8. What is “per se illegality” and the “rule of reason”?
Section 1 of the Sherman Act broadly prohibits actions that in some way restrain trade. If an action is determined to be a restraint of trade, the following standards apply to determine whether the arrangement is illegal:
• Per Se Illegal – A “naked restraint” of trade is one that is explicitly anticompetitive, such as an agreement controlling the price of a good or the output from production. A naked restraint with no pro-competitive justification is generally held to be per se illegal. That is, these practices are, by their nature, anticompetitive and thus per se illegal. A court will not evaluate any alleged pro-competitive justifications for such activity.
⁃ Example: Agreements setting a minimum or maximum price, output limitations, geographic apportionment of a region, bans on price competition would all qualify as per se illegal. Horizontal agreements among competitors are much more likely to be per se illegal. In vertical agreements between producer, wholesaler, and retailer, it is often difficult to determine if they are anticompetitive . These types of relationship must be examined under the rule of reason. All of these types of restraint are discussed further below.
• Rule of Reason – The rule of reason applies to a restraint that is not deemed a naked restraint. Per Section 1, “every contract, combination, or conspiracy” is illegal if it constitutes undue or “unreasonable” restraint of trade. The test for reasonableness concerns whether the challenged contracts or acts unreasonably restrict competitive conditions in the market or industry. Unreasonableness can be based upon the nature or character of the agreement or surrounding circumstances. The rule of reason balances pro-competitive and anti-competitive effects. In determining whether a restraint of trade is reasonable, the court would consider:
⁃ facts peculiar to this business,
⁃ actual and probable effects of restraint (including the effect on competitors);
⁃ history of the restraint;
⁃ purpose of restraint;
⁃ scope of the restraint;
⁃ convenience to suppliers and consumers; and
⁃ creation of new products.
In essence, if the activity promotes competition, it may justify the anticompetitive aspects.
• Quick-Look (or Truncated) Rule of Reason – This is a test employed by the court in very limited circumstances. It is feasible that a naked restraint may be legal if there is a pro-competitive justification. Under the quick-look test, a court will allow a defendant to introduce evidence that conduct that would otherwise be per se illegal has a pro-competitive aspect. If a pro-competitive justification is plausible, the court will employ a full rule-of-reason analysis.
• Discussion: Why do you think antitrust law allows for multiple standards for determining whether anticompetitive activity is illegal? Why do you think one type of conduct is per se illegal while others are not? Should all typically per se illegal conduct be treated with the truncated rule of reason? Why or why not?
• Practice Question: ABC Corp is challenged by the Federal Trade Commission as entering into a contract with 123 Corp that restrains trade. What process will the court use to evaluate the contract to determine whether it is illegal?