Antitrust Standards of Review: The Per Se, Rule of Reason, and Quick Look Tests
August 10, 2018
Section 1 of the Sherman Act prohibits every contract, combination or conspiracy that restrains interstate trade, or trade with foreign nations, so long as those restraints are unreasonably restrictive of competition in a relevant market.
The actual language is that "Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.”
But courts long ago recognized that not every restraint can be illegal because even a simple contract between two parties technically restrains trade at some level. So courts interpret the Sherman Act to only apply to “unreasonable restraints.”
To analyze whether any particular restraint is unreasonable under the federal antitrust laws, a court will apply one of the following three approaches:
- The Per Se Rule
- The Rule of Reason
- The Quick Look
1. The “Per se” rule
Restraints analyzed under the per se rule are those that are always (or almost always) so inherently anticompetitive and damaging to the market that they warrant condemnation without further inquiry into their effects on the market or the existence of an objective competitive justification. (U.S. v Socony-Vacuum Oil Co., 310 U.S 150 (1940); United States v. Sealy, Inc., 388 U.S. 350 (1967); United States v. Topco Associates, Inc., 405 U.S. 596 (1972); Craftsmen Limousine, Inc. v. Ford Motor Co., 363 F.3d 761 (8th Cir. 2004); U.S. Dep’t of Justice and Federal Trade Comm’n, Antitrust Guidelines for Collaborations Among Competitors from April 2000 (Section 3.2).
In other words, first (besides antitrust injury), a plaintiff is only required to prove that the specific anticompetitive conduct actually took place. The plaintiff does not need to demonstrate the conduct’s competitive unreasonableness or negative competitive effects in the relevant product and geographic markets.
Second, under the per se rule, defendants are not entitled to justify their behavior based on any objective competitive justifications. (Northern Pac. Ry. Co. v. US 356 US (1940); Agnew v. National Collegiate Athletic Ass’n, 683 F.3d 328 (7th Circ. 2012); or In re Flat Glass Antitrust Litigation 385 F.3d 350 (3rd Cir. 2004)).
Finally, a plaintiff has less responsibility to analyze the market where the restraint is deemed per se anticompetitive. (National Soc. of Professional Engineers v. U.S. 435 U.S. (1878); In re Insurance Brokerage Antitrust Litigation, 618 F 3d 300 (2010); or In re Southeastern Milk Antitrust Litigation, 739 F.3d 262 (2014). The law, however, isn’t entirely clear to what extent a plaintiff must define the relevant market.
Business practices considered per se illegal under antitrust laws include: (a) horizontal agreements to fix prices, (b) horizontal market allocation agreements, (c) bid rigging among competitors; (d) certain horizontal group boycotts by competitors; and (e) sometimes tying arrangements.
There is, however, a significant exception to per se application, even with these restraints. When parties create a joint venture or other pro-competitive structure and such restraints are necessary to the existence of that venture or structure, there are instances in which a court will deem the suspect restraints ancillary and apply a lessor standard, like the rule of reason.
You can read about such ancillary restraints here at The Antitrust Attorney Blog.
2. The “Rule of Reason” approach
A contract, combination or conspiracy that unreasonably restrains trade and does not fit into the per se category is usually analyzed under the so-called rule of reason test. This test focuses on the state of competition within a well-defined relevant agreement. It requires a full-blown analysis of (i) definition of the relevant product and geographic market, (ii) market power of the defendant(s) in the relevant market, (iii) and the existence of anticompetitive effects. The court will then shift the burden to the defendant(s) to show an objective procompetitive justification.
This analysis distinguishes between restraints with an anticompetitive effect (or resulting in conduct likely to cause such injury) that are harmful to the consumer, and restraints stimulating competition that are in the consumer’s best interest. (Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49 (1977); State Oil v. Kahn, 522 U.S. 3, 10 (1997)).
Most antitrust claims are analyzed under this test, according to which courts must decide whether they impose an unreasonable restraint on competition. In doing so, judges consider a variety of factors, including (i) intent and purpose in adopting the restriction; (ii) the competitive position of the defendant—specifically, information about the relevant business, its condition before and after the restraint was imposed, and the restraint’s history, nature and effect; (Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717 (1988); National Collegiate Athletic Ass’n v. Board of Regents of university of Oklahoma, 468 U.S. 85 (1984); (iii) the structure and competitive conditions of the relevant market (State Oil v. Kahn, 522 U.S. 3, 10 (1997)); (iv) barriers to entry; and (v) the existence of an objective justification for the restriction (California Dental Ass’n v. FTC, 526 U.S. 756 (1999).
None of the factors are decisive and courts must balance them to determine whether a particular restraint of trade is competitively unreasonable (Leegin Creative Leather Products Inc. v. PSKS Inc. 127 S. Ct US (2007).
If you want to read more about the contours of the rule of reason test, you might review section 3.3. of the U.S. Dep’t of Justice and Federal Trade Comm’n, Antitrust Guidelines for Collaborations Among Competitors from April 2000, which provides some analytical criteria about applying the rule of reason test to agreements between actual and potential competitors.
3. The “Quick Look” review
Under this abbreviated version of the rule of reason analysis, the court does not need to conduct the rigorous analysis of the market and anticompetitive effects that the rule of reason requires. Instead, the plaintiff need only show a form of market injury. A court might apply the quick look analysis when the defendant’s conduct is of the type that, while not per se illegal, appears so likely to have anticompetitive effects that it is unnecessary for a court to go through the full analysis. The US Supreme Court in National Collegiate Athletic Ass’n v. Board of Regents of university of Oklahoma, 468 U.S. 85 (1984), commented that this quick look can sometimes be applied in “the twinkling of an eye.”
The Supreme Court—in one of the most famous quick look cases—applied the quick look test in FTC v. Indiana Federation of Dentists, 476 U.S. 447, 459 (1986) to certain rules that restricted insurance company access to x-rays.
Later, the Court in California Dental Ass’n v. FTC, 526 U.S. 756 (1999), held that a court should only apply the quick look test when an observer with even a rudimentary understanding of economics could conclude that the arrangement in question would have an anticompetitive effect on customers and the market.