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Rule Of Reason v/s Per Se Rule

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 the traders.

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 doesn't 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 conduct's 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 farmer's 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 contracts also.

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 sellers 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 times.

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 doesn't 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 report.

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:
  1. 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;
  2. 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 it�s 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
Awarded certificate of Excellence
Authentication No: MA33996363706-12-0521

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