Rule of Reason
Unfair business practices did not reside solely with business trusts. Issues also occurred in agreements
between competitors, contracts entered into between sellers and buyers, and practices that created or
maintained cartels, monopolies, and mergers (West, n.d.). There were no specific laws that regulated these
practices, so the courts were not entirely sure how to deal with them. Initially, courts seemed to swing both
ways, both accepting and condemning certain forms of restraint of trade. Rulings were not consistent from
state to state, and guidelines needed to be established. The guiding condition seemed to be whether or not
the restraints prevented other merchants from entering the market (West, n.d.).
The courts used the rule of reason as the standard. The rule of reason explored the goal of the contract,
which was considered either naked restraint or ancillary restraint. Naked restraint occurs as contracts
promote a general restraint of competition. If the restraint was created with a goal of long-term impact
without boundaries, it was considered to be a naked restraint (West, nd.). Ancillary restraint occurs as the
restriction is limited in time and geography (West, n.d.). With ancillary restraint, the restraint would be short-
term and limited in scope. The courts tended to frown upon naked restraint, but were less consistent with
ancillary restraint. Initially, there did not seem to be a comprehensive common law applied similarly from state
to state (West, n.d.). This problem was concerning enough to warrant a solution, and in 1890, the first antitrust
law was enacted (Jurist, n.d.).
Antitrust Laws
Antitrust laws regulate economic competition in an effort to maintain fair trade practices (West, n.d.). They
were created to prevent the restraints on trade created by trusts and other large company practices. These
restraints often resulted in price-fixing, control of production, and control of geographical markets (Jurist,
n.d.). Many states recognized these outcomes as a threat to fair business practices. The federal government
also recognized this issue and developed antitrust laws in 1887 as a result of a Standard Oil trust that was
formed. The Standard Oil Trust occurred as oil companies transferred their stocks to a trustee to create a more
powerful block of oil companies that prevented other oil companies from effectively competing with them
(West, n.d.).
The first antitrust law created was the Sherman Antitrust Act in 1890, which became the basis for subsequent
antitrust laws (Jurist, 2013). The Sherman Act was a good start, but it was not comprehensive enough to
prevent trusts, and large companies continued to exert strong control over industries. At the turn of the
century, a few large companies controlled almost half of all of the nation’s manufacturing assets (West, n.d.).
It became evident that more legislation was necessary. President Theodore Roosevelt dubbed himself a
“trustbuster,” and he began a campaign to create more effective legal endeavors (West, n.d.). Additional
antitrust acts were passed in 1914, including the Clayton Act and the Federal Trade Commission Act. These acts
are still in effect, and since 1914, they have been amended by Congress to continue to expand upon and
solidify the coverage. It is estimated that antitrust laws save consumers millions of dollars a year, as they
prohibit business practices that unfairly raise prices on goods and services (United States Department of
Justice, n.d.).
Conclusion
The original purpose of antitrust legislation, i.e., to foster competition that results in lower prices, more
products, and more equal distribution of wealth between producers, remains relevant today (West, n.d.). Yet,
large companies still seek advantages in trade and work to put competitors out of business. It is important to
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Chapter 11 Antitrust Law
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