Rule of Reason is a standard courts use in testing the legality of business conduct under section 1 of the Sherman Antitrust Act (1890), which prohibits “every contract, combination … or conspiracy, in restraint of trade.”

At first, the Supreme Court read the act as condemning every restraint of trade. The Court then began moving away from literalness, and in 1911 Chief Justice Edward D. White, writing for the majority in Standard Oil Co. of New Jersey v. United States and United States v. American Tobacco Co., explained that the act condemned only those practices “which operated to the prejudice of the public interests” by unduly restraining trade (p. 179). He stated that Congress intended that the courts apply the “standard of reason” in determining whether the Act had been violated (p. 60). Although the Court ordered the oil trust dissolved, the rule of reason's factual evaluation of business practices on a case‐by‐case basis was widely viewed as “protrust.”

In Chicago Board of Trade v. United States (1918), Justice Louis D. Brandeis listed some factors to be considered in applying the rule of reason: “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 particular remedy, the purpose or end sought to be attained, are all relevant facts” (p. 238).

The rule of reason was the dominant approach in antitrust cases for about two decades. After 1937, as the power of the national government expanded, the Court increasingly declared that various business agreements or practices were conclusively presumed to be unreasonable without elaborate inquiry about the harm caused or the business justification. These activities were per se illegal “because of their pernicious effect on competition and lack of any redeeming virtue” (Northern Pacific Railway Co. v. United States, 1958, p. 5). The per se approach dominated antitrust litigation from the 1940s through the 1960s. Per se rules proscribed a range of restrictive agreements that included price fixing and market allocations.

With an increasing emphasis on deregulation and a free market in the 1970s and 1980s, the Court began to abolish or modify per se rules, returning to the rule of reason as the prevailing standard to test many business practices (e.g., Continental T.V., Inc. v. GTE Sylvania, Inc., 1977). Per se rules retain some vitality, however, particularly when applied to restraints among competitors. In 1978 the Court declared in National Society of Professional Engineers v. United States that “the inquiry mandated by the Rule of Reason is whether the challenged agreement is one that promotes competition or one that suppresses competition. … [The] purpose of the analysis is to form a judgment about the competitive significance of the restraint” (pp. 691–692).

Although the rule of reason and the per se illegality rule are sometimes viewed as dichotomous, they can also be viewed as complementary categories and converging methods of antitrust analysis. Several Court cases in the 1980s reflect a methodological overlap between the two standards, with some justices advocating a quick threshold examination of a business practice for competitive impact before applying a per se or rule of reason approach.

Debate over the rule of reason remains lively. Some commentators view the Court's renewed emphasis on the rule of reason as part of a free market, probusiness, antigovernment philosophy and as fostering increased economic concentration. Others welcome the diminishing influence of per se rules they consider to be based on unsound economic theory. Several commentators criticize the rule of reason as lacking substantive content, asserting that it establishes a lengthy list of unweighted factors, allowing an unlimited, freewheeling, high‐cost judicial inquiry without providing sufficient guidance to trial courts or businesses. Others propose that the Court adopt “per se rules of legality,” declaring lawful certain business practices that are probably beneficial, with the rule of reason applying only to practices with significant risk of competitive injury.

In the first century of antitrust law, the courts have given shape to the Sherman Act's broad mandate. The interpretation and application of the act have varied over the years, and the rule of reason has provided the means for accommodating changes in economic theory with changing political and social concerns about business practices and the concentration of economic power.

See also Antitrust.

Bibliography

Phillip E. Areeda , Antitrust Law, vols. 7 and 8 (1986).

Shirley S. Abrahamson and and Charles G. Curtis, Jr.

Rule of Reason, a standard created by the judiciary for judging business behavior under the Sherman Act (1890). Because this act spread a very wide net by prohibiting “every contract, combination, or conspiracy, in restraint of trade or commerce,” the U.S. Supreme Court quickly narrowed this prohibition to unreasonable restraints, to be defined through “a standard of reason” and an analysis of the particular facts in each case.

The result was the development over the twentieth century of a federal common law of fair business practices, one that changed as notions of “reasonableness” evolved. Some conduct was consistently condemned as unreasonable per se, such as most forms of price‐fixing, output restrictions, and market divisions among competitors. The courts forbade other forms of “restraints” for many years, only to then reverse themselves and find that the outlawed practices instead promote “consumer welfare.”

The rule of reason has had a controversial history. Many Progressive Era reformers saw it as a loophole that weakened the fight against the giant trusts. Business leaders, by contrast, criticized the rule's ambiguous reach and its failure to offer clear guidelines. Beginning late in the New Deal Era and continuing through the 1960s, a growing number of business practices were struck down as unreasonable, resulting in criticism of the courts as being antibusiness. The trend was reversed after 1970, leading to charges that the courts were too pro‐business and too quick to protect economic efficiency over other values.

The rule of reason, like other vague statutory and constitutional standards, gave courts enormous authority in regulating American life. The rule has been used to police a variety of practices in virtually every field of business endeavor, and its ambiguity accommodated changes in economic theory, political power, and attitudes toward business throughout the twentieth century.
See also Antitrust Legislation; Business; Corporatism.

Bibliography

Thomas K. McCraw , Prophets of Regulation, 1984.
Philip E. Areeda , Antitrust Law, vols. 7 and 8, 1986.

Charles G. Curtis Jr.

RULE OF REASON

RULE OF REASON, a judicial principle applicable when the purpose and intent of legislation are open to serious question. Application of the principle has been largely restricted to the interpretation of the Sherman Antitrust Act of 1890. This measure, if taken literally, would be unenforceable, and possibly unconstitutional. To evade the issue of the law's constitutionality, the Supreme Court, in the 1911 cases Standard Oil Company v. United States and United States v. American Tobacco Company, enunciated the rule of reason and used it to conclude that the statutory prohibition of "all combinations in restraint of trade" set forth in the act actually meant "all unreasonable combinations in restraint of trade."

BIBLIOGRAPHY

Letwin, Willam. Law and Economic Policy in America: The Evolution of the Sherman Antitrust Act. Chicago: University of Chicago Press, 1981 [1965].

W. BrookeGraves/f. b.

See alsoRestraint of Trade ; Standard Oil Company of NewJersey v. United States .