Supreme Court Applies Brooke Group Standard to Reject Predatory Bidding Claim

March 15, 2007

     The United States Supreme Court rejected a $79 million jury verdict entered against Weyerhaeuser Co. on claims of monopolization and attempted monopolization based on alleged predatory bidding for raw material inputs.  Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., 549 U.S. ___ (2007).  The Court adapted and applied to the predatory bidding claims the test it had previously adopted for predatory pricing claims in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993).  Under the Supreme Court’s new holding, a plaintiff proceeding on a predatory bidding theory must first show that the alleged predatory bidding conduct resulted in below-cost pricing of the predator’s outputs.  Weyerhaeuser, Slip Op. at 12.  Second, the predatory bidding plaintiff must establish that the defendant “has a dangerous probability of recouping the losses incurred in bidding up input prices through the exercise of monopsony [buyer monopoly] power.”  Id.

      The Weyerhaeuser Decision.  The plaintiff, Ross-Simmons, filed suit against its competitor, Weyerhaeuser, alleging § 2 claims of monopolization and attempted monopolization on the theory that Weyerhaeuser had bid up input costs in an effort to drive Ross-Simmons out of the market.  Ross-Simmons operated a hardwood lumber sawmill in the Pacific Northwest in competition with Weyerhaeuser, which entered the market in 1980.  Weyerhaeuser gradually increased the scope of its hardwood lumber operation and from 1990 to 2000, invested over $75 million in capital improvements in the region, increasing production at every one of its mills.  From 1998 to 2001, the price of alder sawlogs, which represent up to 75% of a sawmill’s total costs, rose while price for finished hardwood lumber fell.  As a result, Ross-Simmons suffered significant losses and ultimately closed its mill in May 2001.

      Pursuant to its predatory bidding theory, Ross-Simmons alleged that Weyerhaeuser had overpaid for its alder sawlogs in an effort to artificially inflate sawlog prices and drive Ross-Simmons out of business.  As proof of the alleged predatory nature of the practice, Ross-Simmons pointed to Weyerhaeuser’s large share of the alder sawlog purchasing market, rising prices for alder sawlogs, and the fact that Weyerhaeuser’s profits declined during the same period.  Ross-Simmons proceeded on the theory that the standard for predatory bidding was distinct from, and less stringent than, the predatory pricing standard adopted by the Supreme Court in Brooke Group, and indeed, conceded before the Supreme Court that its proof did not meet the Brooke Group standard.  Weyerhaeuser, Slip Op. at 13.

     The Weyerhaeuser Court initially summarized its prior holding in Brooke Group relating to predatory pricing.  “In a typical predatory-pricing scheme, the predator reduces the sale price of its product (its output) to below cost, hoping to drive competitors out of business.”  Id. at 4-5.  The Brooke Group Court established a high standard of proof for claims based on a theory of predatory pricing because “mistaken findings of liability would chill the very conduct the antitrust laws are designed to protect.”  Id. at 7 (quoting Brooke Group, 509 U.S. at 226) (internal quotations omitted).  First, the predatory pricing plaintiff must establish that the complained-of low prices are below an appropriate measure of cost, on the theory that allowing claims of above-cost price cutting “could, perversely, ‘chil[l] legitimate price cutting,’ which directly benefits consumers.”  Weyerhaeuser, Slip Op. at 5 (quoting Brooke Group, 509 U.S. at 223-24).  Second, the predatory pricing plaintiff must establish that the price-cutting competitor has “a dangerous probability of recoupment of [its] losses” because absent such probability, “it is highly unlikely that a firm would engage in predatory pricing.”  Weyerhaeuser, Slip Op. at 6.

     The trial and appellate courts in Weyerhaeuser took the view that predatory pricing and predatory-bidding claims were materially different on the theory that consumers were not necessarily benefited by predatory pricing the way they are by aggressive cutting of sales prices.  The trial and appellate courts therefore concluded that the elevated standard of liability applied in Brooke Group should not apply to a predatory bidding case.  The Supreme Court, adopting the view of the government in its amicus brief, rejected this distinction and concluded instead that claims for predatory pricing and predatory bidding are “analytically similar,” that both “involve the deliberate use of unilateral pricing measures for anticompetitive purposes,” and that both “logically require firms to incur short-term losses on the chance that they might reap supracompetitive profits in the future.”  Id. at 8-9.  “In a predatory-bidding scheme, a purchaser of inputs ‘bids up the market price of a critical input to such high levels that rival buyers cannot survive (or compete vigorously) and, as a result, the predating buyer acquires (or maintains or increases its) monopsony power.’”  Id. at 7 (quoting Kirkwood, Buyer Power and Exclusionary Conduct, 72 Antitrust L.J. 625, 652 (2005)).  The Court paralleled the goals of the predatory bidder and predatory seller, explaining that “a monopsony is to the buy side of the market what a monopoly is to the sell side and is sometimes colloquially called a ‘buyer’s monopoly.’”  Weyerhaeuser, Slip Op. at 7.

