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Rule of Reason

RULE OF REASON

The rule of reason was a statutory construction of the sherman antitrust act by the Supreme Court. Nothing better illustrated judicial policymaking than the rule of reason, which held that the Sherman Act excepted from its scope "good trusts" or "reasonable restraints of trade." The statute expressly declared illegal "every" contract, combination, and conspiracy in restraint of trade, and as a result the Court in several early cases rejected the argument that "every" did not mean what it said. The Court also denied that the statute should be construed in the light of the common law, which had recognized the legality of certain ancillary restraints of trade on the ground that they were reasonable. For example, in united states v. transmissouri freight association (1897) the Court rejected the proposition that "Congress, notwithstanding the language of the [Sherman] act, could not have intended to embrace all contracts, but only such contracts as were in unreasonable restraint of trade." Said Justice rufus peckham for the Court: "[w]e are, therefore, asked to hold that the act of Congress excepts contracts which are not in unreasonable restraint of trade." To read that rule of reason into the statute, Peckham answered, would be an exercise of judicial legislation.

That remained the Court's view until 1911, when it ignored its precedents, the text of the statute, and the views of the Senate and the President. In 1909 the Senate had rejected a bill that proposed to amend the Sherman Act by incorporating the rule of reason. "To amend the antitrust act, as suggested by this bill," declared a subcommittee of the Senate Judiciary Committee, "would be to entirely emasculate it, and for all practical purposes render it nugatory as a remedial statute." In 1910 President william howard taft in a message to Congress had argued that no need existed to amend the scope of the Sherman Act. Yet in 1911, in two major antitrust cases, united states v. standard oil company of new jersey and United States v. American Tobacco Co., Chief Justice edward d. white, who had dissented from earlier opinions repudiating the rule of reason, explicitly adopted it for an 8–1 Court. The sole dissenter, Justice john marshall harlan, echoing the Trans-Missouri Freight case, assaulted "judicial legislation"—the usurpation by the Court of a congressional function. The Sherman Act, Harlan insisted, included "every" restraint of trade, even a reasonable one. But Congress, in its 1914 antitrust legislation of the clayton act and the federal trade commission act, by failing to attack the rule of reason acquiesced in it.

As a result of its rule of reason, the Supreme Court prevented effective use of the Sherman Act to prevent industrial consolidations of a monopolistic character. Thus, in United States v. United Shoe Machinery Company (1918), the Court held that the antitrust act did not apply to the company even though its dominating position in the industry approached that of an absolute monopoly which had restrained trade by its use of exclusive patent rights. In united states v. united states steel corporation (1920) the Court held that the nation's largest industrial enterprise had reasonably restrained trade despite its "attempt to monopolize" in violation of the act. Similarly, in United States v. International Harvester Company (1927) the rule of reason defeated the government's case once again even though the company controlled a big proportion of the market and used exclusive dealer contracts to eliminate competition. Although the Court ruled that trade union activities came within the scope of the antitrust act, no union ever benefited from a Court finding that its restraint of trade was reasonable. The rule of reason, in short, proved to be of considerable importance in the history of judicial review, of the economy, and of government efforts to regulate monopolistic practices.

Leonard W. Levy
(1986)

(see also: Antitrust Law.)

Bibliography

Neale, A.D. 1970 The Antitrust Laws of the United States of America. Cambridge: At the University Press.

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