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BASICS

What follows below is a very basic primer on Section 1 of the Sherman Act, which is the foundation of the antitrust laws in the United States.

General Background

The Sherman Antitrust Act makes illegal every contract, combination, or conspiracy, in the restraint of trade. Unfortunately, antitrust law is not so simple as a cursory reading of the statue would otherwise suggest. As the United States Supreme Court stated in National Society of Professional Engineers v. United States, 435 U.S. 679, 688 (1978):

One problem presented by the language of §1 of the Sherman Act is that it cannot mean what it says. The statute says that "every" contract that restrains trade is unlawful. But, as Justice Brandeis perceptively noted, restraint is the very essence of every contract; read literally, §1 would outlaw the entire body of private contract law. Yet it is that body of law that establishes the enforceability of commercial agreements and enables competitive markets -- indeed, a competitive economy -- to function effectively.

Congress, however, did not intend the test of the Sherman Act to delineate the full meaning of the statute or its application in concrete situations. The legislative history makes it perfectly clear that it expected the courts to give shape to the statute’s broad mandate by drawing on common-law tradition. The Rule of Reason, with its origins in common-law precedents long antedating the Sherman Act, has served that purpose. It has been used to give the Act both flexibility and definition, and its central principle of antitrust analysis has remained constant. Contrary to its name, the Rule does not open the field of antitrust inquiry to any argument in favor of a challenged restraint that may fall within the realm of reason. Instead, it focuses directly on the challenged restraint’s impact on competitive conditions.

Therefore, it is necessary to try and understand the goal of our antitrust laws, which is to protect and promote fair competition.

Rule of Reason & Per Se Violations

There are two types of antitrust analysis. In the first category are agreements whose nature and necessary effect are so plainly anticompetitive that no elaborate study of the industry is needed to establish their illegality. In this first category, the complained of act is considered to be illegal per se. In the second category are agreements whose competitive effects can only be evaluated by analyzing the facts peculiar to the business, the history of the restraint and the reason why the restraint was imposed in the first place. The agreements that fall into this second category are judged by what is called the "rule of reason," which requires a cases-by-case approach that sometimes cannot be easily defined.

Per Se Violations

It is generally inappropriate for a judge to hold that a complained of violation is per se illegal. The per se rule is generally appropriate only after judges have had long experience with a certain practice, and have concluded that the practice produces many pernicious results and almost no beneficial ones. When a complained of violation is classified as a per se violation of the antitrust laws the court will not consider elaborate arguments (that are routine in rule of reason cases) that a particular practice is actually pro-competitive. To the contrary, the court will condemn the practice without taking any arguments into account. The purpose of the per se rule is to avoid expensive litigation in areas in which it is not likely to be fruitful. Currently, the per se rule is applied to horizontal price fixing, horizontal territorial or customer division, vertical price fixing, and some concerted refusals to deal and tying arrangements.

Rule of Reason

In antitrust litigation, most complained of practices are analyzed under what is called the "rule of reason." The United States Supreme Court has stated (also in National Society of Professional Engineers):

[T]he inquiry mandated by the Rule of Reason is whether the challenged agreement is one that promotes competition or one that suppresses competition. The true test of legality is wehther the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition.

Under the rule of reason test, the fact finder must weigh all circumstances of the case to decide whether the practice complained of unreasonably restrains competition. The test requires that the plaintiff show anticompetitive effects, or actual harm to competition. The rule of reason does not, however, require the plaintiff to demonstrate that the complained of practice is unfair or tortious.