of the law of restraint of trade, handed down in 1711. It is generally cited for establishing the principle that reasonable restraints of trade, unlike unreasonable restraints of trade, are permissible and therefore enforceable and not a basis for civil or criminal liability. It is largely the basis in US antitrust law for the "rule of reason." William Howard Taft, then Chief Judge of the Sixth Circuit Court of Appeals, later US President and then Chief Justice of the Supreme Court, quoted Mitchel extensively when he first developed the antitrust rule-of-reason doctrine in Addyston Pipe & Steel Co. v. United States, which was affirmed in 1899 by the Supreme Court. The doctrine also played a major role in the 1911 Supreme Court case Standard Oil Company of New Jersey v. United States 221 U.S. 1 (1911).

FTC v. Motion Picture Advertising Service Co., 344 U.S. 392 (1953), was a 1953 decision of the United States Supreme Court in which the Court held that, where exclusive output contracts used by one company "and the three other major companies have foreclosed to competitors 75 percent of all available outlets for this business throughout the United States" the practice is "a device which has sewed up a market so tightly for the benefit of a few [that it] falls within the prohibitions of the Sherman Act, and is therefore an 'unfair method of competition' " under § 5 of the FTC Act. In so ruling, the Court extended the analysis under § 3 of the Clayton Act of requirements contracts that it made in the Standard Stations case to output contracts brought under the Sherman or FTC Acts.

United States v. Socony-Vacuum Oil Co., 310 U.S. 150 (1940), is a 1940 United States Supreme Court decision widely cited for the proposition that price-fixing is illegal per se. The Socony case was, at least until recently, the most widely cited case on price fixing.

United States v. Terminal Railroad Association, 224 U.S. 383 (1912), is the first case in which the United States Supreme Court held it a violation of the antitrust laws to refuse to a competitor access to a facility necessary for entering or remaining in the market. In this case a combination of firms was carrying out the restrictive practice, rather than a single firm, which made the conduct susceptible to challenge under section 1 of the Sherman Act rather than under the heightened standard of section 2 of that act. Even so, the case was brought under both sections.

References

  1. ↑ Wertheime, B (1984). "Rethinking the Rule of Reason: From Professional Engineers to NCAA". Duke Law Journal. 1984 (6): 1297–1324. doi:10.2307/1372402. JSTOR   1372402.
  2. ↑ Richardt, Meribeth (1985). "Tying Arrangement Analysis: A Continued Integration of the Rule of Reason and the Per Se Rule: Jefferson Parish Hospital District No. 2 v. Hyde, 104 S. Ct. 1551 (1984)". Washington University Law Review. 63 (2). Archived from the original on 2013-12-03.
  3. ↑ Thibault Schrepel, "A New Structured Rule of Reason Approach for High-Tech Markets", Suffolk University Law Review, Vol. 50, No. 1, 2017
  4. ↑ Judgment of the General Court (First Chamber) of 9 September 2011. Kwang Yang Motor Co., Ltd v Office for Harmonisation in the Internal Market (Trade Marks and Designs) (OHIM). Community design - Invalidity proceedings - Registered Community design representing an internal combustion engine - Earlier national design - Ground for invalidity - No individual character - Visible features of a component part of a complex product - No different overall impression - Informed user - Degree of freedom of the designer - Articles 4, 6 and 25(1)(b) of Regulation (EC) No 6/2002 ECLI:EU:T:2011:447
  5. ↑ Judgment of the Court of First Instance (Third Chamber) of 18 September 2001. Métropole télévision (M6), Suez-Lyonnaise des eaux, France Télécom and Télévision française 1 SA (TF1) v Commission of the European Communities. Actions for annulment - Competition - Pay television - Joint venture - Article 85 of the EC Treaty (now Article 81 EC) - Article 85(1) of the Treaty - Negative clearance - Ancillary restrictions - Rule of reason - Article 85(3) of the Treaty - Exemption decision - Duration. ECLI:EU:T:2001:215
  6. ↑ Judgment of the Court of First Instance (Second Chamber) of 27 July 2005. Brasserie nationale SA (anc. Brasseries Funck-Bricher et Bofferding), Brasserie Jules Simon et Cie SCS and Brasserie Battin SNC v Commission of the European Communities. Restrictive practices - Luxembourg beer market - Fines. ECLI:EU:T:2005:298
  7. ↑ Case T-491/07 RENV: Judgment of the General Court of 30 June 2016 — CB v Commission (Competition — Decision by an association of undertakings — Market for the issue of payment cards in France — Decision finding an infringement of Article 81 EC — Pricing measures applicable to ‘new entrants’ — Membership fee, mechanism for ‘regulating the acquiring function’, and ‘dormant member “wake-up” mechanism’ — Relevant market — Restriction of competition by effect — Article 81(3) EC — Manifest errors of assessment — Principle of sound administration — Proportionality — Legal certainty)
  8. ↑ Judgment of the General Court (Second Chamber) of 28 June 2016. Portugal Telecom SGPS, SA v European Commission. Competition — Agreements, decisions and concerted practices — Portuguese and Spanish telecommunications markets — Non-competition clause with respect to the Iberian market inserted in the contract for the acquisition by Telefónica of Portugal Telecom’s share in the Brazilian mobile telephone operator Vivo — Legal safeguard ‘to the extent permitted by law’ — Obligation to state reasons — Infringement by subject-matter — Ancillary restriction — Potential competition — Infringement by effects — Calculation of the amount of the fine — Request for examination of witnesses. ECLI:EU:T:2016:368

Bibliography

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