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September 18, 2016

APPLICABILITY OF THE “RULE OF REASON” IN

PROHIBITION OF ANTI-COMPETITIVE AGREEMENTS
Casting light on what are the anti-competitive practices under the law by
application of the principle
A brief analogy with the principle’s application in the USA and the EU

1. Introduction

The Rule of reason is a legal approach by competition authorities or the courts where an
attempt is made to evaluate the pro-competitive features of a restrictive business practice
against its anti-competitive effects in order to decide whether or not the practice should be
prohibited.[1] It emphasizes on consideration of an impact of the anti-competitive practice
on the market and the economy as a whole. It entails use of reason rather than strict
prohibition irrespective of the effect on competition.

In Tanzania the anti-competitive practices prohibited under the Fair Competition Act, 2003
(‘the Act’) include;

i. anti-competitive agreements,
ii. agreements which are prohibited irrespective of their effect on competition,
iii. abuse of dominant position, and
iv. Merger control.
These are collectively known as restrictive trade practices.

Agreements which are prohibited irrespective of their effect on competition are provided for
under Section 9 of the Act. This is referred to as per se prohibition. Section 9 of the Act may
also be construed to fall under horizontal restrictive practices since it prohibits
agreements between competitors on the same market level. Other agreements which do
not fall under Section 9 of the Act receive the lenient approach of ‘rule of reason prohibition’
as provided for under Section 8 of the Act.

Parties to anti-competitive agreements may be either in a horizontal or vertical relationship.

It is important to note that the Act does not specifically provide for vertical and horizontal
agreements. However, interpretation of Section 8 and 9 pre-supposes vertical and
horizontal agreements respectively.

2. Horizontal Agreements
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Horizontal anti-competitive agreements are agreements concluded between undertakings
that operate on the same market level and compete with each other, for example the
agreements between two manufacturers or two distributors of the same type of goods.

Section 9(1) of the Act provides that a person shall not make or give effect to an agreement
if the object, effect or likely effect of the agreement is:

(a) price fixing between competitors;

(b) a collective boycott by competitors; or
(c) Collusive bidding or tendering.

This provision is construed to be a ‘per se prohibition’ in the sense that such conduct is
prohibited per se irrespective of its effect on competition. The provision may also be
construed to fall under horizontal restrictive practices since it prohibits agreements between
competitors.

3. Vertical Agreements

Vertical agreements are agreements between undertakings that operate on different levels
of the manufacture – distribution chain and do not compete with each other. Examples
include manufacturer and its suppliers, customers or both.

Section 8(1) of the Act provides that a person shall not make or give effect to an agreement
if the object, effect or likely effect of the agreement is to appreciably prevent, restrict or
distort competition. This gives the lenient interpretation that the agreement is only
prohibited if it has negative effects on competition.

4. Application of the Rule of Reason by the Fair Competition Commission

The Fair Competition Commission (“the FCC”) invoked the application of the rule of reason
in the case of Serengeti Breweries Ltd vs. Tanzania Breweries Limited (Complaint No. 2 of
2009). It was alleged that the respondent was entering into branding agreements with bar
owners which excluded the complainant in the market. Such agreements fall within the
category of vertical agreements since they are entered into between the manufacturer and
retailers. These agreements are not prohibited per se unless they have an effect of
preventing, restricting or distorting competition in the market.

The FCC held that;

‘from the provisions of section 8(1) of the FCA, 2003 it is clear that the branding
agreements whether in writing or oral, which the respondent (TBL) has entered into with bar
owners had the object, the effect or likely effect of preventing, restricting and distorting
competition in the Tanzania beer market. The agreements amount to exclusive dealing.
The agreements in this case are restrictive vertical practices since they are agreements
between parties who are in a vertical relationship (TBL with its suppliers/customer)’.

