Section 1 of the Sherman Antitrust Act “applies to the concerted action that restrains trade.” The Sherman Act distinguishes a concerted action from an independent action. Concerted actions occur when “two or more entities that previously pursued their own separately come together to act as one for their common benefit” in imposing trade restrains. Competition law makes detection and prosecution of concerted horizontal restraints the number one priority of antitrust policymaking.
Under the Section 1 of the Sherman Act, “every contract, combination in form of trust or otherwise, or conspiracy in restraint of trade or commerce among several states is deemed illegal.” According to Section 1 of the Sherman Act, when determining whether an agreement is illegal, the Court applies the following standards stated below:
1) Per Se: The Courts find the agreements that interfere with free market price setting is illegal on its face. Additionally, the Courts have found that the conduct that lacks pro-competitive justification is presumed to be per se illegal.
2) Rule of reason Approach: Under this approach, Courts apply a balancing test by weighing anti-competitive and pro-competitive effects. Under Section 1 of the Sherman Antitrust Act, “unreasonable” restraints are prohibited. The Court in National Society of Engineers held that the “true test of legality is whether the restraint imposed is such that merely regulates and perhaps thereby promotes the competition or whether it is such as may suppress or even destroy the competition.” Furthermore, the Court in National Society of Professional Engineers v. United States took into consideration the ethical norms that serve to regulate and promote competition which also falls under rule of reason.
3) Quick Look Approach: This approach is applied in limited circumstances. This inquiry is tailored on a case-by-case basis, and the Court takes the nature of the contested conduct into account. For example, the Court in California Dental Assn. held that a determination of unlawful restraint can be made on the “circumstances, details, and logic of the restraint.”
“Horizontal Restraints” differ from “Vertical Restraints.” Horizontal restraints are agreements among competitors or potential competitors. On the other hand, vertical restraints are agreements among the companies at a different level of trade or industry.
Horizontal restraints agreements can either be ancillary or naked. An ancillary restraint is generally created “in addition to or after the collaboration between the competitors that allows them to reach the competitors that allow them to reach the objectives of the initial agreement more effectively.”
II. Horizontal Restraints and Rule of Reason Inquiry
In 1911, the Court in Standard Oil Co v. United States first explored the rule of reason approach. In this case, the Court established the significance of Rule of Reason. approach Soon after, the Court in United States v. Trans-Missouri Freight Associate held that Section 1 of the Sherman Act prohibits unreasonable and reasonable restraints on trade. For a long time, these two cases produced much confusion. Finally, the Court in United States v. Trenton Potteries, Co. provided some clarity on the rule of reason approach. The Court held, “restraints such as “agreements to fix and maintain prices” is deemed unreasonable.” Under the modern-day approach, courts use the criteria set forth in Trenton Potteries to evaluate horizontal restraints.
Many agreements that would generally be classified as per se illegal are qualified as legal under rule of reason approach so long as the agreements is “ancillary” to an agreement that is pro-competitive as a whole. Generally, per-se rule favors the plaintiffs; however, rule of reason favors the defendant.
For example, in BMI case, the Court held that a blanket license did not create an unreasonable restraint because the blanket license did not prohibit the freedom of the individual composers from direct licensing, and blanket licensing arrangement did not eliminate price competition.
Similarly, in NCAA, the Court moved away from applying the per se rule, and instead applied the rule of reason approach because of the associational nature of the defendant and the need for the economic interdependence among the competitors in the market. The Court further reasoned that preserving the tradition of amateurism in college sports was important, thus restricting output was inconsistent with the goal of the Sherman Act.”
Per se violations are generally limited to price-fixing, bid-rigging, and market allocation. In contrast to a rule of reason inquiry, “per se” violation is proven on its face, and the plaintiff is not required to prove defendant’s anticompetitive harm. The courts have held “certain conduct to be anti-competitive in nature and so inherently devoid of any purpose other than the stifling competition that it is conclusively presumed without further inquiry, to be unreasonable and hence illegal.”
In a per se violation inquiry, the government does not have the burden of proving there is an unreasonable restraint on trade because it is presumed. A per se violation can be established by merely showing that the defendant “knowingly participated” or had an intent to agree to the conspiracy which is per se illegal. Once this finding of per se unreasonableness is established, it relieves the court of conducting an investigatory analysis.
Cases involving the per se rule demonstrate that this rule operates as a conclusive presumption. When the Supreme Court is called upon to determine whether the restraint classifies under the per se violation, the Court makes an inquiry into both the economic and business considerations out of which the arrangement emerges, and the impact that the arrangement has on the on the competition.
Court’s Application of Rule of Reason Approach
When the defendant’s anticompetitive conduct can only be established by performing complex analysis, the Courts apply the rule of reason approach. Under modern antitrust law, the rule of reason approach is dominating. The rule of reason analysis takes into consideration both the harmful and the beneficial effects of the defendant’s anticompetitive conduct.
The determination of reasonableness is factual and varies on a case-by-case basis. Selected professions, such as engineers, have been given special treatment. In National Society of Engineers, the Court deferred to the engineers’ specialized knowledge and considered secondary factors (economic, social, and moral) that possibly motivated the engineering professionals in acting the way they did. By considering the secondary factors in its analysis and using a balancing approach, the Court provides an opportunity for professionals to present evidence regarding an activity that is based on rule of reason approach would have initially deemed per se unreasonable.
