Rule of Reason: The best formula for adjudicating Anti-Competitive agreements?

The Indian system of adjudication has always been inclined towards the use of the per se rule for determining the anti-competitive agreements. But now in the recent judgements pronounced by the Competition Commission of India, we can see an increasing use of rule of reason for determining the anti-competitive nature of any transaction.

Lets now first understand the concept of rule of reason before we can evaluate its application in the current system of adjudication.

The rule of reason is defined as a legal approach by competition authorities or the courts where an attempt is made to evaluate the anti-competitive features of a restrictive business practice against its anti-competitive effects in order to decide whether or not the practice should be prohibited.[1] The “rule of the reason” is used by the courts to evaluate the antitrust claims, wherein the plaintiff pleads and proves the defendants are practicing anti-competitive practices.[2] This rule is considered to be in contrast to that of the “per se rule” which was once followed by the Courts, wherein the plaintiff need not prove anything and the anti-competitive effects are largely inferred from the conduct itself.[3] Over the time, starting from its application in the United States, there has been two approaches that has been adopted when proceeding the conduct or practices of a firm or firms. The first rule is the per se rule and the second one is the rule of reason. The rule of reason is considered to be most applicable as a law, as it can adopt itself to the changing economic conditions. The importance of investigation and examination of circumstances under this approach makes the rule fair and in adherence to natural justice. The author will be analysing the importance of rule of reason as an approach that should be adopted by the Court while deciding any matter relating to anti-competitive practices.


Development of Rule of Reason as a concept

The purpose of suppression of competition is generally to build up a position of the market in order to achieve monopoly in price fixing and product share in the market. The courts have over the period of time established two basic approaches that can be adopted when proceeding against the conduct or practices of a firm. The first rule includes those practices which may be directly prohibited under the per se rule and the second rule is that a particular conduct would be declared anti-competitive only if it fails to satisfy certain criteria under “rule of reason”.[4] The rule of reason is a broad concept which has evolved to meet the ever changing needs of the economy. Under this approach, a trade practice falls within the mischief of law only after a full investigation of its economic consequences reveals that the practice is anti-competitive or will have anti-competitive impact on the market. Under this rule “the fact finder weighs all of the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition”.[5] While applying this rule of reason, the court or the monopolies commission is required to determine in each particular case, the economic effects of the restrictive business practices before it.[6] Such enquiries often require masses of economic data and involve many imponderables. However, they impart flexibility by ensuring that only the more important or significant restraints fall within the otherwise all-embracing terms of the law.[7]

Evolution of Rule of Reason in the United States

The rule of reason under the Antitrust law was born out of the thirty year old American Supreme Court debate concerning the legality of the multi-fir restraints on competition. The rule of reason was for the very first time used by the US Supreme Court in the case of Standard Oil Co. v. United States[8] in the year 1911. The then Supreme Court Chief Justice Edward Doughlass White, while penning down the judgement held that the only “reason” can be used to determine the antitrust cases and no other approach should be used.[9] As a result of this judgement, rule of reason came into existence and has been used by the court since. The Supreme Court in 1927, cleared any doubts on the use of rule of reason as the most suitable approach and held in the case of United States v. Trenton Potteries & Co.[10] that although restraints imposed by the Act are subjected to the rule of reason, specific types of restraints such as “agreements to fix & maintain prizes” are automatically deemed unreasonable.[11]

The anti-trust statutes prevalent in the US does not include or provide about the formation of specific rules for determining the illegality. The Sherman Act[12], is silent on this matter and the Clayton Act[13], only proscribes price discrimination, tying and exclusive dealing, and mergers were the effect may be anti-competitive in nature or which can less the competition.[14] Thus, lack of proper guidelines and rules has made it necessary for the courts to interpret the laws, apply reason to evaluate the impact of the challenged restraint on the competition, which suggests that the per se treatment is not appropriate.[15] Also, the Act does not define the term, “competition” or provide any such test for evaluating the same.[16] Thus, this ambiguity and lack of proper guidelines, makes the court’s role unusually important in the development of the anti-trust rules. They are charged both with creating the substance of the anti-trust and with fashioning appropriate rules of pleading and procedure, including assignment of proof burdens. Therefore, the importance of rule of reason is very much clear in the US Jurisprudence.


