How do you Determine Whether Conduct is Illegal under the Sherman Act?

Section 1 of the Sherman Act broadly prohibits actions that in some way restrain trade. If an action is determined to be a restraint of trade, the following standards apply to determine whether the arrangement is illegal: Per Se Illegality and Rule of Reason.

What is Per Se Illegality?

A naked restraint of trade is one that is explicitly anticompetitive, such as an agreement controlling the price of a good or the output from production. A naked restraint with no pro-competitive justification is generally held to be per se illegal. That is, these practices are, by their nature, anticompetitive and thus per se illegal. A court will not evaluate any alleged pro-competitive justifications for such activity.

Example: Agreements setting a minimum or maximum price, output limitations, geographic apportionment of a region, bans on price competition would all qualify as per se illegal. Horizontal agreements among competitors are much more likely to be per se illegal. In vertical agreements between producer, wholesaler, and retailer, it is often difficult to determine if they are anticompetitive . These types of relationship must be examined under the rule of reason. All of these types of restraint are discussed further below.

What is the Rule of Reason? 

The rule of reason applies to a restraint that is not deemed a naked restraint. Per Section 1, every contract, combination, or conspiracy is illegal if it constitutes undue or unreasonable restraint of trade. The test for reasonableness concerns whether the challenged contracts or acts unreasonably restrict competitive conditions in the market or industry. Unreasonableness can be based upon the nature or character of the agreement or surrounding circumstances. The rule of reason balances pro-competitive and anti-competitive effects. In determining whether a restraint of trade is reasonable, the court would consider:

• facts peculiar to this business,
• actual and probable effects of restraint (including the effect on competitors);
• history of the restraint;
• purpose of restraint;
• scope of the restraint;
• convenience to suppliers and consumers; and
• creation of new products.

In essence, if the activity promotes competition, it may justify the anticompetitive aspects.

What is the Quick-Look (or Truncated) Rule of Reason?

This is a test employed by the court in very limited circumstances. It is feasible that a naked restraint may be legal if there is a pro-competitive justification. Under the quick-look test, a court will allow a defendant to introduce evidence that conduct that would otherwise be per se illegal has a pro-competitive aspect. If a pro-competitive justification is plausible, the court will employ a full rule-of-reason analysis.

Related Topics

• Antitrust Law (Intro)
• What is Antitrust Law?
• What are the Major Antitrust Laws?
• What government agency enforces antitrust law?
• What Sanctions are available under antitrust law?
• What is the Sherman Act of 1890 (Sherman Act)?
• What is a Contract, Combination, of Conspiracy in restraint of trade?
• What is Per Se Illegality and the Rule of Reason?
• What is a Monopoly?
• Herfindahl Hirschman Index (HHI) Definition
• What businesses are exempt from the Sherman Act?
• Horizontal Restraint Sherman Act?
• Sharing Information?
• Refusal to Deal?
• Territorial Agreement?
• Price Fixing?
• Resale restraint?
• Exclusive dealing?
• Tying products?
• Territorial agreements?
• What is Monopolization under the Sherman Act?
• What is the Clayton Act of 1914 (Clayton Act)?
• What is price discrimination under the Clayton Act?
• What are special arrangements prohibited under the Clayton Act?
• When are tying contracts an illegal restraint under the Clayton Act?
• When are reciprocal dealing contracts an illegal restraint under the Clayton Act?
• How does the Clayton Act regulate mergers and acquisition?
• FTC Act Antitrust Law