Supreme Court Establishes New Standards for Buying Practices

Since the 2003-2004 term, the Supreme Court has heard a surprising number of antitrust cases ' nine in all ' reflecting its increasing interest in, and willingness to address, questions that significantly impact the business community. Equally remarkable is the array of issues the Court has addressed in these cases. In the past three years, the Court has heard cases concerning issues ranging from a unilateral refusal to deal with rivals (Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko, 540 U.S. 398 (2004)), to pricing decisions by joint ventures (Texaco, Inc. v. Dagher, 547 U.S. 1 (2006)), to claims of tying involving a patented product (Illinois Tool Works, Inc. v. Independent Ink, Inc., 547 U.S. 28 (2006)).

Of the four antitrust cases heard by the Court this term, one opinion has been issued so far ' the unanimous decision in Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., 127 S. Ct. 1069 (2007). Weyerhaeuser concerns conduct known as 'predatory bidding' ' deliberately bidding up the price of inputs to prevent competitors from procuring sufficient supplies to manufacture finished products. The Court's decision holds that the same stringent standard used to judge the lawfulness of predatory pricing must be applied to claims of predatory bidding as well.

Key Implications

While Weyerhaeuser specifically addresses the standards to be applied in determining whether buying practices are, in fact, predatory, the decision highlights two broader themes in the Court's recent antitrust jurisprudence. First, the decision reinforces the Court's view that the purpose of the antitrust laws is to promote consumer welfare, not to protect individual competitors. Second, the decision underscores the Court's belief that antitrust standards should be crafted so as to reduce the likelihood that courts will inadvertently condemn aggressive competition on the merits. The Weyerhaeuser decision:

• recognizes that 'myriad legitimate reasons ' ranging from benign to affirmatively procompetitive ' ' exist for outbidding rival firms in order to secure necessary inputs, and that these business activities should be encouraged, not punished, by the antitrust laws;
• provides companies with certainty that even aggressively competitive bidding practices will not be subject to antitrust condemnation so long as a bidder stays within the well-established legal borders of Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993); and
• discourages the lower courts from giving credence to allegations of predation, by reemphasizing the Court's belief that 'predatory schemes are rarely tried, and even more rarely successful.'

Background

Ross-Simmons Hardwood Lumber Co., a sawmill operator in the Pacific Northwest, brought its case against Weyerhaeuser, one of the largest manufacturers of hardwood lumber in the world, alleging that Weyerhaeuser monopolized and attempted to monopolize the input market for alder sawlogs (the necessary input for production of hardwood lumber) in the Pacific Northwest in violation of
' 2 of the Sherman Act. Ross-Simmons Hardwood Lumber Co. v. Weyerhaeuser Co., 411 F.3d 1030, 1033 (9th Cir. 2005). Ross-Simmons alleged that Weyerhaeuser monopolized the market by artificially increasing the price of alder sawlogs through overbidding and overbuying in order to restrict its competitors' access to these necessary inputs and, consequently, to drive them out of business. Id. at 1034.

After trial, the district court instructed the jury that if it found that Weyerhaeuser paid 'higher prices than necessary' for sawlogs, it could consider that to be an anticompetitive act for purposes of ' 2. Following the district court's instruction, the jury found for Ross-Simmons on both the monopolization and the attempted monopolization claims. After trebling the damage award, the court entered judgment against Weyerhaeuser for nearly $79 million.

The Ninth Circuit Decision

On appeal to the Ninth Circuit, Weyerhaeuser argued that it had no market power in the market for alder sawlogs, and that it had not committed any anticompetitive acts that were actionable under ' 2 of the Sherman Act. The court of appeals was thus presented with the question of the appropriate legal standard for determining ' 2 liability in claims of alleged 'predatory bidding' ' was the appropriate test the one used by the district court, or was the court required to apply the test for predatory pricing as set forth in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp.

