The rule of reason after Leegin: reconsidering the use of economic analysis in the antitrust arena.

• Author: Casey, Jason A.
• Position: Company overview

1. INTRODUCTION

   The United States Supreme Court has long distinguished between horizontal and vertical price restrictions in assessing their legality under the Sherman Antitrust Act (the Act). (2) Traditionally, courts use the "rule of reason" standard to determine whether a given price restraint violates the Act. (3) According to this rule, the fact-finder must determine whether the restraint's anti-competitive effects unreasonably outweigh its potentially pro-competitive effects. (4) This standard, however, does not govern all price restraints. (5)

   For example, courts deem horizontal price restraints--those occurring between market participants at the same level of production or distribution--per se illegal in recognition of their consistent anti-competitive purpose and effect. (6) Additionally, beginning in 1911 with the Supreme Court's landmark decision in Dr. Miles Medical Co. v. John D. Park & Sons Co. (7) until 2007, courts deemed minimum resale price maintenance schemes per se illegal under the Act. (8) Minimum resale price maintenance is a type of vertical price restraint ordinarily employed by manufacturers to enhance a product or products. (9)

   The Court's rejection of the per se rule as applied to resale price maintenance schemes in Leegin Creative Leather Products, Inc. v. PSKS, Inc. (10) signaled a dramatic shift in the Court's ability to recognize and interpret economic data and its effect. (11) Furthermore, applying the rule of reason standard to resale price maintenance schemes will certainly have lasting effects on producers and other corporate entities likely to employ such schemes. (12) The Court's rejection of decades of case law is not surprising, though, given its longstanding distaste for the overbroad characterizations inherent in per se analysis. (13) Although the Court initially established the per se rule for vertical price restraints in Dr. Miles, subsequent Supreme Court decisions have largely dismantled this holding. (14) In fact, these changes are the result of the Court's measured yet consistent willingness to recognize the pro-competitive effects of vertical price restraints. (15) Indeed, rule of reason analysis may avoid overbroad characterizations and allow the Court to assess the actual effect of a given restraint on private entities and the market as a whole. (16)

   This Note examines some of the practical effects of the Court's Leegin decision, particularly on the lower federal courts and the judiciary in general. (17) As a preliminary matter, this Note will describe the general policy concerns that led Congress to enact Section I of the Sherman Act in order to later determine if the Court's current use of the rule of reason best diminishes these concerns. (18) This Note will also generally discuss potential effects of the Court's application of the rule of reason to resale price maintenance on the producer-dealer relationship. (19)

   Part II examines the history of the Supreme Court's use of both the per se rule and the rule of reason to scrutinize both horizontal and vertical price restraints. (20) Part II also addresses the main policy concerns that caused Congress to enact Section I of the Sherman Act, as well as the Supreme Court's role in defining precisely what conduct the Act proscribes. (21) Part III cautions lower federal courts against using purely economic analysis when applying the rule of reason and advocates for courts to use important circumstantial evidence indicative of unlawful intent. (22) Part III also examines problems courts may encounter when applying the rule of reason to resale price maintenance agreements. (23)

2. HISTORY

   1. Early "Antitrust" Law

      Congress enacted the Sherman Antitrust Act in 1890, and it remains the most preeminent piece of American antitrust legislation today. (24) Despite its name, Congress did not intend the Act to target trusts in particular, but rather any mechanism used to artificially curtail trade and competition in the marketplace. (25) Though lawmakers doubted if common law governed antitrust issues, the decision to enact antitrust legislation grew mainly from concerns surrounding enormous corporate organization and the ensuing accumulation of corporate wealth in the late nineteenth century. (26) Legislators suspected that these wealthy corporations were beginning to use their power, financial and otherwise, to stifle competition and artificially increase prices. (27) Congress premised the Act on the theory that the unrestrained interaction of competitive forces yields the best allocation of economic resources, the lowest prices, and the best quality goods. (28) This theory, however, continues to garner significant criticism by both legal and economic scholars. (29)