5. The Rule of Reason in the US

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Section 1 of the Sherman Act, 1890 provides that, every contract, combination in the form
of a trust or otherwise, or conspiracy, in restraint of trade or commerce is declared to be
illegal. Although the language of Section 1 does not contain a legal exception to this
prohibition, the Supreme Court of USA has repeated time and time again that Section 1
outlaws only unreasonable restraints. The Court has consistently distinguished the
unreasonable restraints on the basis of impact on competition. This marks recognition
of the rule of reason in the US though not expressly provided for under the Sherman Act.

An agreement will not be in restriction of competition if its pro-competitive effects are found
to outweigh its anti-competitive effects, after a detailed analysis of the market. In this
context, the maximization of consumer welfare has been perceived as the only legitimate
goal of the US antitrust law.

In the case of Chicago Board of Trade v. United States, 246 U.S. 231 (1918) the Court held
that an agreement between rivals limiting rivalry on price after an exchange was closed
was reasonable and thus did not violate the Sherman Act. Similarly, in the case of United
States v. American Tobacco Co., 221 U.S. 106 (1911) it was held that Section 2 of the
Sherman Act, which bans monopolization, did not ban the mere possession of a monopoly
but banned only the unreasonable acquisition or maintenance of monopoly.

It can be rightly deducted under the rule of reason analysis in the US antitrust law, before
condemning an agreement as illegal, the facts that surround the agreement in question, the
counterfactual and the nature and effect of the restraints must be considered, and the pro
and anti-competitive aspects of the agreement must be weighed up.

6. The Rule of Reason in the EU

Article 101 of the Treaty on the Functioning of the European Union (TFEU), is found to be
similar to the US antitrust law and application, in the way that some agreements are
characterized as per se infringements, whereas others are subject to a rule of reason
analysis. However, the important difference in EU law is that, even if an agreement has as
its object the restriction of competition, in other words, it is a per se infringement, the
parties to the agreement can still ask for an exemption under Article 101(3) of the TFEU.

Article 101(3) of the TFEU can be applied to all kinds of agreements, whether they have the
restriction of competition as their object or effect. This means that the rule of reason
applies to all kinds of anti-competitive agreements both horizontal and vertical
agreements. Article 101(3) of the TFEU provides:

“The provisions of paragraph 1 may, however, be declared inapplicable in the case of:

any agreement or category of agreements between undertakings,

any decision or category of decisions by associations of undertakings,
any concerted practice or category of concerted practices,

which contributes to improving the production or distribution of goods or to promoting

technical or economic progress, while allowing consumers a fair share of the resulting
benefit, and which does not:

(a) impose on the undertakings concerned restrictions which are not indispensable to the
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attainment of these objectives;

(b)afford such undertakings the possibility of eliminating competition in respect of a

substantial part of the products in question”.

In the US the application of the rule of reason is not wide as compared to the EU. This is
because there is no similar article equivalent to Article 101(3) of the TFEU. In the US
agreements falling under the per se prohibition may not enjoy the defence of the rule of
reason as it is the case in the EU. The situation is similar in Tanzania where applicability of
the rule of reason is not given a wider application as it is in the EU.

7. Conclusion

The Fair Competition Act, 2003 acknowledges applicability of the rule of reason in
determination of anti-competitive practices as per the provisions of Section 8 of the Act.
The application of this rule is limited by the provisions of Section 9 of the Act which
contains per se prohibitions regardless of the effect on competition. It is recommended
that the applicability of the rule of reason is given a wider approach equivalent to that
provided under Article 101(3) of the TFEU.

Important Notice:

This publication has been prepared for general guidance on matters of interest only, and
does not constitute professional advice. You should not act upon the information contained
in this publication without obtaining specific professional advice. No representation or
warranty (express or implied) is given as to the accuracy or completeness of the
information contained in this publication, and, to the extent permitted by law, Breakthrough
Attorneys, its members, employees and agents do not accept or assume any liability,
responsibility or duty of care for any consequences of you or anyone else acting, or
refraining to act, in reliance on the information contained in this publication or for any
decision based on it.

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