• Supreme Court Establishes High Standard for Predatory Bidding Claims
  • March 5, 2007 | Author: Edward F. Malone
  • Law Firm: Jenner & Block LLP - Chicago Office
  • Yesterday, the Supreme Court decided the first of several antitrust cases on its docket for the 2006-2007 Term.  In Weyerhaeuser Company v. Ross-Simmons Hardwood Lumber Company, Inc. No. 05-381, the Court held that the test it established in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993) for evaluating claims of predatory pricing also applies to predatory bidding claims.  As it did in last Term's decision in Texaco Inc. v. Dagher,164 L. Ed. 2d 1 (2006), the Court unanimously reversed a pro-antitrust plaintiff decision of the Ninth Circuit Court of Appeals.

    In Weyerhaeuser, both plaintiff-respondent, Ross-Simmons Hardwood Lumber, and defendant-petitioner, Weyerhaeuser, ran saw mills.  They bought saw logs from loggers and processed them into finished alder lumber.  Between 1998 and 2001, the price of saw logs rose while the price of finished lumber decreased.  Plaintiff's production declined, and in 2001 it went out of business.  Plaintiff alleged that defendant artificially increased the price of saw logs to drive plaintiff and other competitors out of business.  At trial, plaintiff presented evidence that defendant engaged in predatory bidding -- paying a higher price than necessary -- for the saw logs, overbuying of saw logs, and other anticompetitive conduct.  The jury entered judgment for the plaintiff.  On appeal, defendant argued, among other things, that in instructing the jury and ruling on defendant's motion for judgment as a matter of law, the district court misapplied the applicable law.  Defendant argued that the district court erred in refusing to apply the law of predatory pricing as set forth in Brooke Group Ltd. to plaintiff's claims.  Specifically, defendant argued that the jury should have been instructed that plaintiff had to prove that 1) the prices defendant paid for the saw logs were so high that it operated at a loss on the finished product it sold; and 2) there was a dangerous probability that it would recoup that loss.

    The Ninth Circuit rejected defendant's claim that the Brooke Group test for predatory pricing should apply to predatory bidding.  It explained that Brooke Group set a high standard for proving liability in predatory pricing cases because consumers benefit from lower prices and price cutting fosters competition, and no similar consumer benefits necessarily flow from predatory bidding.  The Ninth Circuit therefore upheld the district court's denial of defendant's requests for a new trial and for judgment as a matter of law. 

    In a unanimous opinion authored by Justice Thomas, the Supreme Court  rejected the Ninth Circuit's reasoning and held that the same economic analysis supporting the high threshold for recovery imposed by the Brooke Group in predatory pricing cases warranted application of that same standard in predatory bidding (and other predatory buying) cases.  The Court reasoned that predatory pricing and predatory bidding claims are analytically similar for two general reasons. 

    The Court first observed that monopsony power (market power of a buyer) is theoretically similar to monopoly power (market power of a seller).  Both result from the "deliberate use of unilateral pricing measures for anticompetitive purposes," and both predatory pricing and predatory bidding claims assert that defendants have incurred "short-term losses on the chance that they might reap supracompetitive profits in the future" by driving competitors out of business. 

    The Court also noted that there are many practical similarities between predatory pricing and predatory bidding schemes.  First, neither type of scheme is often tried or often successful.  Second, just as firms often lower the price of outputs for legitimate pro-competitive reasons, so firms may raise bids on inputs for legitimate reasons.  Among the examples noted by the Court was the efficient firm that might bid up input prices to acquire more inputs as part of a procompetitive strategy to gain market share in the output market.  Notably, among the few facts from the record that the Court recited at the beginning of its opinion was the fact that defendant had invested heavily in its mills to boost production, while plaintiff "appears to have engaged in little efficiency-enhancing investment."  Third, just as a failed predatory pricing scheme may actually benefit consumers, a failed predatory bidding scheme might result in the manufacture of more outputs, which would generally result in lower prices to consumers.  Fourth, the Court reasoned that predatory bidding actually presents less of a direct threat to consumers than predatory pricing because a successful scheme will not necessarily result in higher prices in the output market because there may be other ways for the alleged predator to recoup any losses suffered from the higher input prices paid in the predatory stage.

    For all these reasons, the Court concluded that the Brooke Group requirements should also be applied to plaintiffs attempting to prove predatory bidding or buying claims.  Because plaintiff conceded that it had not presented evidence that satisfied the Brooke Group test, the Court vacated the judgment of the Ninth Circuit affirming the jury's verdict.

    The difference between the Supreme Court's interpretation of Brooke Group and the Ninth Circuit's interpretation reflects a fundamentally different understanding of the purpose of antitrust law.  The Ninth Circuit interpreted Brooke Group to be primarily concerned that courts not deny consumers the potential benefit of low prices, a benefit that is not so obvious in a predatory bidding case.  In contrast, the Supreme Court interpreted Brooke Group to be primarily about striking the right balance between the relatively small risk that single-firm predatory behavior poses to competition and the potential procompetitive justifications and effects of unilateral decisions to cut prices of outputs and increase payments for inputs.  The Court rejected the Ninth Circuit view that antitrust litigation only poses a danger to competition when it threatens to chill clearly pro-consumer practices, in favor of an approach that allows more breathing room for firms to make unilateral pricing decisions that are potentially procompetitive.