COMPETITION LAW

RULE OF REASON AND PER SE ILLEGAL

SUBMITTED BY

: CHAITRA J YADWAD

REGISTER NUMBER

: 1216253

CLASS

: 5th YEAR IX SEM BA LLB

SECTION

: C

INTRODUCTION
There are two basic ways in which antitrust cases can be interpreted i.e. per se and rule of reason.
The per se says that an agreement or conduct is illegal just because it is very obvious that it was
made to distort competition and that the same goal could have been achieved in some other
method in a less damaging way. The rule of reason looks at the economic realities of various
conducts. The rule of reason and per se rule which were two opposing methods of analyzing
conduct found its origin in section 1 of the Sherman Act. This premise was based on the
classification of Section 1 practices as either pro competitive or anti competitive. Thus, pro
competitive conduct should receive the benefit of the doubt under the rule of reason that
considers all of its possible competitive justification and beneficial effects. 1 Anticompetitive
practices, on the other hand, should be summarily condemned under the per se rule without
giving a defendant the opportunity to prove that a restraint may have a redeeming beneficial
purpose.2 Traditionally, the rule of reason has meant a decision for the defendant and the per se
rule a victory for the plaintiff.
COMPETITION ACT, 2002
Section 3 of the Indian Competition Act, 2002 talks about anti competitive agreements. Anti
competitive agreements are divided into two broad categories:1. Horizontal agreements - Section 3(3) of Competition Act, 2002 envisages horizontal
agreements. These agreements are between competitors operating at the same level in the
economic process i.e. enterprises engaged in broadly the same activity. These are the agreements
between producers or between wholesalers or between retailers, dealing in similar kinds of
products. There are four types of horizontal agreements stated under section 3(3) of competition
act which are as follows:
(a) Agreements regarding prices: These include all agreements that directly or indirectly fix the
purchase or sale price.
1 Chicago Board of trade v. United states, 246 US 231, 238 (1918).
2 Arizona v. Maricopa country medical society, 457 US 332, 344 (1982).

(b) Agreements regarding quantities: These include agreements aimed at limiting or controlling
production, supply, markets, technical development, investment or provision of services.
(c) Agreements regarding bids (collusive bidding or bid-rigging): These include tenders
submitted as a result of any joint activity or agreement.
(d) Agreements regarding market sharing: These include agreements for sharing of markets or
sources of production or provision of services by way of allocation of geographical area of
market or type of goods or services or number of customers in the market or any other similar
way.
2. Vertical Agreements - Section 3(4) of the competition act, 2002 talks about vertical
agreements and such agreements are between non-competing undertakings at different levels of
manufacturing and distributing process. These are agreements between manufacturers of
components and manufacturers of products, between producers and wholesalers or between
producers, wholesalers and retailers. There are five types of vertical agreements states under
section 3(4) of the said act, which are as follows:(a) Tie-in agreement - agreement between a seller and a buyer under which the seller agrees to
sell a product or service (the tying product) to the buyer only on the condition that the buyer also
purchases a different (or tied) product from the seller.
(b) Exclusive supply agreement.
(c) Exclusive distribution agreement.
(d) Refusal to deal - A refusal to deal may be against another competitor; for example, if one
business refuses to do business with another company, customer or supplier, unless they agree to
cease business with another company, the agreement would be a refusal to deal.
(e) Resale price maintenance - Resale price maintenance or vertical price fixing is the practice in
which the manufacturers seek to fix the minimum or maximum retail price of their products. The
manufacturer may impose the retail price on the retailer or it may be a joint agreement between
the two on the prices to be charged.

In considering whether an agreement has the effect of undue restraint on trade, the courts adopt
two separate approaches (1) per se illegal , that an agreement is presumed to be unreasonable
and therefore illegal and no argument is needed to justify its reasonableness: (2) rule of reason,
that the agreement is not presumed per se unreasonable but is assessed in its legal and economic
perspective to determine whether the restraint imposed is such as merely regulates and perhaps
thereby promotes competition or whether it is such as may suppress or even destroy the
competition. Section 3(3) of the competition act which talks about horizontal agreements are
considered per se illegal and vertical agreements under section 3(4) of the competition act, rule
of reason is applied.
Under modern Antitrust theories, the traditionally illegal per se categories create more of
a presumption of unreasonableness.3 The court carefully narrowed the per se treatment and
began issuing guidelines. Courts and agencies seeking to apply the per se rule must:
1. show "the practice facially appears to be one that would always or almost always tend to
restrict competition and decrease output";
2. show that the practice is not "one designed to 'increase economic efficiency and render
markets more, rather than less, competitive'";
3. carefully examine market conditions; and
4. absent good evidence of competitiveness behavior, avoid broadening per se treatment to
new or innovative business relationships.4
CASE LAWS
1. In Addyston Pipe and Steel Co. v. United States,5 The defendants were pipe makers who were
operating in agreement. When municipalities offered projects available to the lowest bidder, all

