Rule of Reason

Per Se Rule

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rule of reason
Sherman Act 1890
It was in the year 1890 that the most famous Sherman Act 1890 came in existence. The
effects of this law were that there was a ban on business arrangements that may lead to
restraint in trade, and followed by that it also prohibited the attempts to acquire
monopoly.
This act was passed due to the ill practices of railway companies, which were exploiting
their monopoly position which as a result had negative effects on the farmers, shippers and
other traders. And many industries were conjointly having 'trusts' and were adopting
measures to drive out the competitors out of the market.
Therefore, Section 1 of the Sherman Act institutes that, any contract in the form of
combinations or any trust or any otherwise, or any conspiracy, which may lead to restraint
in trade ...... is to be declared illegal.

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 • In the case of the United States v. Trans-Missouri Freight
Association the court held that if the act clearly specifies that all
contracts... that are in restraint of trade will be illegal, then it does
not preclude only that type of contract will there which is given, but
carries ambit towards all contracts, no limitation or any exclusion
can be permitted unless defined in the act.

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rule of reason
 • the court channeled new dimension for section 1 in its decision in the case
Standard Oil Co. v. United States. This is one of the greatest celebrated case in
view of antitrust case under Sherman Act. To be sure the name "anti- trust" had
been authored in light of trust, for example, Standard Oil. Setting the decided
antitrust masters of the time against the money related premiums of John D.
Rockefeller and other industrialists, the case denoted an end of antitrust's
immaturity in more courses than one.
• At the end of the case, a standout amongst the broadest trust to rise up out of
the late nineteenth century turned into a loss of the twentieth, dismantled into
its more than thirty constituent parts.

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rule of reason
 • Again, "rule of reason" was discussed and explained in the case of
Chicago Board of Trade v. United States. It lays down that, the
legitimateness of an agreement can't be dogged by a simple test,
as to whether it limits rivalry/competition. Each agreement and
regulation with respect to trade, restrains.

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 India

• he Supreme Court of India, opined the cases Mahindra and Mahindra v.

Union of Indiaand TELCO v. Registrar of RT13 that the rule of reason is
supposed to be functional in these case because the term "Restricted
trade Practices" is very vast and is of non-inclusive nature. Further in
case of Sodhi Transport Co. v. State of U.P it was held that 'Shall be
presumed' is taken as an assumption and not as an evidence itself, yet
just characteristic on whom onus of proof lies. Vertical agreements
identifying with exercises alluded to under Section 3(4) of the
Competition Act then again must be dissected as per the 'rule of reason'
investigation under the Competition Act.
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rule of reason
• URRENT STATUS OF BOTH PER SE AND RULE OF REASON IN
INDIA
• Section 3 of the Competition Act, 2002, has been instituted
with a specific end goal - to get the diverse sort of
Agreements having anticompetitive nature and additionally
the anti-trust nature. There are the two noteworthy
categories of the agreement under Competition Act:
• Horizontal Agreements

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rule of reason
Inquiry into certain agreements and dominant position of
enterprise
19.

• (3) The Commission shall, while determining whether an agreement has an

appreciable adverse effect on competition under section 3, have due regard to all
or any of the following factors, namely:—
• (a) creation of barriers to new entrants in the market;
• (b) driving existing competitors out of the market;
• (c) foreclosure of competition by hindering entry into the market;
• (d) accrual of benefits to consumers;
• (e) improvements in production or distribution of goods or provision of services;
or
• (f) promotion of technical, scientific and economic development by means of
production or distribution of goods or provision of services.

03-01-2022 NLIU Competition law classes draft prof kondaiah Jonnalagadda rule of reason 8
 VERTICAL UNDERSTANDINGS

• Vertical agreements are agreements between endeavours/enterprises that are at

various stages or levels of the manufacturing chain, and accordingly, in various
markets. A case of this would be an agreement between a manufacturer and
wholesaler. Vertical limitations on competition include18:
• Tie-in agreement
• Agreement for Exclusive supply
• Agreement for Exclusive circulation/distribution
• Refusing to bargain
• Maintaining of resale price

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rule of reason
 MANU/CO/0028/2010
Neeraj Malhotra
Vs.
Deustche Post Bank Home Finance Limited and Ors.