The tests under Rule of Reason for analysing the alleged transactions:

It is pertinent to note that as rule of reason has evolved through the various case laws, it is not based on any substantive law and is completely analytical in nature which involves a system for directing investigation and decision. The US Courts have evolved a number of tests for determining the antitrust cases, out of which three tests have been repeatedly by the Courts now for over a century.

The first test, as part of the rule of reason which has been proposed by Judge Taft in US v. Addyston Pipe & Steel Co.[17], wherein he drew from the common law the concept of the “ancillary restraint”. “Naked restraints” in which the sole object is the elimination of the competition are under this test per se illegal. In this case, rule of reason was used by the court to determine the legality of the ancillary restraints. It was opined by the court that if the ancillary restraints is a part of any legal transaction, then such restraints would be considered legal. Justice Taft, had suggested that ancillary restraints are those which are subordinate and collateral in nature and would be declared illegal if those ancillary restraints are a part of the general plan of establishing monopoly in the market.[18] This was further upheld in the case of the Professional Engineers v. United States[19] wherein the Court emphasised on the fact that Rule’s only function is to determine whether the practice have a negative impact on the competition in the prevalent market scenario.[20] Thus, it can inferred that according to this test, any ancillary action cannot survive if it is anticompetitive in nature.

The second test under this rule was laid down by the US Supreme Court in the case of Standard Oil v. United States[21] where Justice White emphasised that only “undue restraints” were recognised by the Sherman Act. This was further explained in the case of United States v. Amercian Tobacco Co.[22], where he had applied the rule of reason to interpret the provisions of the Statute. According to Justice White widened the scope of the phrase “restraint of trade” to include those transactions which are prejudicial to the welfare of the society by unduly restricting the trade through its “inherent nature”, “inherent effect” or market power or because of the “evident purpose” or the specific intent to restrain the trade and establish monopoly.[23]

The third test laid down by the US Court in the case of Professional Engineer’s Case[24] where the court adopted a narrower view to determine the anti-competitive nature of the transaction. The court opined that the rule of reason analysis would require to balance the restraint’s anticompetitive effects against its procompetitive aspects. In other words, the test determines looks into the economic efficiency of the transaction, consequent to which whether it would make the market more competitive or restrict the competition.[25]

Thus, under each of the tests for the rule of reason “the inquiry is confined to a consideration of the impact on competitive conditions. In this respect the rule of reason has remained faithful to its origins.”[26] “The purpose of this rule, is to form a judgement about the competitive significance of the restraint. As pointed out, the rule of reason is not so much a rule of substantive law, as one that governs the finding of facts in a situation where the anticompetitive effect of a practice does not appear on the face of it, and therefore must be looked for in all surrounding facts. It is never used to justify anti competitive behaviour, but to determine whether a practice restricts competition.[27]

Use of Rule of Reason as an approach in India

India through the years have devised many tests to determine the adversity of the effect of the anti-competitive transactions entered upon by the companies and the liability that would be levied on the alleged party. The phrase “would be presumed” indicates the applicability of the per rule that of the conduct in question were to fall within any of the acts stipulated in the provision of the Act, it would be automatically lead to a presumption of anti-competitive behaviour.[28]

