Stephen Feldman publishes article in The Antitrust News regarding predatory bidding and predatory pricing
Ellis & Winters
This article previously appeared in Antitrust News (July 2007, Vol. 17, No. 2). It is reprinted with permission.
By Stephen Feldman
In February, the Supreme Court of the United States held that the framework for analyzing a predatory-pricing claim also governs a predatory buying claim in Weyerhaeuser Co. v. Ross- Simmons Hardwood Lumber Co., 127 S. Ct. 1069 (2007). This article examines the Weyerhaeuser decision.
Weyerhaeuser and Ross-Simmons operated competing hardwood-lumber sawmills in the Pacific Northwest. These mills processed red alder sawlogs. The mills purchased many of the sawlogs on the open bidding market.
After it closed its mill in 2001, Ross-Simmons filed suit against Weyerhaeuser claiming that Weyerhaeuser’s bidding practices violated Section 2 of the Sherman Act, 15 U.S.C. Section 2. Ross- Simmons alleged that Weyerhaeuser intentionally drove it out of business by bidding up the cost of red alder sawlogs. Ross-Simmons argued that because Weyerhaeuser had overpaid for sawlogs, sawlog prices rose to artificially high levels. As evidence of Weyerhaeuser’s predatory conduct, Ross-Simmons pointed to Weyerhaeuser’s large share of the alder sawlogs purchasing market, an increase in the price of alder sawlogs, and Weyerhaeuser’s decreased profits.
At trial, Weyerhaeuser argued that the jury instructions should incorporate the predatory pricing test set forth in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993). In a predatory-pricing scheme, the seller drops the retail price of its product below cost to force its competition out of the market. Once successful, the seller raises retail prices to a supra-competitive level. The Brooke Group test requires that a plaintiff raising a predatory-pricing claim must first prove that “the prices complained of are below an appropriate measure of its rivals’ costs.” Id. at 222. Second, the plaintiff must show that its competitor had “a dangerous probabilit[y] of recouping its investment in below-cost prices.” Id. at 224.
Weyerhaeuser argued that a predatory bidding scheme shares the same fundamental traits as a predatory pricing scheme. In each scheme, a firm: (1) invokes a unilateral pricing measure to ward off competition; and (2) suffers short-term losses for the chance of gaining supra-competitive long-term profits.
The District Court, however, rejected the Brooke Group framework and crafted its own standard. The court instructed the jury to consider whether or not Weyerhaeuser “purchased more logs than it needed, or paid a higher price for logs than necessary, in order to prevent [Ross-Simmons] from obtaining the logs they needed at a fair price.” Weyerhaeuser, 127 S. Ct. at 1073.
The jury returned a $26 million verdict-subsequently trebled to $78 million-in Ross-Simmons’s favor. The Ninth Circuit affirmed. Confederated Tribes of Siletz Indians of Ore. v. Weyerhaeuser Co., 411 F.3d 1030, 1038 (9th Cir. 2005). The Supreme Court granted certiorari to determine whether the Brooke Group elements should have governed the predatory-bidding claim.
In Brooke Group, the Supreme Court emphasized that a failed predatory-pricing scheme-like legitimate price-cutting-benefits consumers. Both result in lower retail prices. Loathe to chill legitimate price-cutting, Brooke Group established the high threshold of proof, as stated above, for a plaintiff who brings a predatory- pricing claim.
The Supreme Court deemed the Brooke Group test to be appropriate because “predatory pricing schemes are rarely tried, and even more rarely successful.” Brooke Group, 509 U.S. at 226 (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 589 (1986)). The court formulated the “dangerous probability” requirement in particular because, “without a dangerous probability of recoupment, it is highly unlikely that a firm would engage in predatory pricing.” Weyerhaeuser, 127 S. Ct. at 1075.
The Ninth Circuit Rejects Brooke Group
The Ninth Circuit refused to apply Brooke Group’s high threshold for predatory-pricing claims to the predatory-bidding claim against Weyerhaeuser. The Ninth Circuit reasoned that a predatory-bidding scheme did not provide the same potential for consumer benefit as did a predatory-pricing scheme-particularly because predatory bidding does not require a firm to lower retail prices.
Even if a predatory-bidding firm did lower retail prices during the predation period, the Ninth Circuit reasoned that those lower prices would generate further pressure on competitors already strained by higher input prices. In the Ninth Circuit’s view, the increased threat from that pressure outweighed any benefit to consumers from the lowered prices.
The Ninth Circuit acknowledged some potential benefit from predatory bidding. In certain situations, “rising input prices might encourage new companies to enter the supply side of the market.” Confederated Tribes of Siletz Indians, 411 F.3d at 1038. The new supply-side entrants, in turn, would expand output, increase innovation, and increase efficiency. The red alder sawlog market, however, because it is relatively inelastic, did not lend itself to these benefits. Consequently, the Ninth Circuit determined that “the high standard of liability in Brooke Group does not apply here.” Id.