     Determining that there existed “general theoretical similarities” between monopoly and monopsony, as well as “theoretical and practical similarities of predatory pricing and predatory bidding,” the Court tailored the Brooke Group two-pronged test to the predatory bidding case before it.  First, a plaintiff must show that the alleged predatory bidding conduct resulted in below-cost pricing in the predator’s outputs.  Id. at 12.  Where the output price remains above the alleged predator’s cost, the potential procompetitive justifications for the higher bidding render the conduct insufficiently exclusionary to support the imposition of liability.  Id.  Notably, Weyerhaeuser, like Brooke Group, declined to define the “appropriate measure of . . . cost,” Brooke Group, 509 U.S. at 222, leaving unresolved the existing differences among the circuits on that issue.  Consequently, in circumstances in which a defendant purchases the majority of its supplies under long-term exclusive arrangements, it remains unclear whether a plaintiff may rely upon the incremental cost of additional and allegedly excessive purchases of supplies to show below-cost pricing or must make this showing based upon average supply prices.  With regard to the second prong of the test, the predatory bidding plaintiff will be required to establish that the defendant “has a dangerous probability of recouping the losses incurred in bidding up input prices through the exercise of monopsony power.”  Weyerhaeuser, Slip Op. at 12.¹  Both inquiries must be satisfied to sustain a finding of liability under a predatory bidding theory.

     Implications.  There are a number of potential implications of the Weyerhaeuser  decision that both dominant market participants (as potential defendants) and would-be plaintiffs should keep in mind:

• The Brooke Group standard is a restrictive one, which will tend to discourage and limit predatory bidding claims; however proof is not impossible.²   The would-be monopolist intentionally driving its competitors out of business should not assume that the plaintiff will be unable to make its case.  However, when a dominant competitor is acting in good faith to attempt to achieve security in meeting its raw material needs, the plaintiff’s case will rarely succeed.
• There is some uncertainty as to the implication of the Weyerhaeuser opinion upon various other forms of allegedly predatory conduct, such as alleged predatory capacity additions where the incremental costs of the additional capacity may exceed incremental revenues,³  loyalty programs in which the dominant producer is able to secure customers through discounts based on multi-product purchases,⁴  or exclusive dealing agreements in which the would-be monopolist may tie up suppliers or customers.⁵   Specifically, given the Weyerhaeuser Court’s steadfast adherence to the Brooke Group standard, it is possible, if not likely, that courts will seek economic analogs to below-cost pricing in such circumstances in order to protect potentially pro-competitive conduct.
• Also subject to inquiry is whether the Weyerhaeuser test provides a defense in situations in which a commodities trader or other business effectively “corners” a market through secretive purchases of contracts for future delivery, rendering it impossible for other traders to meet their contractual obligations without buying at very high prices from the defendant.  Recoupment may be easy to show in these  circumstances, but there may be no below-market pricing.

¹ The Court acknowledged that, hypothetically, a buyer whose strategy had achieved a monopoly on both the purchasing and selling side would be able to prove recoupment based on higher sales prices as well as lower raw material bids.  Weyerhaeuser, Slip Op. at 8 n.2.  However, in Weyerhaeuser, the plaintiff failed in its claim that Weyerhaeuser had engaged in monopolization or attempted monopolization in any subsequent lumber market, having failed to establish that there was a distinct market for finished alder lumber.  See United States Amicus Brief at 4.

² See, e.g., Spirit Airlines, Inc. v. Northwest Airlines, Inc., 431 F.3d 917 (6th Cir. 2005) (proof of predatory pricing held sufficient to be presented to a jury).

³ Cf., Spirit Airlines, 431 F.3d at 952  (“[I]f the incremental costs of capacity additions . . . are more that the incremental revenues, then the addition of capacity is predatory because it entails losses that can be explained only as an investment to drive Spirit from the market.”).

⁴ See, e.g., LePage’s Inc. v. 3M, 324 F.3d 141, 155-57 (3d Cir. 2003) (holding that there was a jury issue as to whether a bundled rebate program could rise to the level of a § 2 violation).

⁵ See, e.g., United States v. Microsoft, 253 F.3d 34, 70 (D.C. Cir. 2001).

⁶ In some circumstances, such conduct also might give rise to criminal or civil claims under the Commodity Exchange Act, 7 U.S.C. §§ 13(a)(2) and 25, or possibly, though less likely, the federal RICO statute, 18 U.S.C. § 1961 et seq.

If you are interested in more information about this development, or the services we provide, please feel free to contact any of the following antitrust lawyers or the Sutherland attorney with whom you regularly work:

James R. McGibbon
404.853.8122 [email protected]

Carey P. DeDeyn
404.853.8050 [email protected]

Dara Steele-Belkin
404.853.8184 [email protected]