Rule of reason

 

Author Definition

 

Definition

The ‘rule of reason’ requires a court to balance an agreement’s pro-and anti-competitive effects under section 1 of the Sherman Act 1890 in the US; where the latter outweigh the former, the agreement will be regarded as an unlawful restraint of trade. EU competition law does not recognise a rule of reason under Article 101(1) TFEU. That is because the structure of Article 101 is different from that of section 1 of the Sherman Act; the pro-and anti-competitive effects of an agreement are weighed under Article 101(3) TFEU.

 

Commentary

Section 1 of the Sherman Act 1890 prohibits ‘every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce.’ Taken literally, this wording prohibits every restraint of trade. Since the earliest judgments of the US Supreme Court interpreting this provision in the 20th century, the Court held that it prohibits only unreasonable restraints of trade. Apart from restraints that would always or almost always tend to restrict competition, which are considered ‘per se’ to be in violation of section 1, the US courts apply the ‘rule of reason’ in order to decide whether collusive behaviour constitutes an unreasonable restraint on competition: Chicago Board of Trade v United States (1918). Factors relevant to this case-by-case evaluation include the history of the restraint in question, the purpose sought to be attained and its actual and probable effects: Continental TV v GTE Sylvania (1977). Whether the firms involved have market power is a further, significant consideration: Leegin Creative Leather Products v PSKS (2007).

It is fair to say that, over the last 40 years, the rule of reason standard has become the starting point for determining whether collusive practices restrain trade in violation of section 1. This is not to say that the rule of reason has been immune to criticism. It has been pointed out that the rule of reason is, as often as not, imprecise and unpredictable: ABA Antitrust Section, Monograph No. 23, The Rule of Reason (1999). The US Supreme Court has responded to this concern by allowing the courts to create ‘a litigation structure’ that enables the rule of reason to eliminate anticompetitive restraints and to provide more guidance to businesses (Leegin). The judgment of the US Court of Appeals for the D.C. Circuit in PolyGram v Federal Trade Commission (2005) is an example of a more structured rule of reason. The Court of Appeals first considered the alleged competitive harm, then examined any legitimate justification for the conduct complained about, and finally assessed the overall effects on consumers and competition.

Much of the commentary in the 1980s and early 1990s was critical of the formalistic and unduly broad application of Article 101(1), in consequence of which, so it was argued, meant many agreements required exemption under Article 101(3) which should have fallen outside of Article 101(1) because they did not restrict competition at all. Many commentators called for the adoption in EU law of a ‘rule of reason’ in the application of Article 101(1). The Court of Justice has consistently resisted this clarion call. In Consten and Grundig v Commission (1966), the Court refused to weigh up the pro- and anti-competitive effects of a distribution agreement conferring ‘absolute territorial protection’ on the distributor; an agreement of that kind prevents parallel trade within the EU and was held to be unlawful under Article 101. In Generics (UK) v Competition and Markets Authority (2020), the Court recently reaffirmed the position: EU competition law does not recognise a rule of reason (paragraph 104).

The General Court’s judgment in Métropole v Commission (2001) provides a helpful explanation of why there is no rule of reason under Article 101. That case involved the creation of a new channel for pay TV in France, and whether the rule of reason should be applied in order to find that certain restraints in the joint venture agreement were not caught by Article 101(1). The Court emphasised three points.

First, it drew attention to the ‘bifurcation’ of Article 101, which prohibits anti-competitive agreements in Article 101(1) but which provides that this prohibition ‘may be declared inapplicable’ in the case of agreements that satisfy the terms of Article 101(3) (paragraph 73). Article 101 clearly differs from the simpler structure of section 1 of the Sherman Act, which does not have an equivalent of Article 101(3).

Secondly, if a rule of reason approach were adopted under Article 101(1), analysing the pro- and anti-competitive aspects of an agreement at that stage, Article 101(3) would lose much of its effectiveness. Instead, the pro- and anti-competitive effects of a restrictive agreement may only be weighed when considering whether that agreement satisfies Article 101(3) (paragraph 74).

Thirdly, the General Court acknowledged that various judgments of the EU Courts had been ‘more flexible’ in their interpretation of Article 101(1), but pointed out that this did not mean that they entailed (still less required) a rule of reason in the sense of US law (paragraph 75). Rather, what the EU jurisprudence demonstrates is that a restriction of competition cannot be found in the abstract; it generally requires a careful analysis of the relevant factual, legal and economic context on a case-by-case basis (paragraph 76).

It is fair to say that, over the last 25 years, the European Commission has been more willing to conclude that an agreement falls outside Article 101(1) altogether, rather than to find an infringement of Article 101(1) and then to grant an exemption under Article 101(3). This development does not mean that it has applied a rule of reason standard. Rather, the Commission has adopted a more realistic economics-based approach to Article 101(1) than it has done in the past. As a result, agreements that do not have as their object the restriction of competition and do not create or strengthen the parties’ market power are unlikely to infringe Article 101(1).

In conclusion, the rule of reason is pivotal to the interpretation and application of section 1 of the Sherman Act in many cases in the US, but is not recognised under Article 101(1) TFEU. US and EU competition law are materially different in a number of respects, and one should exercise caution before importing terminology and techniques from one system of competition law into another.

 

Bibliography

Bailey and John (eds), Bellamy & Child’s European Union Law of Competition, (Oxford University Press, 8th edn, 2018), ch 2.

Whish and Bailey, Competition Law, (Oxford University Press, 10th ed, 2021), ch 3.

Forrester and Norall ‘The Laicization of Community Law: Self–help and the Rule of Reason’ (1984), 21 Common Market Law Review 11.

Stucke ‘Does the Rule of Reason Violate the Rule of Law?’ (2009), 42 University of California, Davis Law Review 1375.

Hovenkamp, ‘The Rule of Reason’ (2018), 70 Florida Law Review 81.

This article is being reviewed by the Editors of the Dictionary.

Author

  • King’s College (London)

Quotation

David Bailey, Rule of reason, Global Dictionary of Competition Law, Concurrences, Art. N° 85421

Visites 6755

Publisher Concurrences

Date 1 January 1900

Number of pages 500

 

Institution Definition

A legal approach by competition authorities or the courts where an attempt is made to evaluate the pro-competitive features of a restrictive business practice against its anticompetitive effects in order to decide whether or not the practice should be prohibited. Some market restrictions which prima facie give rise to competition issues may on further examination be found to have valid efficiency-enhancing benefits. For example, a manufacturer may restrict supply of a product in different geographic markets only to existing retailers so that they earn higher profits and have an incentive to advertise the product and provide better service to customers. This may have the effect of expanding the demand for the manufacturer’s product more than the increase in quantity demanded at a lower price. The opposite of the rule of reason approach is to declare certain business practices per se illegal, that is, always illegal. Price fixing agreements and resale price maintenance in many jurisdictions are per se illegal. © OECD

 
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