Mitchel v Reynolds

Mitchel v. Reynolds[1] is a landmark decision in the history of the law of restraint of trade. It is generally cited for establishing the principle that reasonable restraints of trade, unlike unreasonable restraints of trade, are permissible and therefore enforceable and not a basis for civil or criminal liability. It is largely the basis in US antitrust law for the "rule of reason."[2] William Howard Taft, then Chief Judge of the Sixth Circuit Court of Appeals, later US President and then Chief Justice of the Supreme Court, quoted Mitchel extensively when he first developed the antitrust rule-of-reason doctrine in United States v. Addyston Pipe & Steel Co.,[3] which was affirmed in 1899 by the Supreme Court.[4] The doctrine also played a major role in the 1911 Supreme Court case Standard Oil Company of New Jersey v. United States 221 U.S. 1 (1911).[5]

Mitchel is also cited for the proposition that usually harmful practices may be rebuttably presumed unlawful, so that the burden of showing legitimacy is placed on the proponent of the practice.[6]

Factual Setting


Reynolds was a baker at St Andrew Holborn (parish), which included both Lincoln's Inn and Gray's Inn, and therefore a considerable number of lawyers. In this litigation-prone environment, Reynolds chose to rent his bakeshop business to Mitchel for five years and gave Mitchel a bond for 50 pounds with the condition that the bond would be void if Reynolds refrained from acting as a baker in the parish for the next five years. Reynolds resumed his trade as a baker at another location in the parish within the five years, and Mitchel sued on the bond.

The lawsuit


Reynolds defended by demurrer, contending that the bond was void because it was on a restraint of trade. His position was that any such restraint of trade was illegal per se, since it prevented him from exercising his trade as a baker.

Although general restraints of trade are unlawful, the court of the Queen's Bench, per Chief Justice Parker (Lord Macclesfield), held this restraint of trade reasonable and therefore lawful.[7] It was ancillary to a legitimate transaction (the rental or sale of the bakeshop business) and it was reasonably necessary to effectuate the main purpose. Its extent was limited to what was necessary to accomplish the main purpose of the transaction. If Reynolds reopened his bakery business, he would attract his old customers and deprive Mitchel of the benefit of his bargain with Reynolds, which included the goodwill of the business (i.e., the habit of the customers to continue to buy baked goods at the same location). Although a restraint of trade without a good reason to support it is presumed unlawful,[8] the court ruled, the presumption can be rebutted and overcome by facts such as those present here: the restraint of trade was necessary and ancillary to a lawful transaction.[9]

Recent interpretations of the Mitchel doctrine

Even if a restraint is necessary and ancillary, within the meaning of the Mitchel and Addyston Pipe cases, it may still be an unreasonable restraint of trade if its anticompetive effects, and consequent harm to the public interest, outweigh its benefits. As Judge Ginsburg opined in the Polygram case:

If the only way a new product can be profitably introduced is to restrain the legitimate competition of older products, then one must seriously wonder whether consumers are genuinely benefited by the new product.[10]

In the same vein, the U.S. Department of Justice and the Federal Trade Commission stated a similar approach in the 1995 Antitrust Guidelines for the Licensing of Intellectual Property:

If the Agencies conclude that the restraint has, or is likely to have, an anticompetitive effect, they will consider whether it is reasonably necessary to achieve procompetitive efficiencies. If the restraint is reasonably necessary, the Agencies will balance the procompetitive efficiencies and the anticompetitive effects to determine the probable net effect on competition in each relevant market.[11]

Questions have been raised as to how necessary a restraint must be to the accomplishment of the main purpose to which it is claimed to be ancillary. For example, must it be indispensable? Is it sufficient if it is of some aid? The FTC-DOJ 2000 Guidelines for Collaborations among Competitors say that, in determining whether a restraint is "reasonably necessary," the issue is "whether practical, significantly less restrictive means were reasonably available when the agreement was entered into."[12]

A related issue is "necessary to what?" In one recent case, a court rejected a credit card issuer's attempted justification of a restriction against competitive dealings said to be reasonably necessary to promote "loyalty" and "cohesion."[13] How necessary and necessary to what thus remain controverted issues under the doctrine of Mitchel v. Reynolds.

References

  1. ↑ 1 P Wms 181, 24 ER 347 (QB 1711)
  2. ↑ See National Soc'y of Professional Engineers v. United States, 435 U.S. 679, 689 (1978) (the rule of reason is the "standard for testing the enforceability of covenants in restraint of trade which are ancillary to a legitimate transaction").
  3. ↑ 85 F. 271 (6th Cir. 1898)
  4. ↑ Addyston Pipe & Steel Co. v. United States. See Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717, 737-39 (1988) (dissenting opinion of Justice Stevens: "Although Judge Taft was writing as a Circuit Judge, his opinion is universally accepted as authoritative.").
  5. ↑ Mitchel is also referred to in Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717, 729 n.3 (1988), in which the Supreme Court declared certain types of price fixing to be potentially reasonable.
  6. ↑ See concurring opinion of Justice White in United States v. Singer Mfg. Co., 374 U.S. 174 (1963), where he argued that defrauding the patent office should be at least rebuttably presumed illegal under the antitrust laws, citing Mitchel.
  7. ↑ Mitchel v. Reynolds, 1 P. Wms. 181, 24 E.R. 347 (Q.B. 1711).
  8. ↑ Such a restraint is not "necessary" in the sense of being needed to accomplish the lawful main purpose of another undertaking.
  9. ↑ Judge Bork explained the doctrine in Rothery Storage & Van Co. v. Atlas Van Lines, Inc., 792 F.2d 210, 224 (D.C. Cir. 1986), in these terms:
    To be ancillary, and hence exempt from the per se rule, an agreement eliminating competition must be subordinate and collateral to a separate, legitimate transaction. The ancillary restraint is subordinate and collateral in the sense that it serves to make the main transaction more effective in accomplishing its purpose.
    See also Schering-Plough Corp.v. FTC, 402 F.3d 1056,1073 (llth Cir.2005) ("In order for a condition to be ancillary, an agreement limiting competition must be secondary and collateral to an independent and legitimate transaction.").
  10. ↑ PolyGram Holding, Inc. v. FTC, 416 F.3d 29, 38 (D.C. Cir. 2005).
  11. ↑ Antitrust Guidelines, § 4.2. See also Rothery, supra note _.
  12. ↑ Id. § 3.2.
  13. ↑ United States v. Visa U.S.A., Inc., 163 F. Supp. 2d 322 (S.D.N.Y. 2001), aff'd, 344 F.3d 229 (2d Cir. 2003).
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