The Supreme Court’s Decision
In reversing the Ninth Circuit, the Supreme Court did not consider whether the Brooke Group framework should apply to a predatory bidding claim specifically concerning a “relatively inelastic market.” (Indeed, the Supreme Court did not even refer to the market for red alder sawlogs as inelastic.) Instead, the Weyerhaeuser opinion focused on the many parallels between a predatory-bidding claim and a predatory-pricing claim.
First, the court noted that both schemes are rarely successful. In both the predatory-pricing and predatory-bidding contexts, few rational businesses will agree to suffer short-term losses on the chance of gaining long-term supra-competitive profits. As Weyerhaeuser’s counsel said at oral argument, “predatory conduct is self-deterring.”
Second, the court found that the actions taken in both predatory-pricing and predatory-bidding schemes are “the very essence of competition.” Weyerhaeuser, 127 S. Ct. at 1077 (quoting Brooke Group, 509 U.S. at 226). A firm that engages in predatory pricing lowers prices to compete for consumer sales. A firm that engages in predatory bidding pays high prices “to compete for scarce inputs.” Id. There are many lawful reasons, said the Supreme Court, why a firm might bid up input prices. For example, a firm might be:
- Miscalculating its input needs;
- Responding to increased consumer demand for its outputs;
- Trying to gain market share in the output market;
- Using a new production process that requires more inputs; or
- Acquiring excess inputs to protect against future input shortages.
As Chief Justice Roberts explained at oral argument, regardless of which of these motives is at work, the high prices will benefit suppliers in the short-term.
Third, like a failed predatory-pricing scheme, a failed predatory-bidding scheme may benefit consumers. The Court explained that when a predator acquires more inputs, it will “usually” lead to the manufacture of more outputs. At oral argument, Justice Scalia raised the point that increases in output “will benefit consumers who want those goods.”
This result, however, is not a guaranteed byproduct of predatory bidding. In a footnote, the Court conceded that “if the same firms compete in the input and output markets, any increase in outputs by the predator could be offset by decreases in outputs from the predator’s struggling competitors.” Id. at 1077 n.5.
While the Ninth Circuit relied on this potential outcome to conclude that Brooke Group should not control predatory-bidding claims, the Supreme Court concluded that predatory bidding ultimately presents less of a direct threat of consumer harm than predatory pricing. This is because “a predatory bidder does not necessarily rely on raising prices in the output market to recoup its costs.” Id. at 1078. Rather, a predatory bidder captures monopsony profits by forcing down input prices, not by raising output prices.
A Unanimous Decision
The Supreme Court decided Weyerhaeuser unanimously. This result may be linked to Ross-Simmons’s failure to offer a feasible alternative framework. The District Court’s jury instructions required the jury to determine the “fair price” for red alder sawlogs. At oral argument, Justices Souter and Alito asked Ross-Simmons’s counsel how a jury could ascertain a “fair price.” Justice Breyer bluntly remarked, “You see, the reason they’re coming up with this [Brooke Group] test is that they don’t think . . . that you can produce a better one.” Presumably, the Court was not convinced that a jury could determine a “fair price” or that a test better than Brooke groups was apparent.
The Future of Predatory Buy-Side Claims
The long-term effects of the Weyerhaeuser decision are difficult to forecast. Predatory-bidding claims are raised less frequently than are predatory-pricing claims. Now that prospective plaintiffs definitively know that they have to satisfy the Brooke Group test, predatory-bidding claims might become even more scarce. The same may be true for predatory-overbuying claims. In a footnote, the Supreme Court explained that predatory-bidding and predatory overbuying claims are analytically identical and that the Brooke Group test applies to both claims.
A Consumer Protection Perspective
The Solicitor General submitted an amicus curiae brief in support of Weyerhaeuser. Although the Federal Trade Commission joined this brief, one commissioner, J. Thomas Rosch, spoke out against that decision in a speech entitled “Monopsony and the Meaning of ‘Consumer Welfare’: A Closer Look at Weyerhaeuser.” Commissioner Rosch gave the speech on December 7, 2006, at the Milton Handler Annual Antitrust Review in New York City.
In his speech, Commissioner Rosch argued that applying the Brooke Group test to predatory- bidding cases wrongly assumes that the antitrust laws protect buyers and sellers equally. In his view, the antitrust laws protect consumers who purchase outputs. Brooke Group, he said, expressed concern for the welfare of these consumers.
By adopting the Brooke Group test for predatory-bidding claims that do not necessarily affect consumer welfare, the Supreme Court (according to Commissioner Rosch) endorsed the position that the antitrust laws protect total societal welfare.