In year 1890, Sherman act 1890 was passed after circulated growth of trust in
1880 which prohibited unlawful restriction in trade and attempts to acquire
market. This act came into existence because of the unlawful practices which
were exploiting the market and monopoly position which had an adverse effect on
Its main purpose was to protect public from the failure of the market. Section 1
of the Sherman act states 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.
Section 2 of the Sherman act states that:
Every person who shall monopolize, or
attempt to monopolize, or combine or conspire with any other person or persons,
to monopolize any part of the trade or commerce among the several States, or
with foreign nations, shall be deemed guilty of a felony. Article 38 and 38 of
the constitution of India, MRTP act of 1969 and Hazari committee report of 1955
led to the formation of competition law in India.
The competition act, 2002 was enacted by the parliament of India and this act
enforced competition policy and punish anti-competitive business practices by
firms. The competition act 2002 talks about the abuse of dominance position,
agreements and mergers etc. there are 2 main rules in the competition law i.e.
RULE OF REASON AND PER SE RULE which decides whether the company is
anticompetitive in nature or not. This research article deals with two rules
i.e. rule of reason and per se rule and we will also talk about the competition
laws in India and U.S. - comparative study.
Rule of reason and per se rule have risen in United States.
The rule of reason
is developed from the section 1 of the Sherman act
and it is a legal doctrine. The rule of reason requires an in-depth inquiry and
reading one by one the provisions of the act to find out whether the issue which
came out is violative of the provision or not. The rule of reason is fair and
broader in scope. It involves a lot of inquiry. Plaintiff is the main person on
whom the burden of proof lies and he has to prove that the issue in agreement
has an anti-competitive effect on market. The plaintiff has more responsibility.
Per se rule
is a rule which is used to determine the legality of the
agreements whether they are oral or written between competitors. It is derived
from various case laws in the American courts. If there is a clear violation of
a provision then per se rule will be applicable. This rule doesnít require a lot
of inquiry. Limitation found out under per se rule are those that are always
anticompetitive and damaging to the market that they guarantee disapproval
without further inquiry into their effects on the market.
Defendants are not liable to justify their behavior. Plaintiff is required to
prove the anticompetitive conduct but not required to show the conductís
unreasonableness in the relevant product and market. Plaintiff has a less
responsibility to analyze the market because the law itself is not clear to what
extent a plaintiff should define a relevant market.
Evolution Of Rule Of Reason In U.S.
In the year 1890, the United States passed the Sherman act 1890 to overcome the
problem of unfairness. This act was passed because the several rail road
companies of America were exploiting traders and farmerís etc. and this
exploitation was being done for their own sake and benefits through various
restrictive trade practices. Companies were exploiting by making others enter
into the anticompetitive agreements.
At that time trust was the main factor which was making competition in their
favor legally through the practices which were unfair. In the year 1888, the
parties realized and agreed that there was a need to hold back the market.
Case laws are the main source for the derivation of the rule of reason. Section
1 of the Sherman act prohibits agreements in restraint of trade-like price
fixing and bid rigging etc. between the competitors and customers. Every person
who shall make any contract or engage in any combination or conspiracy will
declared to be illegal, shall be deemed guilty and, on conviction thereof, shall
be punished by fine not exceeding one million dollars in case of corporation,
or, if any other person, one hundred thousand dollars or by imprisonment not
exceeding three years, or by both. The supreme court of U.S. announced that when
a body of an act announces any contract illegal then it is not limited to only
that kind of contract i.e. unreasonableness ,it is applicable to other related
In Chicago board of trade vs. United States case the Supreme Court applied the
Rule of reason and explained that the legality of an agreement cannot be
determined by a simple test in fact the legality should be tested whether a
restraint imposed promotes competition or destroys the competition. To get an
answer of this the court must consider facts of the case on which restraint is
applied and then he must analyze the nature, scope and history of the rule. The
rule made pricing very clear. Dominant sellersí market was reduced and prices
were set by open bidding.
The rule of reason in very comprehensive in nature and testing of legality is
itself so elaborative requires an in-depth inquiry.
Evolution Of Per Se Rule In United States And India
In US law the word illegal per se means the act is illegal. The per se rule is
applied in the cases of price fixing, group boycott and allocation of
territories which were considered as illegal. Court never used to consider such
cases as it require a lot of inquiry.
In Jefferson parish hospital district vs. Hyde case the court states that in the
cases where the anti-competitiveness nature of the act is so high to determine
the unfairness then court says that inquiry is not needed on that issue and
court without inquiry gives the direction accordingly without wasting more
It is stated that in per se rule if an act falls under certain criteria of per
se rule then further inquiry is not needed in that case and the efforts to prove
the unreasonableness should not be considered. It says that when in case the
level of unreasonableness is so high that it doesnít require further inquiry
then the per se rule is applied in that case. It is not time consuming and also
saves cost as the inquiry process seems useless.
