Rule of reason
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The rule of reason is a doctrine developed by the United States Supreme Court in its interpretation of the Sherman Antitrust Act. The rule, stated and applied in the case of Standard Oil Co. of New Jersey v. United States, 221 U.S. 1 (1911), is that only combinations and contracts unreasonably restraining trade are subject to actions under the anti-trust laws and that size and possession of monopoly power was not illegal.
Prior to the Standard Oil case, the Court had interpreted the language of the Sherman Act to hold that all contracts restraining trade were prohibited, regardless of whether the restraint actually produced no ill effects.
The rule was narrowed in later cases that held that certain kinds of restraints, such as price fixing agreements, group boycotts, and geographical market divisions, were illegal per se.
The European Court of Justice (ECJ) has adopted the concept in its own jurisprudence concerning the free movement of goods within the European Common Market. The rule has arisen in the context of Article 28 (ex 30) of the Treaty of Rome, which prohibits quantitative restrictions on imports (or measures having equivalent effect). In Cassis de Dijon the ECJ drew a distinction between measures in breach of Article 28 which were indistinctly applicable as opposed to distinctly applicable. Indistinctly applicable measures are ones that, prima facie, do not favour domestic producers over importers, and whose effects are equal on both. The ECJ argued that indistinctly applicable measures that favoured domestic traders over importers were not necessarily in breach of Article 28. They could be justified if they satisfied 'mandatory' requirements - namely that the measure is necssary for protecting the public or the consumer. The rule of reason is essentially the proposition that a proportionality exercise must be performed by the Court to determine whether the effects of Member State legislation on the free movement of goods is justified in light of the legislation's stated goals.
This proportionality exercise has itself been applied by the ECJ further than the boundaries of Article 28 would initially allow.
See also: United States Government, U.S. history