Rule of Reason

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. Possession of monopoly power is not in itself illegal.

Some of the 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 only trade "indirectly." Indeed, in his 1912 book on antitrust law, Taft reported that nio 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.

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 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 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 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 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 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 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)). Moreover, 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).

The European Court of Justice (ECJ) 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-Zentrale AG v Bundesmonopolverwaltung für Branntwein 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 but have effects that 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: 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 been applied by the ECJ farther than the boundaries of Article 36 TFEU initially allowed.