      In 1910, John D. Rockefeller's Standard Oil Company became one of the first trusts regulated under the Act. (30) The Standard Oil Company had grown so large that by 1900, the company controlled almost 90 percent of all refined oil flows in the continental United States. (31) The Supreme Court held that Rockefeller violated Section I of the Act by constructing a type of horizontal monopoly, a corporate enterprise designed to control and manipulate supply in a particular market. (32) Despite realizing incredible profits for Rockefeller and Standard Oil, this level of horizontal integration resulted in a monopolization of the United States oil market that stifled competition and spawned unfair price manipulation. (33) In 1911, as a result of the Supreme Court's holding, the Standard Oil Company dissolved. (34)

   2. The United States Supreme Court and the Sherman Act

      Even though the Standard Oil litigation targeted a particular monopoly, the main concern voiced by both the plaintiffs and the Court was the general anticompetitive effects of artificial price restrictions. (35) Although the Court in Standard Oil ultimately held that the Sherman Act proscribed horizontally integrated monopolies, the language of the Act itself still provides little guidance as to what specific conduct is prohibited. (36) Accordingly, courts have the difficult task of determining on a case-by-case basis what conduct the Act proscribes. (37) After the Act's inception, for example, a district court interpreted the meaning of "restraint on trade" as used in Section I of the Act. (38) Based on this early interpretation, the word "trade" is synonymous with "competition" when considering what conduct violates the Act. (39)

      Early interpretations of the Act proscribed all transactions and contracts that restrained trade whether reasonable or unreasonable based on the plain language of the Act. (40) The Court first adopted the rule of reason in 1911 effectively reading the word "unreasonable" into the statute and providing the most comprehensive interpretation of the Act to date. (41) In limited circumstances, however, certain anti-trade and anti-competitive restraints remained per se illegal under the Sherman Act in recognition of their limited or non-existent pro-competitive effects. (42) Despite these restraints, the contemporary trend has been to limit those instances where the per se rule is used; the Court instead relies on a more holistic assessment under the rule of reason. (43) This reliance is easily traced to the Court's increased ability to accurately predict and theorize a given restraint's economic and competitive effects on the market. (44)

   3. The Per Se Rule and the Rule of Reason: A Case History

      For much of the twentieth century, the Court applied the per se rule to vertical price and non-price restraints, but after years of reducing its strict application the Court suddenly shifted to a rule of reason standard. (45) Although the Court has long considered horizontal price restrictions per se illegal under the Sherman Act, the per se regime began in 1911 when the Court applied the per se rule to vertical price restrictions in Dr. Miles Medical Co. v. John D. Park & Sons Co. (46) The Dr. Miles holding was significant because the Court likened minimum retail price maintenance schemes to horizontal price restraints in light of their overwhelmingly negative effect on competition; the Court also moved toward extending the per se rule to vertical price restraints generally. (47) Interestingly, the Court's Dr. Miles opinion appears more objective than most others that consider vertical price and non-price restraints because of the Court's comprehensive discussion of the rule of reason and the per se rule. (48) Despite its objectivity, however, the Court concluded that the defendant's restraint was per se illegal under Section I of the Sherman Act. (49)

      In 1967, in United States v. Arnold, Schwinn & Co., (50) the Court held certain vertical non-price restrictions per se illegal under the Sherman Act, further expanding the notion of per se illegality. (51) The Court based its conclusion on an analogy between the "territorial" restraint in question and restraints on alienation generally, like those examined in Dr. Miles. (52) The Court disregarded the defendant's proper motive in establishing the restraint and any possibility of assessing its legality under the rule of reason because the restraint fundamentally restricted trade in violation of Section I of the Act. (53)

      The Supreme Court continued its expansion of the per se rule in 1968 with its decision in Albrecht v. Herald Co. (54) Relying largely on reasoning articulated in the Schwinn decision a year earlier, the Court held that Section I of the Sherman Act prohibited the maximum retail price maintenance scheme employed by the Herald Company. (55) According to the Court, this agreement precluded the "natural" establishment of price through bargaining by buyers and sellers, an essential market component often restricted by maximum price schemes. (56) Restricting bargaining in order to influence price adversely affects competition and trade in the market and is thus per se illegal under Section I of the Act. (57)

      The Supreme...