INTRODUCTION

There are two basic ways in which antitrust cases can be interpreted, per se and rule of reason.
The per se says that an agreement or a conduct is illegal merely because it is very obvious that it
was made to distort competition and that the same goal could have been achieved by some other
method in a less damaging way. The rule of reason looks at the economic realities of various
conducts. The rule of reason and per se rule, which were two opposing methods of analyzing
conduct, found its origin in Section 1 of the Sherman Act. This premise was based on the
classification of Section 1 practices as either pro-competitive practices or anticompetitive
practices. Thus, pro-competitive conduct should receive the benefit of doubt under the rule of
reason that considers all of its possible competitive justification and beneficial effects.
1 Anti-competitive practices, on the other hand, should be summarily condemned under the per
se rule without giving a defendant the opportunity to prove that a restraint may have a redeeming
beneficial purpose.
2 Traditionally, the rule of reason was construed as a decision for the defendant and the per se
rule, a victory for the plaintiff.

RULE OF REASON IN INDIAN LEGISLATION

Section 3 of the Indian Competition Act, 2002 talks about anti-competitive agreements.
Anticompetitive agreements are classified into two broad categories:

1. Horizontal Agreements: Section 3(3) of Competition Act, 2002 envisages horizontal

agreements as agreements between competitors operating at the same level in the economic
process, i.e., enterprises engaged in broadly the same activity. These are the agreements between
producers or between wholesalers or between retailers, dealing in similar kinds of products.
There are four types of Horizontal Agreements stated under Section 3(3) of the Competition Act:
(a) Agreements regarding Prices: These include all agreements that directly or indirectly fix the
purchase or sale price.
(b) Agreements regarding Quantities: These include agreements aimed at limiting or controlling
production, supply, markets, technical development, investment or provision of services.
(c) Agreements regarding Bids (Collusive Bidding or Bid-Rigging): These include tenders
submitted as a result of any joint activity or agreement.
(d) Agreements regarding Market Sharing: These include agreements for sharing of markets or
sources 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.

2. Vertical Agreements: Section 3(4) of the Competition Act, 2002 deals with Vertical
Agreements. Such agreements are between non-competing undertakings at different levels of
manufacturing and distributing process. These are agreements between manufacturers of
components and manufacturers of products, between producers and wholesalers or between
producers, wholesalers and retailers. There are five types of Vertical Agreements stated under
Section 3(4) of the said Act:
(a) Tie-in Agreement: An agreement between a seller and a buyer under which the seller agrees
to sell a product or service (the tying product) to the buyer only on the condition that the buyer
also purchases a different (or tied) product from the seller is a Tie-in Agreement.
(b) Exclusive Supply Agreement.
(c) Exclusive Distribution Agreement.
(d) Refusal to Deal: A Refusal to Deal may be against another competitor; for example, if one
business refuses to do business with another company, customer or supplier, unless they agree to
cease business with another company, the agreement would be a refusal to deal.
(e) Resale Price Maintenance: Resale Price Maintenance or Vertical Price Fixing is a practice in
which the manufacturers seek to fix the minimum or maximum retail price of their products. The
manufacturer may impose the retail price on the retailer or it may be a joint agreement between
the two parties on the prices to be charged. In considering whether an agreement has the effect of
undue restraint on trade, the courts adopts two separate approaches (1) Per se Illegal, that an
agreement is presumed to be unreasonable and therefore illegal and no argument is needed to
justify its reasonableness and (2) Rule of Reason, that an agreement is not presumed per se
unreasonable but is assessed in its legal and economic perspective to determine whether the
restraint imposed is such that it merely regulates and perhaps, promotes competition or whether
it is such that it may suppress or even destroy the competition. Section 3(3) of the Competition
Act states that Horizontal Agreements are considered Per se illegal whereas Section 3(4) of the
Competition Act states that Rule of Reason is to be applied to Vertical Agreements. Under
modern Antitrust theories, the traditional illegal per se categories create more of a presumption
of unreasonableness. The court carefully narrowed the per se treatment and began issuing
guidelines.

