Rule of reason Summary

  • Last updated on November 11, 2022

A rule established by the Supreme Court for examining the reasons for certain business activities before deciding whether a corporation has violated antitrust statutes.

The rule of reason was first enunciated by the Supreme Court in the antitrust case of Standard Oil Co. v. United States[case]Standard Oil Co. v. United States[Standard Oil Co. v. United States] (1911). Standard Oil had been accused of monopolistic practices that were said to violate the Sherman Antitrust Act of 1890. The act made illegal “every contract, combination…or conspiracy in restraint of trade or commerce.” The second section of the Act was directed against “every person who shall monopolize or attempt to monopolize…or conspire…to monopolize any part of trade or commerce among the several States.” The language of the act is extraordinarily broad.Sherman Antitrust ActAntitrust law

The Court dealt with this problem by formulating the rule of reason. The justices attempted to draw together several diverse strands of common-law jurisprudence as well as earlier American cases. Chief Justice Edward D. White’s opinion for the majority held that competition is the central rule of trade and cannot be put aside. Some business practices, such as price fixing, are always anticompetitive and thus come under the Sherman Antitrust Act. However, some things on which competing businesses might agree are “reasonable” are not necessarily anticompetitive. An example might be common physical or electrical standards for products. In each case, the Court must scrutinize the agreement between companies to see whether it is more in the public interest than competition would be and if the terms of the agreement are in fact reasonable. The Court concluded that restraints on trade become unlawful only if they are undue or unreasonable. Both sections of the Sherman Antitrust Act were held to be subject to this qualification.

In the face of evidence that Standard Oil (and, in a similar 1911 case, the American Tobacco Company) had engaged in industrial espionage, local price cutting, price fixing, and secret rebates, the Court held that Standard Oil had engaged in predatory practices and the company was ordered to be dissolved.

Subtle Judgments and Differences

The Court’s subsequent cases establish that there are two kinds of considerations in an antitrust case. Some business practices are unreasonable per se (in themselves) and are not subject to the rule of reason. Price fixing and market-sharing arrangements are examples of these. Other concerted business practices must be analyzed in the light of the rule of reason, in which case the Court must ask itself whether the public interest is better served by the business agreement or by completely free competition. The final question is whether competition is substantially impeded.

The kinds of judgments that courts and the Supreme Court in particular must make in this area are very complex and subtle, in large part because every case requires separate analysis in both legal and economic terms. Antitrust cases are almost always extremely technical and tend to divide the Court along liberal-conservative lines.

In general, business groups favor the rule of reason. Over the years, they have attempted to persuade the Court to expand the scope of the rule and to simultaneously limit the number of practices that fall under the per se rule. Critics of the rule of reason, including many consumer-oriented groups, argue that the rule emasculated the Sherman Antitrust Act. Although on its face the law appears to make any restraint of trade unlawful, some restraints are lawful under the rule of reason. Critics complain in particular that the size of a business alone is not, according to the Court, analyzed under the per se rule. Thus even when monopoly power can be exercised by a very large firm, unless the government can show that actual anticompetitive practices took place, a Sherman Antitrust Act conviction may not stand. This was one of the issues in the great antitrust action brought by the government against Microsoft in the late 1990’s.

Further Reading
  • Cefrey, Holly. The Sherman Antitrust Act: Getting Big Business Under Control. New York: Rosen Publishing Group, 2004.
  • Ely, James, Jr. The Guardian of Every Other Right: A Constitutional History of Property Rights. New York: Oxford University Press, 1992.
  • Gellhorn, Ernest, William E. Kovacic, and Stephen Calkins. Antitrust Law and Economics in a Nutshell. St. Paul, Minn.: West Publishing, 2004.
  • Price, Polly J. Property Rights: Rights and Liberties Under the Law. Santa Barbara, Calif.: ABC-Clio, 2003.
  • Thompson, George C., and Gerald P. Brady. Antitrust Fundamentals: Test Cases and Materials. St. Paul, Minn.: West Publishing, 1974.

Antitrust law

Commerce, regulation of

E. C. Knight Co., United States v.

Northern Securities Co. v. United States

Sherman Antitrust Act

Standard Oil Co. v. United States

Categories: History