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Development of the Rule of Reason

Basic History: the reasonability standard was introduced by Standard Oil, while the judicial test (rule of reason) was established by CBT

Formulation of Rule of Reason after CBT: does the ROT "merely regulate" and "perhaps thereby promote" competition, or does it "suppress or even destroy" competition?

  • Court must consider the nature/scope/effect of the restraint
  • Other relevant factors include facts peculiar to the business, condition before and after the restraint, history of the restraint, and reason for adopting the restraint

Caselaw:​

Standard Oil v. U.S. (1911) (reasonability is the standard for all Section 1 violations)​

  • Holding: only unreasonable restraints of trade are illegal under the Sherman Act (rule of reason)

Chicago Bd. of Trade v. U.S. (1918) (classic rule of reason case)​

  • Holding: Board of Trade's rule was reasonable under the rule of reason
    • Lower court erred:
      • Didn't consider the purpose of the call rule
      • Excluded evidence on the effect of the rule
    • Outlined judicial test: does the ROT "merely regulate" and "perhaps thereby promote" competition, or does it "suppress or even destroy" competition?
      • Court must consider the nature/scope/effect of the restraint
      • Other relevant factors include facts peculiar to the business, condition before and after the restraint, history of the restraint, and reason for adopting the restraint
    • Applied test:
      • Nature of restraint: time restriction made it in interest of sellers to attend the call
      • Scope of restraint: applied toa small part of daily grain shipped and daily sales
      • Effect of restraint: no appreciable effect on prices or volume
    • Worried that warehouses would exercise market power, CBT setting prices improves competition
  • Facts: restriction on the after-hours price in the "to arrive market" for grain
    • To arrive market: parties transact about graint that arrives the next morning (between the spot and future markets)
    • Agreement: at the end of the day's spot market trading, arrive price is fixed for each transaction (further negotiations are prohibited)
  • Note: didn't overrule Trans-MO, but gave defendants a path forward