Proving a Case under Rule of Reason Approach
Under the rule of reason approach, the Court in Twombly v. Iqbal required the plaintiff to “adequately plead the market power and the anticompetitive effects of challenged restraints.” In addition, the plaintiff is required to plead and prove that the defendants has engaged in anticompetitive conduct. To determine the reasonableness of the trade restraint, the Court conducts a fact-specific inquiry. Initially, the plaintiff has the burden of proving the restraint. Once the plaintiff has proven the restraint, he is required to establish that the restraint hurts the competition. An increase in the price or a decrease in the output or quality can establish the required negative effect on the competition. After the plaintiff meets its burden of establishing anticompetitive restraint, the burden shifts to the defendant who is required to prove a procompetitive justification for the challenged anticompetitive restraint. Once the defendant meets its burden of showing procompetitive justification for the challenged restraint, the plaintiff gets an opportunity to rebut by demonstrating the availability of the reasonable alternatives for challenged restraint.
In the absence of a restrictive alternative, the Court is generally required to look at the restraint on trade and the justification and then attempt to “balance” the anticompetitive effects. If the rule of reason claim has survived this scrutiny, then the plaintiff has the burden of showing that the anticompetitive conduct’s effect outweighs the procompetitive benefits.
In addition to providing special treatment to the specialized professions under the “Rule of Reason” approach, the earlier courts also attempted to establish standards that could define a valid defense under rule of reason. The Court’s decision in Socony- Vacuum Oil indicated that an anticompetitive restraint that has an economic impact, such as price, will initially be scrutinized by the courts more closely. However, if at first glance, a restraint classifies as per se violation, the Court will not apply the rule of reason analysis.
Rule of Reason Inquiry- Recommended?
The federal court’s application of Section 1 of the Sherman Antitrust Act to the horizontal restraints is often blurred and the dichotomy between per-se and rule of reason analysis is inadequate when determining the best litigation strategy.
The courts conduct a broad analysis of the rule of reason inquiry which leaves the lower courts with little to no guidance.
Courts regard the rule of reason inquiry as an “acceptable standard.” However, the Courts disregard the significant implications that this standard has on antitrust policies and the judicial dynamics in general.
Conducting a rule of reason inquiry creates many more problems than applying the per se rule creates. Proving anticompetitive harm is not always easy and can often become burdensome and very costly. In addition, the plaintiff has the burden to define the relevant products and the geographic markets. Furthermore, estimating the market power and obtaining the evidence that establishes the anticompetitive effects of the defendant’s conduct is not straightforward and very difficult to prove.
Often an economic expert’s testimony is required for an in-depth market analysis. This testimony can generally be rebutted by the defendant’s economic expert, who then shows the procompetitive effect of defendant’s alleged conduct. Going back and forth in the courtroom to prove anticompetitive harm is not recommended because it does not promote judicial efficiency.
When using the rule of reason approach, the burden of persuasion shifts back and forth between the parties, which further complicates makes things less predictable in the courtroom, subjecting the litigants to costly discovery.
It is important consider the decisive factors involved in using this approach. These factors include, but are not limited to: litigation cost, expenses involved in detecting anticompetitive violations, discovery costs, trial costs, including the cost of appealing the case. Prior to bringing the suit, the plaintiff must determine whether enough evidence exists for a successful suit. Compliance costs is also something that courts should take into consideration.
Lastly, the dichotomy between per-se and rule of reason analysis is inadequate when determining the best litigation strategy.
Expanding the Rule of Reason Framework
It is not enough that the Courts ask whether the defendant has met its burden of establishing some procompetitive justification for its conduct that imposed restraint on the trade. This particular question is overly broad and leads to difficulty proving procompetitive justification for the defendant’s conduct.
Instead, the Courts should inquire whether the defendant has met its burden of proving that the relevant market failed or would have failed absent the anticompetitive conduct. By demonstrating that the market would have failed or presently failed absent the anticompetitive behavior, the Courts are likely to reduce false negatives.
Non-commercial conduct should not be subject to rule of reason analysis. Only the behavior that has an economic impact should be considered under this analysis. When the defendant tries to meet its burden to prove procompetitive justification for the restraint, it can become quite misleading.
A Better Structure for Rule of Reason Inquiry
Keeping the above-stated considerations in mind, the following proposed rule of reason inquiry is recommended :
1. Plaintiff should adequately allege and prove:
a. that the defendant had control over the market; and
b. that this control can result into potential or actual anti-competitive behavior.
2. After the plaintiff meets this burden of proof, the defendant should then be required to adequately demonstrate the existence of the procompetitive justification for the imposed restraint, based on the following steps:
a. The defendant should first identify the market failure, in the absence of the restraint.
b. The defendant should then show that the imposed restraint alleviates the market failure.
3. The Court should have an opportunity to conduct a balancing test demonstrating the need for the anticompetitive restraint.
By using a systematic approach, the Courts can minimize errors, increase consumer welfare, and establish a clear judicial framework. Going forward, the Courts should expand on the rule of reason inquiry to better improve the outcome.
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