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Does the Rule of Reason Violate the Rule of Law?

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Does the Rule of Reason Violate the Rule of Law? Does the Rule of Reason Violate the Rule of Law? Maurice E. Stucke* In the past few years, the Supreme Court has been more active in deciding antitrust issues. The Court’s choice of legal standards affects future market behavior and the incentives for individuals and organizations to engage in productive activity. Over the past thirty years, the Court has primarily relied upon the rule-of-reason standard — a fact-specific inquiry into whether a restraint of trade is “unreasonable.” But despite its increased activity, the Court never assesses the deficiencies of this standard under rule-of-law principles. That assessment is critical. This Article analyzes the rule-of-reason standard’s significant deficiencies, and how these deficiencies adversely affect antitrust enforcement and competition policy generally. Because perfect compliance with rule-of-law ideals, however, may be unobtainable and undesirable, this Article recommends several improvements to reorient the rule of reason closer to rule-of-law ideals. * Associate Professor, University of Tennessee College of Law. The author thanks the 2008 SEALS New Scholar Workshop participants, Michael A. Carrier, Peter Carstensen, Kenneth Davidson, Franklin M. Fisher, Michal Gal, Joan Macleod Hemingway, Bernard Hollander, William Kovacic, George Kuney, Don Leatherman, Donald Polden, D. Daniel Sokol, Elizabeth Stucke, and Spencer Weber Waller for their helpful comments, and the University of Tennessee College of Law for its summer research grant. 1375 1376 University of California, Davis [Vol. 42:1375 TABLE OF CONTENTS INTRODUCTION ................................................................................. 1377 I. DEVELOPMENT OF THE RULE-OF-REASON STANDARD ............. 1387 A. The Sherman Act ............................................................. 1387 B. The Introduction and Criticism of the Rule of Reason ....... 1389 C. Rise of the Per Se Rule ..................................................... 1399 D. The Rule of Reason Strikes Back ...................................... 1407 E. Quick-Look Rule of Reason .............................................. 1410 II. EVALUATING THE RULE OF REASON UNDER THE RULE OF LAW .................................................................................. 1417 A. Rule-of-Law Principles .................................................... 1417 B. Rule of Law Is a Precondition for Effective Antitrust Enforcement .................................................................... 1418 C. The Rule of Reason’s Infirmities Under Rule-of-Law Principles ........................................................................ 1421 1. Under the Rule of Reason, Market Participants Cannot Foresee with Fair Certainty How the Authority Will Use Its Coercive Power in Given Circumstances and Therefore Cannot Effectively Plan Their Affairs. .................................................... 1422 2. The Rule Of Reason Is Ill Suited to a Legal System in Which the Supreme Court Reviews an Insignificant Proportion of Decided Cases. ............. 1429 3. In Changing the Sherman Act’s Goals, the Court Further Reduces Accuracy, Objectivity, and Predictability Under Its Rule-of-Reason Standard. .. 1434 4. In Making Competition Policy Tradeoffs, the Court Further Reduces Accuracy, Objectivity, and Predictability Under the Rule of Reason. ................. 1439 5. Because the Rule Of Reason Is Not Prospective, Accessible, and Clear, It Does Not Constrain the Executive Branch from Exercising Power Arbitrarily. ................................................................ 1446 6. Because the Rule of Reason Is Not Prospective, Accessible, and Clear, It Does Not Constrain Rent- Seeking nor Prevent the Judiciary from Exercising Its Power Arbitrarily. ................................................ 1456 7. The Rule of Reason Prevents Courts from Enforcing the Antitrust Laws Quickly and Inexpensively. ........................................................... 1460 2009] Does the Rule of Reason Violate the Rule of Law 1377 D. The Rule of Reason’s Infirmities Have Significant Implications for Antitrust Enforcement and Competition Policy .............................................................................. 1466 III. SHORTCOMINGS OF THE RULE OF LAW .................................... 1473 A. The Rule of Law Must Account for the Law’s Development and Growth ..................................................................... 1474 B. The Rule of Law Does Require Judges to Centrally Plan ... 1478 IV. TOWARD A BETTER RULE OF REASON ...................................... 1480 A. Returning to the Legislative Policies Underlying the Sherman Act .................................................................... 