The Supreme Court of India adopted the rule of reason approach in the case of Tata Engineering and Locomotive Co. Ltd v. Registrar of Restrictive Trade Agreement[29]. The Court in this case interpreted the rule of reason. The court laid down the three questions that court should determine to inquire into the anticompetitive nature of the transaction. The first tests included the “what facts are peculiar to the business to which the restraint is imposed”. The second question is that “what was the condition before and after the restraint is imposed” and the last question that court needs to look into is that, “what is the nature of the restraint and what is its actual and probable effect.” The Court also opined that the while using this rule, the court should also balance the procompetitive effects as against the anticompetitive effects of the transactions. The Apex further affirmed the rule in the case of Mahindra v. Mahindra Limited v. Union of India[30] and also affirmed with the judgement passed by Justice Brandeis in the case of Chicago Board of Trade v. United States[31] wherein it was held that “true legality is whether 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. To determine that question the court must ordinarily consider the facts peculiar to the business to which the restraint is applied; its condition before and after the restraint was imposed; the nature of the restraint and its effects, actual or probable. The history of the restraint, the evil believed to exist, the reason for adopting the particular remedy, the purpose or end sought to be attained, are relevant facts.” The court has opined that it’s only on consideration of the abovementioned factors, that it can be decided whether a particular act, contract or agreement, imposing the restraint is unduly restrictive of competition so as to constitute “restraint of trade”.[32]

In the case of vertical agreements, where agreements are between enterprises or people situated at different stages of production, then, such agreements are governed as per S. 3(4) of the Act which asks for the application of rule of reason. They can be declared anti-competitive if facts conclusively prove, that the transactions entered upon by the enterprises are anticompetitive in nature and can cause AAEC.[33] While analysing the AAEC, the adjudicating authority must take into account factors such as the “creation of barriers to market entry”, the “squeezing out of existing competitors”, the “foreclosing of competition” and the “provision of benefits to end consumers, among other”.[34] Therefore the adjudicatory body would undertake rule of reason analysis to determine the anti-competitive nature of the transaction.

The recent cases that are being handled by the Competition Commission of India under the Act, also showcase that the authorities are now more inclined towards the usage of rule of reason, especially the third test where the adjudicating authority weighs the procompetitive and anticompetitive impacts on the market. Cases under Section 3(4) of the Act result in a factual examination by the CCI to establish anti- competitiveness. In Mohit Manglani vs. Flipkart India Private Limited[35], the CCI did examine the factors under Section 19(3) of the Act to determine “whether the impugned arrangement was anticompetitive.” Concluding that the arrangement at hand did not have anticompetitive effects and, in fact, “promoted competition and consumer welfare, the CCI held that Section 3(4) was not attracted.”

In Belaire Owner’s Association vs. DLF Limited & Ors[36], the CCI successfully used the rule of reason analysis while dealing the question of abuse of dominant position. The Commission observed that “a relevant market is delineated on the basis of a distinct product or service market and a distinct geographic market.” Thus the Commission was of the view that the relevant market in the instant case is the market for services of developer / builder in respect of high-end residential accommodation in Gurgaon.[37]

The CCI successfully decided another case on abuse of dominant position in UPSE v. National Stock Exchange Limited[38], wherein the CCI decided in details the concept of “dominant position”, “relevant market”, “predatory pricing” and “abuse of dominant position” in one market to enter another market in the context of the stock market services using the rule of reason. While examining all these factors, in the instant case, CCI examined them u/S.19 of the Act using the rule of reason. The per se rule was not used at all.

Conclusion

The use of rule of reason has evolved through the years and is now used by various courts of different jurisdictions. In India, the rule of reason is based on facts and circumstances and the impact of the anti-competitive practice. The application of the rule of reason has been evolving from the era of the MRTP Act, and has been considered by the Supreme Court in various cases. The concept of rule of reason now stands to be implemented in the Competition Act itself, which has made the implementation of the act, much easier. The use of this approach, not only saves the time of the CCI but also, prevails natural justice, as the adjudicating authority looks into all the aspects on which the impact can be made due to such transaction. This approach prevents any kind of arbitrary use of power by any authority while determining the anticompetitive cases.

[1] “Glossary of Industrial Organisation Economics and Competition Law, compiled by R. S. Khemani and D. M. Shapiro,” Directorate for Financial, Fiscal and Enterprise Affairs, OECD, 1993.


[2] phillip e. Areeda & Herbert Hovenkamp, “Antitrust Law: An Analysis Of Antitrust Principles And Their Application” 1501 (4th ed. 2017).


