Supreme Court Limits Antitrust Suits

By Robert J. Ambrogi
Bulletin Newsletter: March 2007

In a victory for major U.S. companies, a unanimous Supreme Court has set a strict standard of proof for cases alleging predatory bidding in violation of federal antitrust law. The court held that the standard it applied in 1993 to predatory selling also applies to predatory buying.

That means that a plaintiff alleging predatory bidding must satisfy a two-prong test. First, it must show that the defendant bid so high a price on raw materials that it would lose money on sales of its products. Second, it must show that the defendant would later recoup its losses after driving its competitors out of business.

The February 20th decision, Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., reversed a $79 million verdict against the lumber company which the 9th U.S. Circuit Court of Appeals had affirmed. It was written by Justice Clarence Thomas.

The case involved a claim by Ross-Simmons, a Vancouver, Washington sawmill, that Weyerhaeuser used its dominant position in the Northwest timber market to drive it out of business. Ross-Simmons contended that Weyerhaeuser bid up the price of sawlogs to a level that prevented Ross-Simmons from competing.

To prove this at trial, Ross-Simmons presented evidence that Weyerhaeuser controlled a dominant share of the sawlog-purchasing market, sawlog prices rose during the predatory period, and Weyerhaeuser's profits declined during the same period. The jury returned a verdict for Ross-Simmons of $26 million, which was trebled to $79 million.

In affirming the verdict, the 9th Circuit rejected Weyerhaeuser's contention that the two-pronged standard applied in claims of predatory pricing – set by the Supreme Court in its 1993 decision, Brooke Group Ltd. v. Brown & Williamson Tobacco Corp. – should be applied also to claims of predatory bidding.

The Supreme Court disagreed, ruling that the Brooke Group test does apply. In so finding, the court noted the parallels between a company's exercise of monopoly power in predatory pricing and a predatory bidding scheme's reliance on monopsony power, or "market power on the buy side of the market."

"If all goes as planned," Justice Thomas explained, "the predatory bidder will reap monopsonistic profits that will offset any losses suffered in bidding up input prices." Given these parallels, the court said, predatory-pricing and predatory-bidding claims "are analytically similar" and "similar legal standards should apply to claims of monopolization and to claims of monopsonization."

"Both claims involve the deliberate use of unilateral pricing measures for anticompetitive purposes," Justice Thomas wrote. "And both claims logically require firms to incur short-term losses on the chance that they might reap supracompetitive profits in the future." These similarities led the court to adapt its two-pronged Brooke Group test to apply to predatory-bidding claims.

The first prong, Justice Thomas said, requires the plaintiff to prove "that the alleged predatory bidding led to below-cost pricing of the predator's outputs. That is, the predator’s bidding on the buy side must have caused the cost of the relevant output to rise above the revenues generated in the sale of those outputs."

The second prong requires the plaintiff to prove "that the defendant has a dangerous probability of recouping the losses incurred in bidding up input prices through the exercise of monopsony power. Absent proof of likely recoupment, a strategy of predatory bidding makes no economic sense because it would involve short-term losses with no likelihood of offsetting long-term gains."

In setting so strict a standard, Justice Thomas noted that there may be a "multitude" of legitimate, procompetitive reasons for a company to engage in higher bidding. "[T]he risk of chilling procompetitive behavior with too lax a liability standard is as serious here as it was in Brook Group," Thomas said. "Consequently, only higher bidding that leads to below-cost pricing in the relevant output market will suffice as a basic for liability for predatory bidding."

The decision is Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., 549 U.S. ___ (2007).

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