The Rule of Reason

 

In 1911 the United States Supreme Court agreed on a "rule of reason" as the principle to apply in antitrust cases.  The key case was Standard Oil Company of New Jersey et. al. v. United States.

Standard Oil was John D. Rockefeller's "oil trust."  The government charged Standard Oil with violating the Sherman Act through unreasonable restraints of trade.  The government, and many popular writers, claimed that Standard Oil had used its power to prevent other oil firms from competing with it.  Standard Oil, in this view, had become a giant firm through unfair competition.

The Supreme Court in 1911 agreed.

"Unreasonable restraints of trade or monopoly . . . meant (1) unfair, oppressive methods designed to eliminate, damage, or destroy competitors; and (2) business practices, the purpose or necessary effect of which was to enhance or depress prices unduly, or affect trade or distribution or transportation unduly, that is, to the detriment of the public interest."  (Quote from Martin J. Sklar, The Corporate Reconstruction of American Capitalism, 1890-1916.  The Market, the Law, and Politics (New York: Cambridge University Press, 1988), 147.)

The Rule of Reason became the guiding principle of antitrust law after 1911.  On a case-by-case basis, the Courts would determine if a firm became large through fair or unfair means.  If a company became large through succeeding in fair competition with its rivals, the courts would allow it to remain big.  If, as was the situation in 1911 and other famous cases, the courts found that a firm such as Standard Oil had become large unfairly, then the courts ordered them broken up.

  • In 1911, the Court ordered Standard Oil of New Jersey broken into seven different oil firms.
  • In 1911, the Court, applying the rule of reason, found against the American Tobacco Company and ordered it broken up.
  • There were other famous cases after 1911 in which the Court ordered very large firms broken up into smaller firms.
  • However, the antitrust law, under the rule of reason, was not against bigness in business per se, only against bigness that resulted from unfair use of power.