• Case Note:
• Anti Competitive Agreements - Abuse of dominant position within the Public domain -
Home loans - Banking and Non-Banking financial Companies (NBFCs)- Pre-payment of
loan - Levy of 1-4 per cent prepayment penalty – Inquiry Report - Levying of pre-
payment penalty makes exit expensive - Practice anti consumer and anti-competitive -
Banks favored levy as necessary to prevent volatility of the market - Pre-payment
charge contended to be not penal in nature and within fair practice guidelines of RBI -
Majority members upheld the validity of prepayment charges - No violation of Section 3
or 4 of the Actestablished - Proceedings closed
• Dissenting Opinion
• Home loans - Practice of levying pre-payment penalty Anti-Competitive -Cartel like
behaviour - In contravention of the Competition Act – Practice needs to be stopped

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 • In US home loan market is regulated by both Federal Legislation as well as by legislation of respective States. In
Indian context banks and HFCs are regulated by the law of Parliament. In US the law combines both Competition
regulation and consumer protection regulations whereas India has an overreaching Consumer Protection Act
which, after amendment in 2002, included both Consumer laws and unfair and restrictive trade practices in it's
ambit.
• The investigating officer in his report after having tested the practice of charging prepayment penalty on the anvil
of 'rule of reason' and having found that the practice has reasonable economic justification has given a finding
that practice is not violative of Section 3(1) of the Act.
• He has also rejected the allegation of market dominance and abuse thereof by the banks and financial institutions
and found that banks and financial institutions and IBA have not violated Sections 4(1), (2)(a)(b) of the Act.
Therefore, investigating officers having given a finding that practice of charging prepayment penalty is
economically reasonable and the persons investigated are not in dominant positions in the market to determine
prices and control services, ought not have come to a contrary and inconsistent conclusions on the basis of same
evidence that banks and financial institutions have violated the Section 3(3) of Competition Act, 2002.

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 • Section 3(1) read with Section 3(2) is in pari materia with Section 1 of
Sherman Act, 1890 of USA, which is based on 'rule of reasonableness'
initiated by the Courts in USA and followed by Indian Courts under MRTPC
Act.

• Deputy Director General in his report after having tested the practice of
charging prepayment penalty on the anvil of 'rule of reason' and having found
that the practice has reasonable economic justification has given a finding
that the practice is not violative of Section 3(1) of the Competition Act.

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 • Therefore, a practice which is not anti-competitive by application of 'rule of
reason' cannot by any stretch of imagination be inherently anti-competitive
calling for application of 'per se rule' as is concluded by DG in his report.

• Section 3(1) read with Section 3(2) is in pari materia with Section 1 of
Sherman Act 1890 of United States of America, which is based on 'rule of
reasonableness' enunciated by the courts in United States and followed by
Indian Courts under MRTPC, which now stands repealed and replaced by
Competition Act

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 • . Further, it is settled law that the language and the form of
agreement cannot be the criterion in any anti-competition
investigation. A practice which is not anti-competitive by
application of 'rule of reason' cannot by any stretch of imagination
be inherently anti-competitive calling for application of 'per se rule'
as is concluded in DG report. For the purpose of invoking Section
3(3) of the Act the practice of charging prepayment penalty should
ex-facie result in or shall have the probability of resulting in any or
any economic consequences enumerated under Section 3(3)(a) to
(d)
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rule of reason
 • The per se rule, as opposed to the rule of reason, has been applied
by the courts in respect of particularly harmful agreements such as
agreements relating to price fixing, allocation of territories, bid
rigging, group boycotts, concerted refusal to deal, and resale price
maintenance. It should be noted, however, that in recent years the
approach of the US courts has undergone a transition from a
dichotomous approach based on two distinct rules, the per se rule
and the rule of reason, to a more nuanced and case specific inquiry
tailored to the suspect conduct in each particular case

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rule of reason
 • The practice which is not anti competitive by application of
rule of reason cannot by any stretch of imagination be
inherently anti competitive calling for application of 'per se
rule' as concluded by the investigating officer

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