The Rule of Reason

88 Pages Posted: 16 Dec 2016 Last revised: 6 May 2018

See all articles by Herbert Hovenkamp

Herbert Hovenkamp

University of Pennsylvania Carey Law School; University of Pennsylvania - The Wharton School; University College London

Date Written: 2018

Abstract

Antitrust’s rule of reason was born out of a thirty-year (1897-1927) division among Supreme Court Justices about the proper way to assess multi-firm restraints on competition. By the late 1920s the basic contours of the rule for restraints among competitors was roughly established. Antitrust policy toward vertical restraints remained much more unstable, however, largely because their effects were so poorly understood.

This article provides a litigation field guide for antitrust claims under the rule of reason – or more precisely, for situations when application of the rule of reason is likely. At the time pleadings are drafted and even up to the point of summary judgment, the parties are often uncertain whether a court will apply the rule of reason. Because the choice of rule presents a question of law, it is generally established prior to trial. The first section examines pleading and summary judgment rules, including the role of stare decisis, arguing that stare decisis should apply to a mode of analysis rather than to a specific class of restraints. Then it discusses numerous problems surrounding the burden of proof and the quality of evidence needed to shift the burden or get to a jury. I argue that the plaintiff’s burden for a prima facie case should be relatively stringent for the market power requirement, but relatively light for proof of an anticompetitive act.

I also show why a consumer welfare standard for antitrust violations is the only manageable one for evaluating practices under the rule of reason. The alternative, general welfare standard requires that all consumer losses be quantified and compared with producer efficiency gains, as well as likely effects on others. Aside from any substantive reasons for preferring a consumer welfare standard, a general welfare standard is impossible to apply in any but the most obvious cases. The consumer welfare standard queries only whether output will be higher or lower (or prices lower or higher) under the restraint. This query can be difficult enough but is nevertheless much simpler than the proof requirements for a general welfare standard. Finally, this section examines the possibility of truncated, or “quick look,” analysis as an alternative to both the rule of reason and the per se rule, arguing against recognition of any categorical “quick look.” I conclude with a brief discussion of “balancing,” and why the rule of reason’s staged set of queries is designed so that courts can avoid balancing whenever possible. In this regard, the Second Circuit’s recent decision in the American Express case, which the Supreme Court will review, represents a major affront to the rule of reason. The Second Circuit effectively required plaintiffs to balance anti- and pro-competitive effects across both sides of a two-sided market as part of its prima facie case. That approach would undo three decades of progress in legal development of the rule of reason.

The next section considers how to identify the types of conduct to which antitrust’s rule of reason should be applied. It also examines the question of appropriate remedies, particularly when the basic features of joint activity are either unchallenged or conceded to be competitive, but a specific provision or practice threatens competition. Then it turns briefly to the special case of antitrust restraints in markets for intellectual property rights. A final section examines the market structure requirements for antitrust rule of reason cases, including vertical agreements as well as agreements that have both horizontal and vertical elements. For rule of reason cases involving collaborative conduct generally, market power requirements should be less than those for single firm conduct. The principal exception is vertical exclusionary agreements (mainly, tying and exclusive dealing), where power requirements should be equivalent to those used in monopolization cases.

Keywords: antitrust, rule of reason, per se rule, intellectual property, patents, legal history

Suggested Citation

Hovenkamp, Herbert, The Rule of Reason (2018). Florida Law Review, Vol. 70, p. 81, 2018, U of Penn, Inst for Law & Econ Research Paper No. 17-28, Available at SSRN: https://ssrn.com/abstract=2885916 or http://dx.doi.org/10.2139/ssrn.2885916

Herbert Hovenkamp (Contact Author)

University of Pennsylvania Carey Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
319-512-9579 (Phone)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

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