1480 B. Crafting More Intelligible Standards Consistent with the Sherman Act’s Principles ................................................. 1483 C. More Empirical Analyses to Better Comprehend How Markets Operate and Evolve ............................................ 1487 CONCLUSION..................................................................................... 1489 INTRODUCTION A “key feature of all industrial market systems,” according to the World Bank, “is a strong state that can support a formal legal system that complements existing norms and a state that itself respects the law and refrains from arbitrary actions.”1 This is especially true of antitrust law. With clear applicable standards, market participants can channel behavior in welfare-enhancing directions and better predict their rivals’ behavior. Clear standards reduce transaction costs, rent- seeking behavior by market participants, and decision errors by the antitrust agencies and courts. The rule of law is part of our “ubiquitous drive to make [our] environment more predictable,”2 it is a precondition for effective antitrust policy, and it remains integral to our democracy.3 1 WORLD BANK, WORLD DEVELOPMENT REPORT: BUILDING INSTITUTIONS FOR MARKETS 4 (2002); see also, J.C. Dammann & Henry Hansmann, A Global Market for Judicial Services 11 n.18 (Univ. of Tex. Law, Law and Econ Research Paper No. 98, Yale Law & Econ. Research Paper No. 347, 2007), available at http://ssrn.com/ abstract=976115 (collecting other studies that functioning judiciary is important precondition for, rather than simply consequence of, robust economic growth); William Easterly & Ross Levine, Tropics, Germs and Crops: How Endowments Influence Economic Development 17-18 (Nat’l Bureau of Econ. Research, Working Paper No. 9106, 2002). 2 DOUGLASS C. NORTH, UNDERSTANDING THE PROCESS OF ECONOMIC CHANGE 14 (2005). 3 See generally D. Daniel Sokol, Order Without (Enforceable) Law: Why Countries Enter into Non-Enforceable Competition Policy Chapters in Free Trade Agreements, 83 CHI.-KENT L. REV. 231 (2008) (explaining rule of law’s supporting role in antitrust policy and economic growth). The rule of law, based on logical persuasion, displaced 1378 University of California, Davis [Vol. 42:1375 There is, however, a disturbing trend: antitrust standards are straying from rule-of-law principles. Once hailed by President and Chief Justice Taft as among “the most important statutes ever passed in this country,”4 the federal antitrust laws are now noteworthy for their “considerable disadvantages.”5 In the past few years, the Court has complained about the state of federal antitrust law. The Court decries antitrust’s “interminable litigation”6 and “inevitably costly and protracted discovery phase,” as hopelessly beyond effective judicial supervision.7 The Court also complains that antitrust’s per se illegal standard might increase litigation costs by promoting “frivolous” suits.8 It fears the “unusually” high risk of inconsistent results by antitrust courts.9 But who has created this predicament? The Supreme Court. Over the past ninety years, the Court has supplied the Sherman Antitrust Act’s legal standards. In determining the legality of restraints of trade, the Supreme Court generally employs either a per se or rule-of-reason standard.10 Under the Court’s per se illegal rule, certain restraints of trade are deemed illegal without consideration of any defenses. These the Furies, and a form of justice based on fear, anger and an orgy of reprisal life for life. But Athena warned of polluting the rule of law, “foul a clear well and you will suffer thirst . The stronger your fear, your reverence for the just, the stronger your country’s wall and city’s safety.” Aeschylus, The Eumenides, in THE ORESTEIA: AGAMEMNON, THE LIBATION BEARERS, THE EUMENIDES 262, 262 (Robert Fagles trans., 1984). As Aeschylus recognized, the response to fear is to reaffirm the rule of law. Torture, on the other hand, is one sign of a “political order that has rejected the standards and practices of democracy’s revered institutions, notably in the realm of law.” Karen J. Greenberg, Scars and Stripes, FIN. TIMES, May 31, 2008, at 19. 4 WILLIAM HOWARD TAFT, THE ANTI-TRUST ACT AND THE SUPREME COURT 2 (1914). 5 Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 412 (2004). 6 Id. at 414. 7 Bell Atl. Corp. v. Twombly, 127 S. Ct. 1955, 1966, 1967 n.6 (2007) (quoting Asahi Glass Co. v. Pentech Pharm., Inc., 289 F. Supp. 2d 986, 995 (N.D. Ill. 2003)); see also CIVIL RULES ADVISORY COMMITTEE, MINUTES 32 (Nov. 8-9, 2007), http://www.uscourts.gov/rules/Minutes/CV11-2007-min.pdf [hereinafter CIVIL RULES MINUTES] (demonstrating that court “spent some time decrying the enormous burdens that could be imposed by [antitrust] discovery,
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