3 FTC v. Indiana Federation of Dentists, 476 U.S. 447 (1986).

companies but the one designated would overbid, guaranteeing the success of the designated low
bidder if no bidder outside the group submitted a bid.
The government argued that some antitrust violations, such as bid rigging, were such egregious
anti-competitive acts that they were always illegal (the so-called "per se" rule). The defendants
asserted that it was a reasonable restraint of trade and that the Sherman Act could not have meant
to prevent such restraints. The Court held that for a restraint of trade to be lawful, it must be
ancillary to the main purpose of a lawful contract. A naked restraint on trade is unlawful; it is not
a defense that the restraint is reasonable.
2. In Standard Oil Co. of New Jersey v. United States,6 By the 1880s, Standard Oil was using its
large market share of refining capacity to begin integrating backward into oil exploration and
crude oil distribution and forward into retail distribution of its refined products to stores and,
eventually, service stations throughout the United States. Standard Oil allegedly used its size and
clout to undercut competitors in a number of ways that were considered "anti-competitive,"
including under pricing and threats to suppliers and distributors who did business with Standard's
competitors.
The government sought to prosecute Standard Oil under the Sherman Antitrust Act. The main
issue before the Court was whether it was within the power of the Congress to prevent one
company from acquiring numerous others through means that might have been considered legal
in common law, but still posed a significant constraint on competition by mere virtue of their size
and market power, as implied by the Antitrust Act.
Over a period of decades, the Standard Oil Company of New Jersey had bought up virtually all
of the oil refining companies in the United States. Initially, the growth of Standard Oil was
driven by superior refining technology and consistency in the kerosene products (i.e., product
standardization) that were the main use of oil in the early decades of the company's existence.
The management of Standard Oil then reinvested their profits in the acquisition of most of the
refining capacity in the Cleveland area, then a center of oil refining, until Standard Oil controlled
the refining capacity of that key production market. By 1870, Standard Oil was producing about

6 221 U.S. 1 (1911).

10% of the United States output of refined oil. 7 This quickly increased to 20% through the
elimination of the competitors in the Cleveland area.
As in the case against American Tobacco, which was decided the same day, the Court concluded
that these facts were within the power of Congress to regulate under the Commerce Clause. The
Court recognized that, "taken literally," the term "restraint of trade" could refer to any number of
normal or usual contracts that do not harm the public. The Court embarked on a lengthy exegesis
of English authorities relevant to the meaning of the term "restraint of trade." Based on this
review, the Court concluded that the term "restraint of trade" had come to refer to a contract that
resulted in "monopoly or its consequences." The Court identified three such consequences:
higher prices, reduced output, and reduced quality.
The Court concluded that a contract offended the Sherman Act only if the contract restrained
trade "unduly"that is, if the contract resulted in one of the three consequences of monopoly
that the Court identified. A broader meaning, the Court suggested, would ban normal and usual
contracts, and would thus infringe liberty of contract. The Court endorsed the rule of
reason enunciated by William Howard Taft in Addyston Pipe and Steel Company v. United
States, 85 F. 271 (6th Cir. 1898), written when the latter had been Chief Judge of the United
States Court of Appeals for the Sixth Circuit. The Court concluded, however, that the behavior of
the Standard Oil Company went beyond the limitations of this rule.
Justice John Marshall Harlan wrote a separate opinion concurring in the result, but dissenting in
the Court's adoption of the rule of reason. Among other things, he argued that the "rule of reason"
was a departure from prior precedents holding that the Sherman Act banned any contract that
restrained trade "directly." See, e.g.., United States v. Joint Traffic Ass'n, 171 U.S. 505 (1898).
While some scholars have agreed with Justice Harlan's characterization of prior case law, others
have agreed with William Howard Taft, who concluded that despite its different verbal
formulation, Standard Oil's "rule of reason" was entirely consistent with prior case law.

7 Dudley Dillard, Economic Development of the North Atlantic Community (Englewoods Cliffs,
N.J.:Prentice-Hall, 1967), pp. 409-410

3. In Broadcast Music v. Columbia Broadcasting System,8 The TV network CBS filed

an antitrust suit against licensing agencies alleging that the system by which these agencies
received fees for the issuance of blanket licenses to perform copyrighted musical compositions
amounted to illegal price fixing. The basic question in the case is "whether the issuance by
ASCAP and BMI to CBS of blanket licenses to copyrighted musical compositions at fees
negotiated by them is price fixing per se unlawful under the antitrust laws."
The Supreme Court held that blanket licenses issued by ASCAP and BMI did not necessarily
constitute price fixing. The judgment, delivered by White J, was unanimous in holding that such
practice should instead be examined under the rule of reason to determine if it is unlawful.
Stevens J agreed with the majority, but would not have remanded the case to the lower courts for
rehearing. He would have held that the blanket license were a breach of Section 1 of the Sherman
Act using the rule of reason.
CONCLUSION
There is a basic distinction between cases that focus on the nature of the restraint and those that
focus on the nature of the market. In general, the former set involves restraints that are
traditionally considered per se illegal or restraints that, on the basis of long experience, are
considered likely to have adverse consequences. All other restraints fall in the latter category. A
full rule-of-reason inquiry into market effects may include either direct measurement of
anticompetitive effects in a particular case or indirect inferences based on market shares in
defined markets. One method is not necessarily more truncated than the other. In general, there
is symmetry between the particularity required for the plaintiffs case and for the defendants
case. A case based on inferences can be rebutted by inferences, but a case based on specific facts
will require specific facts in rebuttal.

8 441 U.S. 1 (1979).