US courts employ the rule of reason to assess a restraint’s effects on competition. Commentators have recently debated the predictability and appropriate structure of the analysis. However, at the same time as these nuances have been fleshed out in the literature, courts appear to have lost sight of first principles. This paper, available here, criticises recent developments in the US.
It does so as follows:
Section 2 looks at the background and analytical framework of the rule of reason.
Some offences (like price fixing, bid rigging, and market sharing) are considered inherently anticompetitive and deemed automatically illegal without any scrutiny of actual competitive effects. In contrast, the vast majority of agreements are considered under the rule of reason. For much of the mid-20th century, antitrust courts applied mostly per se rules, even beyond hard-core cartels. That changed in the 1970s with the introduction of economic analysis, which led to the rule of reason beginning to be applied in earnest.
However, unlikely what is commonly said, the rule-of-reason does not balance pro- and anticompetitive in an unstructured fashion. In one of his earlier writings, which reviewed all 495 rule of reason cases decided between 1977 and 1999, the author showed that courts typically followed a burden-shifting approach. First, the plaintiff must show a significant anticompetitive effect, typically in the form of a price increase, output reduction or market power. The plaintiff’s failure to establish this element led to dismissal of 84 percent of cases. If a prima facie anticompetitive effect is demonstrated, the burden shifts to the defendant to demonstrate a legitimate procompetitive justification. Defendants’ failure to satisfy this burden led to invalidation of the restraint in 3 percent of the cases. Thirdly, if the defendant successfully establishes a pro-competitive justification, the burden shifts back to the plaintiff to demonstrate that the restraint is not reasonably necessary to achieve the defendant’s objectives or that the defendant’s objectives could be achieved by less restrictive means. At most, 1 percent of the cases were dismissed at this stage. If the defendant fails to establish this, the court will then balance the restraint’s anticompetitive and procompetitive effects, which occurred in 4 percent of the cases. In a subsequent study, the author demonstrated that, between 1999 and 2009, courts dismissed 97 percent of cases at the first stage, reaching the balancing stage in only 2 percent of cases.
This four-part framework provides a practical approach that can simplify antitrust analyses, enabling courts to dispose of many cases without needing to address some of the complexities inherent to balancing. Courts should balance the apples of anticompetitive effects against the oranges of procompetitive justifications only when absolutely necessary to reach the correct outcome. If the plaintiff cannot show an anticompetitive effect, the court need not proceed further since there cannot be an antitrust violation. And after the plaintiff shows such an effect, a defendant unable to show a legitimate justification should not emerge victorious.
Section 3 explains how the four-stage analysis in principle and practice.
The majority of courts that apply the rule of reason have described the analysis as involving balancing, most typically through the four-step framework described above. Some courts, in contrast, have articulated a three-step analysis that does not include balancing. More important than courts’ characterisation of the analytical framework, however, are the analyses they actually apply. On this issue, the critical cases are those that survive the first two stages. If there is no anticompetitive effect or procompetitive justification, the court’s recitation of the framework (as an indicator of analysis in later stages) is only dicta. However, where the analysis proceeds beyond the first two stages, the framework has direct effect.
Since 1977, only 28 cases that involved application of the burden-shifting framework have made it past the second stage. These cases took one of three forms. In the first one, the court finds that the plaintiff was able to show at the third step that there is a less restrictive alternative, or an absence of reasonable necessity for the conduct sub judice, and therefore concludes that the plaintiff wins. This happened in one recent case. In the second scenario, the court reached the final stage and balanced anticompetitive and procompetitive effects. This happened in 25 cases. The last possibility is for the plaintiff to fail to show a less restrictive alternative or lack of reasonable necessity, with the court then deciding that the plaintiff loses. This variation saddles the plaintiff with the burden of making a showing that is not necessary, since a plaintiff, even without showing a less restrictive alternative, could still show that a restraint’s anticompetitive effects outweigh its procompetitive justifications. If the plaintiff does not show that the restraint is not reasonably necessary or that there are less restrictive alternatives, it should not lose – instead, the case should proceed to balancing.
Nonetheless, this latter approach was the approach adopted by the 9th Circuit Court in O’Bannon and, more worryingly, by the Supreme Court in Amex. In the latter case, reviewed here and discussed in a number of subsequent article reviews, the Supreme Court addressed American Express’s “antisteering” rules, which “prohibit[ed] merchants from discouraging customers from using their Amex card after they . . . entered the store and [we]re about to buy something, thereby avoiding Amex’s fee.” The author’s concern here is merely that the Supreme Court, in its dicta, elaborated a three step rule-of-reason that omitted balancing – despite citing three sources for its rule of reason framework which explicitly include balancing in their analyses. As will be remembered, the Supreme Court did not actually engage with this, since it concluded that the plaintiff failed to demonstrate a restraint of competition and, therefore, dismissed the case at the first step.
The last section explain why this matters.
These developments raise three concerns. First, such an approach is not consistent with the analytical underpinnings of antitrust law. With the exception of per se offenses, antitrust analysis involves a consideration of anticompetitive and procompetitive effects. Second, the omission of balancing is not consistent with courts’ application of the rule of reason. Third, the omission of balancing is also not consistent with the policies underlying the rule of reason. Central to this framework is a court’s consideration of a restraint’s anticompetitive and procompetitive effects. It is hard to see how this can be done without, at some point, having the chance to directly consider the two. Though invoking a three-step analysis that omits balancing will not affect most cases, the extrication of balancing can be detrimental in some cases. Treating the rule-of-reason as a four-step framework solves these problems, ensuring that the ultimate balancing of anticompetitive and procompetitive effects is enshrined in the analysis and is not overlooked in a three-step inquiry.
This is a solid, clear analysis of US developments. It may a bit too technical for non-US lawyers, and it does not go into a number of other reasons why the developments it depicts have been so heavily criticised, but it provides a good overview of how the rule of reason operates in the US.