What’s the rule of reason?

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The Rule of Reason states that only contracts, acquisitions and mergers that unreasonably restrict trade are affected by antitrust laws. It also states that monopolies are not, per se, illegal. The rule was developed by the United States Supreme Court and made its first written appearance in the same-day 1911 rulings in Standard Oil Co. of New Jersey v. United States and on United States v. American Tobacco Co.

The Sherman Antitrust Act was passed in 1890 to protect businesses and consumers from greedy and often vicious cartels and corporations. The act outlawed any activity that limited the ability of consumers to choose their preferred supplier or prevented new companies from entering a market. Before the emergence of the rule of reason, courts typically interpreted the law very narrowly. Any company that entered into a contract that restricted trade in any way or that, in essence, had no competitors was found to be acting illegally.

In 1911, the United States filed an action under the requirements of the Sherman Antitrust Act against the Standard Oil Company. Standard Oil had monopolized the oil business in the United States and was using its monopoly power to impose unreasonable prices on consumers and to prevent potential competitors from entering the market. The Supreme Court found Standard Oil guilty, but ruled that the illegal act was not the possession of a monopoly, but rather the unfair and restrictive acts that resulted from it.

The United States has also filed a lawsuit against American Tobacco Company for violating anti-trust laws. In this case, the court again ruled that merely owning a monopoly was not illegal, but that the way the monopoly was obtained could be. Since both sentences were handed down on the same day, they are taken together to represent the rule of reason.

Further US court cases have refined the rule of reason to address issues such as price fixing and geographic divisions of the market. Other courts around the world, especially those in European countries, have also adopted the standard. The European Court of Justice uses the rule to decide cases affecting the European common market.

In its simplest form, the rule of reason recognizes that sometimes trade restrictions are unavoidable and may even be desirable. For example, mergers or co-branding deals that create a monopoly can actually benefit consumers by marrying advanced technology with superior customer service. As long as no law has been violated in obtaining the monopoly or contract, and as long as the monopoly or contract is not used to perform tort, mere possession of the monopoly or the restrictive contract remains legal.

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