[3] See, Newman v. Universal Pictures, 813 F.2d 1519 (9th Cir. 1987) (“explaining that the per se rule relieves plaintiff of the burden of demonstrating an anticompetitive effect, which is assumed”)


[4] See: E. Gellhorn, “Antitrust Law and Economics in a Nutshell” ch.5 (1981); Joliet, “The Rule of Reason in Antitrust Law : American , German and Common Market Laws in Perspective” (1967)


[5] Continental T.V. Inc. vs. GTE Sylvania Inc., 433 U.S. 49 (1977)


[6] Yamey, "Antitrust in the United Kingdom: Some Introductory Remarks", in “Comparative Aspects of Antitrust Law in the United States. The United Kingdom and the European Economic Community”, 13, 15 (1963).


[7] Jones, "American Antitrust and EEC Competition Law in Comparative Perspective," 90 L.Q. Rev. 191 (1974).


[8] 221 US 502 (1911).


[9] Id. at 516.


[10] 0273 U.S. 392 (1927).


[11] Id. at 396-398, (“The aim and result of every price-fixing agreement, if effective, is the elimination of one form of competition. . . . Agreements which create such potential power may well be held to be in themselves unreasonable or unlawful restraints, without the necessity of minute inquiry whether a particular price is reasonable or unreasonable as fixed and without placing on the government in enforcing the Sherman Law the burden of ascertaining from day to day whether it has become unreasonable through the mere variation of economic conditions.”).


[12] Sherman Act, ch. 647, 26 Stat. 209 (1890).


[13] Clayton Act, ch. 323, 38 Stat. 730 (1914) .


[14] Id. § 13(a). Id. § 13 (“price discrimination”); id. § 14 (“tying and exclusive dealing”); id. § 18 (“mergers”); see also: Hovenkamp, Herbert J., "The Rule of Reason" (2018). Faculty Scholarship. 1778.


[15] see Richard S. Markovits, “economics and the interpretation and application of u.s. And e.u. Antitrust law” 87–88 (2014) (“noting Clayton Act’s emphasis on provable effects”).


[16] Supra n. 10.


[17] 85 Fed 271 (6th Cir. 1898).


[18] Yash Vyas, “The Monopolies And Restrictive Trade Practices Act And The Rule Of Reason: A Comment On The Supreme Court Approach”, Journal of the Indian Law Institute, Vol. 34, No. 3 (July-September 1992), pp. 365- 384.


[19] 435 U.S. 679 (1978).


[20] Id. at 689.


[21] 221 U.S. 502 (1911).


[22] 221 U.S. 106, 179 (1911).


[23] Bork, "The Rule of Reason and the Per Se Concept: Price Fixing and Market Division," 74 Yale L.J. 775 (1965).


[24] Supra n. 10.


[25] Broadcast Music Inc. vs. Columbia Broadcasting System Inc., 441 U.S. 1 (1979) (ASCAP).


[26] Supra n. 10 at 689.


[27] Supra n. 14; See also: Steindorff, "Article 85 and the Rule of Reason" 21 C.M.L. Rev.


[28] Chaitra Yadwad, “Antitrust Cases- Rule of Reason and Per Se Illegal”, International Journal of Legal Insight, available at http://www.ijli.in/assets/docs/ChaitraYadwad.pdf, at 204.


[29] AIR 1977 SC 973.


[30] AIR 1979 SC 798.


[31] 246 US 231, 238 (1918).


[32] Supra n.32


[33] Aman Srivastava, Anti Competitive Agreements Under Competition Act 2002, 2(5), LawMantra, available at http://journal.lawmantra.co.in/wp-content/uploads/2015/05/10.pdf, at 10.


[34] Competition Act, 2002, §19, cl.3


[35] Case No. 80/2014, Competition Commission of India. (23.04.2015).


[36] Case No. 19/2010, Competition Commission of India. (12.8.2011).


[37] Dr. Souvik Chatterji, “Indian Competition (Amendment) Act, 2007 Has Not Made Difference Between Per Se Rule And Rule Of Reason”, Competition Law Cirque, NLU Jodhpur, Vol.1 (1), at 60.


[38] Case No. 67/2012, Competition Commission of India. (19.02.2013).


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Co-Founder,

AmicusX.


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