RULE OF REASON AND ADDYSTON CASE

In Addyston Pipe and Steel Co. v. United States, there were six defendants who entered into a
combination and conspiracy among themselves by which they agreed that there should be no
competition between them in any of the States or Territories mentioned in the agreement
(comprising of thirty six in all) in regard to the manufacture and sale of cast-iron pipe. The
defendants were pipe makers who were operating in agreement. When municipalities offered
projects available to the lowest bidder, all companies but the one designated would overbid,
guaranteeing the success of the designated low bidder if no bidder outside the group submitted a
bid.

The government argued that some antitrust violations, such as bid rigging, were egregious
anticompetitive acts and that they were always illegal (the so-called ‘per se’ rule).The defendants
asserted that it was a reasonable restraint of trade and that the Sherman Act could not be meant to
prevent such restraints. The Appeals Court noted that it would be impossible for the Sherman
Act to prohibit every restraint of trade. Therefore, reasonable restraints were permitted only if the
restraint is ancillary to the main purpose of the agreement. If the primary purpose is to restrain
trade, then the agreement is invalid and in this case, the restraint was direct and therefore,
invalid. Therefore, a distinction was established between Naked Restraints (illegal per se) and
Ancillary Restraints (permissible restraints). The following are the Permissible Ancillary
restraints: a) by the seller of property/business not to compete with buyer in a way that reduces
its value; b) by a retiring partner not to compete with the firm; c) by a partnership binding a
partner not to interfere with the business of the firm; d) by the buyer of property not to use it in
competition with business retained by the seller; and e) by an assistant, servant, or agent not to
compete with a former employer. The trial court dismissed the petition and thereafter, an appeal
was made to the Court of Appeals. This case was appealed to the Supreme Court and on appeal,
the defendants argued on three points. First, Commerce Clause of the constitution did not
empower Congress to regulate private agreements. Second, even if Congress possessed the
authority to regulate purely private agreement, banning defendants' cartel would infringe liberty
of contract because the defendants' cartel purportedly set reasonable prices. Third, their cartel did
not directly restrain trade. The court rejected all the arguments and held that the defendants'
cartel in fact directly restrained trade.

United States v. Addyston Pipe & Steel Co

1. Addyston Pipe and Steel Co. v. United States, [175 U.S. 211 (1899)], was a United States
Supreme Court Case in which Court determined that United States Antitrust Laws as
stated in the Sherman Antitrust Act will be governed by a Rule of Reason. This Case was
decided on 4th December, 1899 by Chief Justice Melville Fuller.
2. There are six defendants who entered into a combination and conspiracy among
themselves by which they agreed that there should be no competition between them in
any of the states or territories mentioned in the agreement (comprising some thirty-six in
all) in regard to the manufacture and sale of cast-iron pipe:
3. Addyston Pipe & Steel Company, of Cincinnati, Ohio; - Dennis Long & Company, of
Louisville, Kentucky; - Howard-Harrison Iron Company, of Bessemer, Alabama; -
Anniston Pipe & Foundry Company, of Anniston, Alabama, - South Pittsburg Pipe
Works, of South Pittsburg, Tennessee, - Chattanooga Foundry & Pipe Works, of
Chattanooga, Tennessee.
4. The defendants were pipe makers who were operating in agreement, so that when
municipalities offered projects available to the lowest bidder, all companies but the one
designated would overbid, thus guaranteeing the success of the designated low bidder. -
The Government argued that some antitrust violations, such as bid rigging, were such
egregious anti- competitive acts that they were always illegal (the so- called "per se"
rule). The defendants asserted that this was a reasonable restraint of trade, and that the
Sherman Act could not have meant to prevent such restraints.
 5. The Trial Court has dismissed the petition. - Thereafter, an Appeal was made to the Court
of Appeals : - Finding of the Court : - The United States Court of Appeals for the Sixth
Circuit noted that it would impossible for the Sherman Act to prohibit every restraint of
Trade. Therefore reasonable restraints were permitted only if the restraint was ancillary to
the main purpose of the Agreement. - If the primary purpose is to restrain trade, then the
agreement is invalid, and in this case, the restraint was direct, and therefore invalid.
6. This case was appealed to the Supreme Court as Addyston Pipe and Steel Company v.
United States,1. However, on appeal, the defendants did not attack the reasoning of the
Sixth Circuit. - Instead they argued on the following three points : - Commerce Clause of
the Constitution did not empower Congress to regulate private agreements. - Even if
Congress possessed the authority to regulate purely private agreements, banning
defendants' cartel would infringe liberty of contract because the defendants' cartel
purportedly set reasonable prices - their cartel did not directly restrain trade
7. The Court, in an opinion by Justice Peckham, rejected all three arguments and affirmed
the decision below. - Peckham conceded that the framers of the Constitution likely
anticipated that the Commerce Clause would mainly authorize Congressional interdiction
of state-created barriers to interstate commerce. - At the same time, Peckham observed
that, in some cases, purely private agreements can have the same economic impact, that is
directly restrain commerce among the several states. - Finally, Peckham held that the
defendants' cartel did in fact directly restrain trade.

