Section 1 of the Sherman Act bans "[e]very contract, combination in form of trust or otherwise, or conspiracy in restraint of trade or commerce."(1) Fortunately, the courts do not read the statute literally. Only agreements unreasonably restrictive of competitive conditions are considered unlawful.(2) For most agreements the courts apply a wide ranging "rule of reason" to determine whether the effect of the agreement is unreasonably restrictive of competitive conditions.(3) But for certain agreements a "per se" rule applies and they are condemned as unreasonably restrictive of competitive conditions without regard to their purpose or effect.(4)
The difficulty faced by the law is how to determine the elements that must be established before knowing that the per se rule should be applied. These elements constitute the characterization framework--the means of characterizing those agreements subject to the per se rule as distinguished from those agreements subject to the rule of reason.
Characterization has received little direct attention in the law despite the fact that it necessarily must be considered in every horizontal restraints case. This article focuses on the characterization of per se unlawful horizontal restraints and suggests parameters for a characterization framework that will maximize the utility of the per se rule.
Characterization in the Supreme Court
Unfortunately, it is not always clear whether a practice is properly characterized as subject to the per se rule or the rule of reason. The Supreme Court's analytical framework for characterization varies depending on the conduct at issue. For example, in Socony-Vacuum, the first Supreme Court case to announce a per se rule in those words, the Court offered the deceptively simple characterization of "combinations operating directly on prices or price structures."(5) Forty-five years later in Northwest Wholesale Stationers the Court came close to stating a rule of reason test when it held that group boycotts were to be characterized as per se unlawful if the group has "market power or exclusive access to an element essential for effective competition."(6)
Despite the variation in characterization frameworks, the Court has been consistent in its descriptive, as distinguished from operational, statement of what constitutes per se unlawful conduct. The classic descriptive statement of the per se rule is in the Northern Pacific decision:
[T]here are certain agreements or practices which becase of their pernicious effect on competition and lack of any redeeming virtue are conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use.(7)
The use of the term "characterization" derives from the BMI decision where the Supreme Court noted that although price fixing was per se unlawful there was more to the analysis than "simply . . . determining whether two or more potential competitors have 'fixed' a 'price.'"(8) Writing for the majority, Justice White observed that literal "price fixing" is not necessarily "plainly anticompetitive" or likely without "redeeming virtue."(9) "Thus," the Court instructed, "it is necessary to characterize the challenged conduct as falling within that category of behavior...