Formalism in Competition Law

Formalism is competition law’s scarecrow. For many decades, scholars, practitioners, and courts have argued against “formalistic” or “form-based” approaches in competition law analysis. While many scholars and other commentators alike reject “formalistic” analysis, it is often unclear what is meant by the term. Does it refer to per se prohibitions? Per se prohibitions that are overinclusive? Any categorization of conduct that abstracts from the unique circumstances of each case?

This article offers an account of the meaning and relevance of formalism in competition law. Its aim is to provide an analysis of how formalism is understood in general legal theory, how this legal–theoretical understanding of formalism applies to competition law, and what role formalism plays in current competition law and doctrine. The article is structured around five claims:

1. The term “formalism” should be understood as referring to decision-making constrained by rules, which exclude considerations from the decision-making process. In other words, “formalism” is conceptually contrasted to “all-things-considered” decision-making.¹

2. While the paradigmatic example of formalism in competition law is the per se rule, the application of per se rules often fails to be genuinely formalistic throughout.² The same applies more strongly to the notion of a restriction of competition “by object” in EU competition law.³

3. The rule of reason is in theory characterized by a low degree of formalism, but in practice has developed into a set of structured, partly conduct-specific rules that are considerably formalistic.⁴

4. The assessment of “anticompetitive effects” is frequently contrasted with a formalistic or form-based approach to competition law. In practice, however, the notion of anticompetitive effects has itself been highly formalized in economic science. Such economic formalism generally translates into formalistic legal rules. As a result, “effects-based” and “economics-based” approaches to competition law have not substituted, but rather reproduced legal formalism in competition law.⁵

5. The normative relationship between formalism, type 1 and 2 errors, and legal certainty is fundamentally shaped by beliefs about institutional competence and the allocation of decisional jurisdiction.⁶

Existing competition law literature has not yet provided a robust, theoretical analysis of formalism in competition law.⁷ Since my aim is to provide a conceptual and general account of the meaning and relevance of formalism in competition law, this article does not focus on one legal order specifically. The main, theoretical part of this article will refer to examples from both U.S. antitrust law and EU competition law. However, I do not aim to provide a comparative analysis between U.S. and EU law, nor do I aim to offer a comprehensive analysis of a specific domain of either legal order. Notwithstanding the importance of such a task, reasons of space prevent me from analyzing fully all substantive and institutional dimensions of formalism in either U.S. antitrust law or EU competition law as such. By contrast, in this article, I only discuss various examples from Sections 1 and 2 of the Sherman Act 1890 and Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU). I will not discuss merger control or other provisions of competition law. The theoretical framework that I use can, to the best of my knowledge, be applied equally to other legal orders and other domains of competition law. In this regard, my discussion of the meaning and relevance of formalism in Sections 1 and 2 of the Sherman Act 1890 and Articles 101 and 102 TFEU aims to serve as an introductory and exemplifying analysis.

As a second methodological note, I mainly use the term “formalism” as a general, theoretical concept to describe some features of competition law that are sometimes called “form-based” or “formalistic.” It might be that those who use the term “form-based” have something in mind that is completely different from my interpretation of formalism.⁸ However, I think that my understanding of formalism explains what is at stake in “form-based” and “formalistic” approaches to competition law, and adds conceptual clarity. At bottom, I hope to provide a conceptual framework that allows us to analyze the use of formalistic and form-based reasoning in competition law in a neutral, analytical manner.

The remainder of this article is structured as follows. Section II discusses the concept of formalism in general, drawing in particular from the rich literature in legal theory, and conceptualizes formalism as “rule-based decision-making.” Sections III–V apply this theoretical framework to more familiar concepts and distinctions in competition law: the per se rule in U.S. antitrust law (Section III), the “by object” restriction in EU competition law (Section IV), and the rule of reason (Section V). Section VI connects the concept of legal formalism to that of anticompetitive effects, in particular by critically analyzing the frequently used distinctions between “form” and “effect” and between “form-based” and “effects-based” approaches to competition law. Section VII discusses the relationship between formalism and type 1 and type 2 errors from an institutional perspective, showing that this relationship is more fundamentally about the institutional allocation of decision-making power than about the substantive over- and underinclusiveness of rules. Section VIII concludes.

What is this infamous notion called formalism? In law, the terms “formalism” and “formalistic” appear to derive their meaning almost exclusively from pejorative usage. Hardly anyone would describe themselves as a “formalist.”⁹ Instead, formalism appears to be a concept primarily used to criticize certain approaches to legal reasoning. In conceptualizing “formalism” as “rule-based decision-making,” this article mainly draws on the work of legal philosopher Frederick Schauer. Before turning to his analysis of formalism and formalistic decision-making, this Section will first situate this approach in the broader literature on legal formalism. This will help to contextualize Schauer’s attempt to avoid a pejorative conception of formalism. Indeed, as we shall see, avoiding such a pejorative or otherwise normative stance towards formalism helps fleshing out the characteristics of formalism and formalistic decision-making in (competition) law.

Attempts to grasp the meaning of “(legal) formalism” in a neutral manner have typically resulted in highly abstract definitions. Formalism has been described, for instance, as the “endeavor to treat particular fields of knowledge as if governed by interrelated, fundamental, and logically demonstrable principles of science.”¹⁰ Alternatively, the process of (legal) formalization has been said to imply that the operations within the system are determined “by specifying solely the graphical forms of the linguistic signs used and their distribution in space.”¹¹ More specifically, and more dramatically, the legal theorist Roscoe Pound described the idea that law is a consistent, interdependent, and fixed system of rules, within which rules were to be applied to concrete cases through deductive reasoning, as a formalistic construct of the lawyer’s mind: “the lawyer believes that the principles of law are absolute, eternal, and of universal validity, and that law is found, not made…''¹²

From a historical perspective, the endeavor to formalize the law was one of the leading movements in nineteenth-century jurisprudence—most notably associated with Langdellian legal science in the United States, and Begriffsjurisprudenz in Germany.¹³ However, in law the formalist program never acquired the status which it acquired in the natural¹⁴ and the social sciences,¹⁵ including notably economics.¹⁶ In the United States and in Europe, legal formalism became the antithesis of the Interessenjurisprudenz and the Freirechtslehre, the libre recherche scientifique and, most famously, American legal realism.¹⁷ Not only did scholars associated with traditions such as American legal realism endorse the use of empirical methods in legal scholarship, they also rejected commitments to formalistic reasoning, agreeing with judges such as Oliver Wendell Holmes, who did not hide his “realist” perception of law and judicial decision-making:

Nevertheless, formalism and formalistic decision-making have not waned. This is perhaps in large part due to the fact that legal language has an inherent commitment to form.¹⁹ The same applies, perhaps even more forcefully, to judicial decision-making, which is based on certain pre-commitments to form-based reasoning, and what it means to “reason like a lawyer.”²⁰ Thus, charges of legal formalism continue to be widespread in critical analysis of the legal status quo. While it is frequently unclear what it means to reason “formalistically,” I believe that scholarly literature employing the term “legal formalism” typically has one of two types of formalism in mind. I call these types sociological formalism and analytical formalism. While the remainder of this article mainly focuses on the application of analytical formalism to competition law, the basic characteristics of sociological formalism will be outlined in order to sharpen the distinction between the two.