Legal and Professional Responsibilities of Auditors, Consultants, and Securities Professionals

Coed Theatres (Coed), a Cleveland area movie theater booking agent, began seeking customers in southern Ohio. Shortly thereafter, Superior Theatre Services (Superior), a Cincinnati booking agent, began to solicit business in the Cleveland area. Later, however, Coed and Superior allegedly entered into an agreement not to solicit each other’s customers. The Justice Department prosecuted them for agreeing to restrain trade in violation of § 1 of the Sherman Act. Under a government grant of immunity, Superior’s vice president testified that Coed’s vice president had approached him at a trade convention and threatened to start taking Superior’s accounts if Superior did not stop calling on Coed’s accounts. He also testified that at a luncheon meeting he attended with officials from both firms, the presidents of both firms said that it would be in the interests of both firms to stop calling on each other’s accounts. Several Coed customers testified that Superior had refused to accept their business because of the agreement with Coed. The trial court found both firms guilty of a per se violation of the Sherman Act, rejecting their argument that the rule of reason should have been applied and refusing to allow them to introduce evidence that the agreement did not have a significant anticompetitive effect.What is the rule of reason and how does it differ from the per se rules? Should the rule of reason have been applied in this case? Explain why or why not. Please include 1 peer reviewed source

Legal and Professional Responsibilities of Auditors, Consultants, and Securities Professionals

Q1. What is the rule of reason and how does it differ from the per se rules?

The difference between the Per Se and the rule of reason originated from Section 1 Sherman Act. The rule of reason entails a full-scale market investigation and the inclusion of justifications brought forward by the defendants. The confusion from the rule of reason, led to the development of Per Se Rules, which avoids the necessity for an incredibly complicated and prolonged economic investigation. The defenses available for Per Se Rules are also strictly limited. The Per Se Rules follow the argument that:

“There are certain agreements or practices which because 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” (Mtonga, 2020, p. 10).

Therefore, a naked restraint that does not consider pro-competition justification is Per Se illegal. In the rule of reason, the court may consider a practice illegal if it constitutes an undue or unreasonable restraint of trade.

Q2. Should the rule of reason have been applied in this case? Explain why or why not.

No, the rule of reason should not have been applied in this case. The rule of reason should be applied to encourage business efficiency or limit competition in distribution channels, especially between manufacturers and retailers. The two companies tried to create a monopoly in the market by dividing the territory amongst themselves. The Per Se Rules are applicable in this case because the agreement between violated Section 1 of the Sherman Act, which prohibits agreements between independent parties that unreasonably restrain trade (15 U.S.C. § 1).

References

Mtonga, L. (2020). A Discussion of the Characterization Doctrine As Applied in South Africa. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3884323