Rule of reason
Encyclopedia
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 contract
s unreasonably restraining trade
are subject to actions under the anti-trust laws, and that possession of monopoly
power is not inherently 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 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 boycott
s, 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 Television 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 Internal Market
. The rule has arisen in the context of Article 34 and 35 TFEU (ex 28 EC), which prohibit quantitative restrictions on imports and exports (or measures having equivalent effect). In Cassis de Dijon (Rewe-Zentral AG v Bundesmonopolverwaltung für Branntwein case 120/78) the ECJ drew a distinction between measures in breach of Article 34 TFEU which were indistinctly applicable as opposed to distinctly applicable. Indistinctly applicable measures are ones that, prima facie, do not favor domestic producers over importers, and whose effects are equal on both. The ECJ argued that indistinctly applicable measures that favored domestic traders over importers were not necessarily in breach of Article 34 TFEU. 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.
Examples of matters of Overriding Interests (Rule of reason) are Obel - case 155/90: working conditions, Cinéthéque SA - case 60+61/84: culture.
This proportionality exercise has itself been applied by the ECJ further than the boundaries of Article 36 TFEU would initially allow.
Sherman Antitrust Act
The Sherman Antitrust Act requires the United States federal government to investigate and pursue trusts, companies, and organizations suspected of violating the Act. It was the first Federal statute to limit cartels and monopolies, and today still forms the basis for most antitrust litigation by...
. The rule, stated and applied in the case
Legal case
A legal case is a dispute between opposing parties resolved by a court, or by some equivalent legal process. A legal case may be either civil or criminal...
of Standard Oil Co. of New Jersey v. United States
Standard Oil Co. of New Jersey v. United States
Standard Oil Co. of New Jersey v. United States, 221 U.S. 1 , was a case in which the Supreme Court of the United States found Standard Oil guilty of monopolizing the petroleum industry through a series of abusive and anticompetitive actions...
, 221 U.S. 1
Case citation
Case citation is the system used in many countries to identify the decisions in past court cases, either in special series of books called reporters or law reports, or in a 'neutral' form which will identify a decision wherever it was reported...
(1911), is that only combinations and contract
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...
s unreasonably restraining trade
Trade
Trade is the transfer of ownership of goods and services from one person or entity to another. Trade is sometimes loosely called commerce or financial transaction or barter. A network that allows trade is called a market. The original form of trade was barter, the direct exchange of goods and...
are subject to actions under the anti-trust laws, and that possession of monopoly
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...
power is not inherently illegal.
Some of Standard Oil's critics, including the lone dissenter Justice John Marshall Harlan
John Marshall Harlan
John Marshall Harlan was a Kentucky lawyer and politician who served as an associate justice on the Supreme Court. He is most notable as the lone dissenter in the Civil Rights Cases , and Plessy v...
, 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 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
William Howard Taft
William Howard Taft was the 27th President of the United States and later the tenth Chief Justice of the United States...
and Robert Bork
Robert Bork
Robert Heron Bork is an American legal scholar who has advocated the judicial philosophy of originalism. Bork formerly served as Solicitor General, Acting Attorney General, and judge for the United States Court of Appeals for the District of Columbia Circuit...
, 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
Louis Brandeis
Louis Dembitz Brandeis ; November 13, 1856 – October 5, 1941) was an Associate Justice on the Supreme Court of the United States from 1916 to 1939.He was born in Louisville, Kentucky, to Jewish immigrant parents who raised him in a secular mode...
, Chicago Board of Trade v. United States
Chicago Board of Trade v. United States
Chicago Board of Trade v. United States, 246 U.S. 231 , was a case in which the Supreme Court of the United States applied the rule of reason to the internal trading rules of a commodity market.-Facts and procedural history:...
, 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.
United States v. American Tobacco Co.
United States v. American Tobacco Company, 221 U.S. 106 , was a decision by the United States Supreme Court, which held that the combination in this case is one in restraint of trade and an attempt to monopolize the business of tobacco in interstate commerce within the prohibitions of the Sherman...
