Rule of Reason

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The Rule of Reason is the most difficult test in antitrust law for a plaintiff to prove that a restraint of trade violates Section One of the Sherman Act (the other two are "per se" and "quick look"). See National Society of Professional Engineers v. United States, 435 U.S. 679, 691 (1978). To prevail, the plaintiff must demonstrate that the challenged agreement or action has an adverse impact on competition in the relevant market. See Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752, 762 (1984). Specifically, the court must decide "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." Chicago Board of Trade v. United States, 246 U.S. 231, 238 (1918).

In case decided under Rule of Reason, the threshold issue is market power. Market power is defined as the ability to raise prices above the competitive level by restricting output. Wilk v. American Medical Ass'n, 895 F.2d 352, 359 (7th Cir.), cert. denied, 496 U.S. 927 (1990).

Under the rule of reason standard, the plaintiff must prove that:

  • (1) that the defendants contracted, combined, or conspired;
  • (2) that the scheme produced anticompetitive effects;
  • (3) that the restraint affected relevant product and geographic markets;
  • (4) that the object of the scheme and the conduct resulting from it was illegal; and
  • (5) that the scheme was a proximate cause of the plaintiff's antitrust injury.

Background

Justice Louis Brandeis described the Rule of Reason in 1918 as follows:[1]

":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. To determine that question the court must ordinarily consider the facts peculiar to the business to which the restraint is applied; its condition before and after the restraint is 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. This is not because a good intention will save an otherwise objectionable regulation or the reverse; but because knowledge of intent may help the court to interpret facts and to predict consequences.”

See also Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877, 885-887 (2007); Am. Needle, Inc. v. NFL, 130 S. Ct. 2201, 2217 (2010).

"Under this rule, the factfinder weighs all of the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreason-able restraint on competition."[2] Appropriate factors to take into account include "specific information about the relevant business" and "the restraint's history, nature, and effect." [3]. Whether the businesses involved have market power is a further, significant consideration. [4] [5] In its design and function the rule distinguishes between restraints with anticompetitive effect that are harmful to the consumer and restraints stimulating competition that are in the consumer's best interest.

In the Third Circuit, a plaintiff must show under the "Rule of Reason" that:

(1) concerted action by the defendants; (2) that produced anticompetitive effects within the relevant product and geographic markets; (3) that the objects of the conduct pursuant to the concerted action were illegal; and (4) that it was injured as a proximate result of the concerted action.

See Petruzzi's IGA v. Darling-Delaware, 998 F.2d 1224, 1229 (3d Cir.), cert. denied sub nom Moyer Packing Co. v. Petruzzi's IGA Supermarkets, Inc., 114 S. Ct. 554 (1993) (citations omitted); see also Tunis Bros. Co., Inc. v. Ford Motor Co., 952 F.2d 715, 722 (3d Cir. 1991), cert. denied, 112 S. Ct. 3034 (1992). "Without proof of all of these elements, a plaintiff cannot maintain a section 1 claim." Petruzzi's IGA, 998 F.2d at 1229.

Other tests

The "rule of reason" test does not govern all restraints. The per se rule, treating categories of restraints as necessarily illegal, eliminates the need to study the reasonableness of an individual restraint in light of the real market forces at work [6]; and, it must be acknowledged, the per se rule can give clear guidance for certain conduct. Restraints that are per se unlawful include horizontal agreements among competitors to fix prices, or to divide markets.[7].

References

  1. Board of Trade of Chicago v. United States, 246 U.S. 231, 238 (1918)
  2. Continental T. V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49 (1977)
  3. State Oil Co. v. Khan, 522 U.S. 3, 10 (1997)
  4. See, e.g., Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 768 (1984) (equating the rule of reason with "an inquiry into market power and market structure designed to assess [a restraint's] actual effect")
  5. See also Illinois Tool Works Inc. v. Independent Ink, Inc., 547 U.S. 28, 45-46 (2006).
  6. Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717, 723 (1988)
  7. see Palmer v. BRG of Ga., Inc., 498 U.S. 46, 49-50 (1990) (per curiam)
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