The focus of the Sherman Act is to prohibit only “unreasonable” restraints of interstate trade and commerce. Okay, that sounds simple enough, but what does that mean? How would the average business or commercial lawyer respond to the question, “What is an unreasonable restraint of trade?” In response, lawyers bandy about standards get bantered such as, the “rule of reason” and the “per se rule.” The application of those standards is further convoluted by terms like, “horizontal restraints” and “vertical restraints.” What do these standards and terms really mean and, more importantly, how do they all fit together so that the antitrust laws seem more approachable? This article will help explain these standards and terms used in antitrust law by tracing their historical development.
The development of the rule of reason and per se rule
The English courts took the position that voluntary restraints were presumptively “unreasonable” as they had deleterious effect on free trade by:
- Artificially raising prices
- Artificially reducing quality
- Keeping able-bodied workers from employment
These effects were bad for the individual subject to the restraint as well as society as a whole. Voluntary restraints were void as against public policy and thereby unenforceable unless the party that sought to enforce the restraint could prove that it was “reasonable” by showing:
The per se standard under the Sherman Act.
Because the rule of reason standard relied upon an elaborate, expensive and time-consuming process of examining a host of competitive variables particular to an industry to determine whether a particular restraint was unreasonable, the process produced inconsistent outcomes across the federal court system. The rule of reason standard presumed that all federal court judges had the appropriate background and business acumen to effectively weigh all of the complex competitive variables at play. Moreover, “reasonableness” is itself a rather vague concept: What may be reasonable to one judge is utterly unreasonable to another. The standard was, and continues to be, susceptible to inconsistent outcomes. Consequently, during the 1940s and 1950s, the Supreme Court began to carve out certain classes of restraints that could escape a full-blown rule of reason analysis. These classes of restraints were presumptively (or per se) unlawful because historically they had no other purpose but to restrain interstate trade and commerce (referred to as “naked restraints”). Naked restraints had a deleterious effect on the machinery of competition. As to them, there was no need for an expensive and time-consuming rule of reason analysis, since the outcome would (or should) be same. Such per se restraints included price-fixing, market divisions, supply restrictions, group boycotts and certain forms of tying arrangements. The significant drawback to the per se standard, from the defendant’s perspective, is that it does not permit the defendant to submit evidence demonstrating pro-competitive affects—no competitive justifications were permitted.
The elimination of the per se standard applied to vertical restraints.
When faced with this important economic distinction, the Supreme Court balked and began to take measured steps to erode the application of the per se standard to vertical restraints. The erosion began with vertical non-price restraints and slowly led to vertical price restraints. Today, all vertical restraints, non-price and price alike, are judged by the rule of reason Only limited classes of horizontal restraints (price-fixing, bid rigging, supply restrictions, market divisions and group boycotts) are judged under the per se standard; all other horizontal restraints are judged under the rule of reason.