, 221 U.S. 106 (1911). That decision held that Section 2 of the Sherman Act, which bans monopolization
Monopolization
The term monopolization refers to an offense under Section 2 of the American Sherman Antitrust Act, passed in 1890. Section 2 states that any person "who shall monopolize . ....
, 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
Price fixing
Price fixing is an agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions such that the price is maintained at a given level by controlling supply and demand...
agreements, group boycott
Boycott
A boycott is an act of voluntarily abstaining from using, buying, or dealing with a person, organization, or country as an expression of protest, usually for political reasons...
s, and geographical market divisions, were illegal per se
Illegal per se
The term illegal per se means that the act is inherently illegal. Thus, an act is illegal without extrinsic proof of any surrounding circumstances such as lack of scienter or other defenses...
. 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 Television v. GTE Sylvania
Continental Television v. GTE Sylvania
Continental Television v. GTE Sylvania, 433 U.S. 36 , was a landmark antitrust decision of the Supreme Court of the United States. Facing declining sales, GTE Sylvania attempted to reduce the number of competing Sylvania retailers by "limit[ing] the number of franchises granted for any given area...
, 433 U.S. 36 (1977) (holding that courts should analyze non-price vertical restraints
Vertical restraints
Vertical restraints are competition restrictions in agreements between firms or individuals at different levels of the production and distribution process. Vertical restraints are to be distinguished from so-called “horizontal restraints,” which are found in agreements between horizontal competitors...
under the Rule of Reason); State Oil v. Khan, 522 U.S. 3 (1997) (holding that courts should evaluate maximum resale price maintenance
Resale price maintenance
Resale price maintenance is the practice whereby a manufacturer and its distributors agree that the latter will sell the former's product at certain prices , at or above a price floor or at or below a price ceiling...
under the Rule of Reason); Leegin Creative Leather Products, Inc. v. PSKS, Inc.
Leegin Creative Leather Products, Inc. v. PSKS, Inc.
Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 , is a US antitrust case in which the United States Supreme Court reversed the 96-year-old doctrine that vertical price restraints were illegal per se under Section 1 of the Sherman Act, replacing the older doctrine with the rule of...
, 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
Tying
Tying is the practice of making the sale of one good to the de facto or de jure customer conditional on the purchase of a second distinctive good . It is often illegal when the products are not naturally related, for example requiring a bookstore to stock up on an unpopular title before allowing...
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
European Court of Justice
The Court can sit in plenary session, as a Grand Chamber of 13 judges, or in chambers of three or five judges. Plenary sitting are now very rare, and the court mostly sits in chambers of three or five judges...
(ECJ) has adopted the concept in its own jurisprudence
Jurisprudence
Jurisprudence is the theory and philosophy of law. Scholars of jurisprudence, or legal theorists , hope to obtain a deeper understanding of the nature of law, of legal reasoning, legal systems and of legal institutions...
concerning the free movement of goods within the European Internal Market
Internal Market (European Union)
The European Union's Internal Market seeks to guarantee the free movement of goods, capital, services, and people – the EU's four freedoms – within the EU's 27 member states.The Internal Market is intended to be conducive to increased competition, increased specialisation, larger...
. The rule has arisen in the context of Article 34 and 35 TFEU (ex 28 EC), which prohibit quantitative restrictions on imports and exports (or measures having equivalent effect). In Cassis de Dijon (Rewe-Zentral AG v Bundesmonopolverwaltung für Branntwein case 120/78) the ECJ drew a distinction between measures in breach of Article 34 TFEU which were indistinctly applicable as opposed to distinctly applicable. Indistinctly applicable measures are ones that, prima facie, do not favor domestic producers over importers, and whose effects are equal on both. The ECJ argued that indistinctly applicable measures that favored domestic traders over importers were not necessarily in breach of Article 34 TFEU. 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
Legislation
Legislation is law which has been promulgated by a legislature or other governing body, or the process of making it...
on the free movement of goods is justified in light of the legislation's stated goals.
Examples of matters of Overriding Interests (Rule of reason) are Obel - case 155/90: working conditions, Cinéthéque SA - case 60+61/84: culture.
This proportionality exercise has itself been applied by the ECJ further than the boundaries of Article 36 TFEU would initially allow.