Per se Analysis vs. The Rule of Reason: When and How Courts Apply these Antitrust Rules, and Why It Matters - ABA YLD 101 Practice Series

By Jennifer Dowdell Armstrong

INTRODUCTION
Under Section 1 of the Sherman Act, "every" contract, combination, or conspiracy that restrains interstate trade or trade with foreign nations is illegal. If taken literally, such broad language would prohibit virtually any business agreement. Courts have, however, interpreted the statute narrowly to prohibit only "unreasonable restraints." Standard Oil Co. v. United States, 221 U.S. 1, 65 (1911); see also Texaco v. Dagher, 126 S.Ct. 1276 (2006) (quoting State Oil Co. v. Khan, 522 U.S.3, 10 (1997) ("[T]his Court has long recognized that Congress intended to outlaw only unreasonable restraints" (emphasis added)). The criterion to be used in judging whether a restraint is "unreasonable" is its competitive effect. See Nat'l Collegiate Athletic Ass'n v. Bd. of Regents of Univ. of Okla., 468 U.S. 85, 104 n.26 (1984). Courts have traditionally applied either per se analysis or the "rule of reason," depending on the nature of the agreement at issue, to determine whether an agreement is anticompetitive. The type of analysis a court applies in an antitrust action essentially determines the outcome. This 101 article discusses when and how courts apply per se analysis and the rule of reason, and why it matters.

TYPES OF ANALYSIS

  1. The Bright Line Per se Analysis
    Per se analysis is reserved for only those agreements that are "so plainly anticompetitive that no elaborate study of the industry is needed to establish their illegality." Nat'l Soc. of Prof'l Eng'rs v. United States, 435 U.S. 679, 692 (1978). The consequences of applying the per se label to a restraint results in far-reaching civil and criminal liability. A plaintiff's burden of proof under per se analysis is minimal and thus favors antitrust plaintiffs. The plaintiff need only prove that the restraint occurred and resulted in harm; it is not required to show the restraint's competitive unreasonableness, and the defendants are precluded from attempting to justify the result as being reasonable. See, e.g., N. Pac. Ry. Co. v. United States, 356 U.S. 1, 6 (1958). The policy rationale for this bright-line rule is that "it not only makes the types of restraints which are prescribed by the Sherman Act more certain to the benefit of everyone concerned, but it also avoids the necessity for an incredibly complicated and prolonged economic investigation. Id.

    Examples of restraints where per se analysis applies includes horizontal price-fixing arrangements between actual or potential competitors, market allocation, group boycotts, and some tying arrangements. See Socony-Vacuum Oil Co., 310 U.S. at 223 (horizontal price fixing); Palmer v. BRG of Ga., Inc., 498 U.S. 46, 49 (1990) (market allocation); Klor's, Inc. v. Broadway-Hale Stores, 359 U.S. 207, 212 (1959) (group boycott); Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 9 (1984) (tying arrangements). The Supreme Court has emphasized that per se analysis "is a valid and useful tool of antitrust policy and enforcement," but that "easy labels do not always supply ready answers." Broadcast Music, Inc. v. Columbia Broadcasting Sys., Inc., 441 U.S. 1, 8 (1979). Accordingly, the Court has cautioned against applying per se analysis to a restraint without first assessing its anticompetitive effects.
  2. The Burden-Shifting Rule of Reason
    The line between applying per se analysis and the rule of reason is not always clearly defined. See Nat'l Collegiate Athletic Ass'n, 468 U.S. at 104 n.26 (1984) (noting that "there is often no bright line separating per se from rule of reason analysis"). The general rule, though, is that conduct that does not clearly harm competition is analyzed under the rule of reason, and it is the prevailing standard for assessing most categories of competitive restraints. Sylvania, 433 U.S. at 36; Texaco, 126 S.Ct. at 1279. ("[T]his Court presumptively applies rule of reason analysis."). Antitrust plaintiffs have a greater burden of proof under the rule of reason than per se analysis; accordingly, antitrust defendants are far more likely to escape liability when the rule of reason is applied.

    The general parameters of the rule of reason were set forth by Justice Brandeis in 1918: "The true test of legality is whether the restraint imposed is such as merely regulates and thereby promotes competition or whether it is such as may suppress or even destroy competition. To determine that question the court must ordinarily consider the facts peculiar to the business to which the restraint is applied; its condition before and after the restraint was imposed; the nature of the restraint and its effect, actual or probable. The history of the restraint, the evil believed to exist, the reason for adopting the remedy, the purpose or end sought to be retained, are all relevant facts." Chicago Board of Trade v. United States, 246 U.S. (1918); see also Sylvania, 433 U.S. at 36.

    Under the traditional rule of reason, the plaintiff must show that a restraint has had or is likely to be anticompetitive. First, the plaintiff must show that the defendant has "market power," i.e., "the ability to raise prices above those that would be charged in a competitive market." Nat'l Collegiate Athletic Ass'n, 468 U.S. at 109. If the plaintiff can establish that the defendant has market power, it must then show that the defendant's restraint is one that will impair competition by increasing, creating, or protecting its market power. ABA at 73.

    If the plaintiff can establish that a restraint is anticompetitive, the burden shifts to the defendant to show that the alleged wrongful conduct was pro-competitive. Courts have recognized a variety of justifications for restraints that include "increasing output, creating operating efficiencies, making a new product available, enhancing product or service quality, widening consumer choice, and other factors." ABA at 74 (citing Broadcast Music, Inc. v. CBS , 441 U.S. 1, 19-20 (1979) (increasing output and making a new product available); FTC v. Ind. Fed'n of Dentists, 476 U.S. 447, 459 (1986) (creating operating efficiencies); Nat'l Collegiate Athletic Ass'n , 468 U.S. at 23 (enhancing product or service quality and widening consumer choice).
    Finally, the plaintiff may try to prove that the defendant's restraint is not reasonably necessary to achieve its stated objective. If the pro-competitive effect could be achieved by reasonably alternative means, the defendant's justification will be rejected; however, a justification will seldom be rejected simply because the restraint is not the "least restrictive means" of achieving the procompetitive effect. Chicago Prof'l Sports P'ship, 961 F.2d at 675-76.
  3. "Quick Look"
    Many lower courts have recognized a truncated or "quick look" version of the rule of reason. See Nat'l Collegiate Athletic Assoc., 468 U.S. at 100-01 (1984). A court may allow this methodology when "the great likelihood of anticompetitive effects can be easily ascertained." Cal. Dental Ass'n v. Fed. Trade Comm'n, 526 U.S. 756, 770 (1999). Under the "quick look" analysis, the defendant is required to advance a legitimate justification for inherently suspect conduct before the case proceeds to a fuller assessment of competitive effects. See also Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U.S. 284 (1985); FTC v. Ind. Fed'n of Dentists, 476 U.S. 447 (1986).

CONCLUSION
It is not always clear whether the per se or rule of reason analysis should apply. A court's decision regarding the appropriate standard, however, essentially determines who will prevail in the matter, and the civil and criminal stakes are high. Plaintiffs generally succeed when a court applies per se analysis, while defendants likely escape liability when courts adopt the rule of reason approach.

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About the Author

Associate, Thompson Hine LLP (Cleveland).

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