JUDGEMENT

The Court, in an opinion by Justice Peckham, rejected all three arguments and affirmed the
decision of the Court of Appeals. Peckham conceded that the framers and ratifiers of the
Constitution likely anticipated that the Commerce Clause would authorize mainly Congressional
interdiction of state-created barriers to interstate commerce. At the same time, Peckham observed
that in some cases, purely private agreements can have the same economic impact and directly
restrain commerce among the several states. Moreover, Peckham also held that contracts that
directly restrain trade are not the sort of ordinary contracts and combinations that find shelter in

1
175 U.S. 211 (1899)
 liberty of contract. Finally, Peckham held that the defendants' cartel directly restrained trade.
Peckham quoted extensively from Judge Taft's opinion below, which found, as a matter of fact,
that the defendant's cartel set unreasonable prices. See 85 F. 291-93. In particular, Peckham
quoted Taft's finding that pipe produced by the cartel could have been produced and delivered to
Atlanta for a cost, including a reasonable profit and the cost of transportation, or $17 or $18 per
ton, but the cartel charged instead $24.25 per ton.

CONCLUSION

· Secret cast iron pipe cartel’s goal is to eliminate a price war. Firms represented 65% of output in
industry. Government challenges on restraint of trade. Cartel argues that restraint is reasonable
b/c ruinous competition and prices are reasonable.
· Court rules that agreement is a naked restraint and thus illegal. The rule is that a contract in
restraint of trade is only valid when the covenant in restraint of trade is merely ancillary, and is
necessary to address concerns that gave rise to contracts and protect it.
A naked restraint is unambiguously anticompetitive and it has no purpose other than to restraint
competition, and enhances or justifies prices. Nothing exists to justify the restraint. Agreements
to fix prices = Naked restraint.
Ancillary restraints are where the positive effects outweigh negative effects and where restraint
is valid or incidental to some main purpose. This also cures the problem of a standard b/c it
furnishes a standard. At CL, a covenant not to compete was reasonable if incidental plus
reasonable scope.
No conventional restraint of trade can be enforced unless the covenant embodying it is merely
ancillary to the main purpose of a lawful contract, and necessary to protect the covenantee in the
enjoyment of the legitimate fruits of the contract, or to protect him from the dangers of an unjust
use of those fruits by the other party.
CRITIQUE

There is a basic distinction between cases that focus on the nature of the restraint and those that
focus on the nature of the market. In general, the former involves restraints that are traditionally
considered per se illegal or restraints that, on the basis of long experience, are considered likely
to have adverse consequences. All the other restraints fall in the latter category. A full ‘Rule of
Reason’ into market effects may include either direct measurement of anticompetitive effects in
a particular case of anticompetitive effects in a particular case or indirect inferences based on
market shares in defines markets. One method is not necessarily more truncated than the other.
In general, there is symmetry between the particularities required for the plaintiff’s case and for
the defendant’s case. A case based on inferences can be rebutted by inferences, but a case based
on specific facts will require specific facts in rebuttal. Hence, each case should be observed
differently and according to the facts of each case, the nature of competition, whether it is
harmful or not should be considered.

ADDYSTON PIPE COMPANY CASE2. The Supreme Court, by a unanimous decision based on
the Sherman Antitrust Act, permanently enjoined six producers of cast-iron pipe from continuing
an agreement that eliminated competition among themselves.

2
175 U.S. 211 (1899)