In the case of FTC vs. Superior Court Trial Lawyers Association
The Supreme Court held that the per se rule is similar to the per se
restrictions, example- prohibition of stunt on the road but if the flying stunt
driver is trained and want to perform and flying stunt on any road is banned,
the restriction remains the same on him as well.
It was stated that when the violation gets too costly and the amount is
insufficient for that investigation, then the judicial system would lower down
the implementation cost.
Section 3(3) of the competition act, 2002 includes non-competing agreements.
Agreements which are considered as anti-competitive in nature are covered under
Section 3(3). Testing of the unreasonableness is essential in non-competing
agreements without ignorance. Agreements should not be per se declared as
anti-competitive as there should be a test for unreasonableness. Test for
anti-competitiveness is a per se resolution according to the raghavan committee
Current Status Of Per Se Rule
Nowadays per se rule is losing its effect due to the various decisions given by
the supreme court of the America and courts are mainly considering rule of
reason. Due to the change in time per se rule is restricted to a limited
understanding ex- price fixing. Per se rule is less wide in scope. Antitrust
policy is tilting towards the rule of reason approach from the per se approach.
Case: U.S. v/s Microsoft
This case shows the changing approach of the court. The court of appeal has
focused upon the change in shift from the per se rule to the rule of reason
which made this case an important case in legal system. Number of issues was
involved in this case which was against the antitrust issues and
anti-competitiveness. There was a violation of Sherman act by Microsoft.
Present Status Of Both The Rules In India
There are two types of agreements in the competition act:
- Horizontal agreements [Section 3(3)]:
It is an agreement for cooperation between two or more competing business
operating at the same level in the market. It develops a kind of healthy
relationship among the competitors. Under section 3(3) the following
agreements are presumed to be anti-competitive
- Directly or indirectly determines purchase or sale prices
- limits or controls production, supply, markets, technical development,
investment or provision of services;
- Shares the market or source of production or provision of services by
way of allocation of geographical area of market, or type of goods or
services, or number of customers in the market or any other similar way;
- Directly or indirectly results in bid rigging or collusive bidding;
- Vertical agreements [Section 3(4)]:
These are agreements, between enterprises that are at different stages or
levels of the production, and therefore, in different markets.
Vertical restraints on competition include:
- Tie-in arrangements
- Exclusive supply agreements
- Exclusive distribution agreements
- Refusal to deal
In the case of Neeraj Malhotra vs. Deustche
Post Bank Home
Finance Limited and ors. It was clearly stated that per se rule which is stated
in section 3 (3) is losing its effect and importance. He came to the conclusion
that the presumption under section 3(3) is rebuttable. He criticized the per se
rule. Reasonableness checking is not required as the act itself is not valid.
So, we can say that like United States, Indians have also restricted the use of
per se rule and is used only in the cases where the issue is price fixing and no
more inquiry is required.
On the other hand rule of reason is widely used by the courts as it involves a
process of investigation to reach to an outcome. Per se rule is limited to some
areas but rule of reason is comprehensive in nature. Replacement of per se rule
is taking place by rule of reason.
I would conclude by saying that in per se rule
if the agreement is
considered anti-competitive in nature then there is no need to find out the
reasonableness as there is no point of wasting time and money on the
investigation because mere making of such agreement is enough to make it
anticompetitive ex= price fixing. Its scope is very limited.
On the contrary rule of reason
is very detailed and involves a lot of
in-depth inquiry into a case. It is evident that if agreements are
non-competitive in nature then court will not consider them and take no action
against such agreements and will consider them valid.
Both the rules are being taken from the American competition law history. Rule
of reason is getting importance whereas per se rule is losing its importance
because of the change in time. Things have changed in judicial system and per se
rule is restricted to some areas of agreements. Rule of reason is a common
concept which is used mostly by the courts. Rule of reason is more focused upon
to determine the reasonableness in agreement in issue.
Therefore when both these rules come into comparison, we cannot disrepair any of
these rules because both of them have its own significance. Rule of reason focus
on finding reasonableness by detailed investigation before declaring an
agreement to be anti-competitive and per se rule declares the agreement to be
anticompetitive if it comes under specified criteria. It is cost effective and
time saving as rule of reason involves a lengthy process.
Both the agreements are important and are required to restraint the
anticompetitive policies and agreements. Nowadays the world has become
globalized and negligence is nowhere a part of a judicial system whether itís
India or United States. Market scenario is changing so to maintain a balance and
to avoid complications in market both the countries are depending upon the
rule of reason
and limiting the use of per se rule
.Award Winning Article Is Written By: Ms.Prashasti Bagri
Authentication No: MA33996363706-12-0521