Weyerhaeuser argued that regardless of whether a case involves 'sell-side' predatory pricing or 'buy-side' predatory bidding, the same legal standard ' Brooke Group ' should apply. The Ninth Circuit disagreed, finding that predatory bidding cases are distinguishable from predatory pricing cases because the consumer benefit (in the form of lower prices) does not necessarily result from predatory bidding in the same way it does from predatory pricing. 411 F.3d at 1037. The court held that a plaintiff bringing a ' 2 monopolization claim based on predatory bidding need not satisfy Brooke Group's high standard of showing that the defendant operated at a loss, and that it had a dangerous probability of recouping its loss after eliminating its competition. Id. at 1038. Instead, the Ninth Circuit affirmed the jury's damage award based on the instruction that if it found that 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,' then the jury should find that Weyerhaeuser committed an anticompetitive act for purposes of ' 2. Id. at 1037 n.8.

The Supreme Court Decision

The Supreme Court unanimously reversed the Ninth Circuit's open-ended holding that a company engages in anticompetitive predatory bidding if it pays 'a higher price than necessary' in order to prevent its competitors from obtaining necessary inputs 'at a fair price.' Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., 127 S. Ct. 1069 (2007). Instead, the Court held that the test applied to claims of predatory pricing in Brooke Group also applies to claims of predatory bidding. Therefore, a predatory bidding plaintiff 'must prove that the alleged predatory bidding led to below-cost pricing of the predator's outputs,' and that 'the defendant has a dangerous probability of recouping the losses incurred in bidding up input prices through the exercise of monopsony power.' 127 S. Ct. at 1078.

In reaching the conclusion that the two-pronged Brooke Group test should be used in the predatory bidding context, the Court's analysis focused on the similarities between the predatory pricing and predatory bidding conduct. Both predatory pricing and predatory bidding claims 'involve the deliberate use of unilateral pricing measures for anticompetitive purposes,' and both claims 'logically require firms to incur short-term losses on the chance that they might reap supracompetitive profits in the future.' 127 S. Ct. at 1076.

In addition, the Court found that predatory bidding activities mirror predatory pricing activities in three ways that the Court in Brooke Group found significant to its analysis:

• predatory bidding or pricing is a highly unlikely competitive strategy, as a rational business will rarely make the financial sacrifice necessary to engage in either type of conduct;
• the actions taken in allegedly predatory bidding and predatory pricing schemes are often 'the very essence of competition,' and legal rules should not deter such conduct; and
• 'ailed predatory bidding or predatory pricing schemes may often result in lower consumer prices. 127 S. Ct. at 1077.

Given the analytical similarities between predatory pricing and predatory bidding, the Court was convinced that the demanding two-pronged Brooke Group test should also apply to predatory bidding claims.

Analysis and Implications

First, the Weyerhaueser decision makes clear that the antitrust laws will rarely constrain decisions regarding the prices at which businesses purchase inputs. The Court found that 'high bidding [for inputs] is essential to competition and innovation on the buy side of the market.' 127 S. Ct. at 1077. It therefore imposed a stringent legal standard, the elements of which 'are not easy to establish,' for predatory bidding liability. Id. at 1075.

Second, the Court held that bidding behavior will not be condemned simply because it harms a rival. Rather, there must be a showing of harm to consumers. The Court emphasized, however, that predatory bidding 'presents less of a direct threat of consumer harm than predatory pricing' because the consumer is not the party from whom a successful predatory bidder would 'recoup' its losses. 127 S. Ct. at 1078. Moreover, the Court found that 'actions taken in predatory-bidding schemes are often 'the very essence of competition.” Id. at 1077 (quoting Brooke Group). The opinion identified several 'affirmatively competitive' reasons why a buyer might deliberately bid up the price of inputs ' e.g., as part of a strategy to gain market share in the output market, or as a hedge against the risk of future rises in the cost of the input (or against the risk of future shortage), or as a response to increased consumer demand for the company's outputs. Finally, the Court observed that failed predatory bidding schemes 'can be a 'boon to consumers” because they 'lead[] to the manufacture of more outputs.' Id. at 1077.

Third, the Court's holding sets a very high bar for establishing a predatory bidding violation, and requires compelling economic evidence to satisfy that standard. By imposing a test that requires a plaintiff to prove: 1) below-cost pricing of the defendant's outputs; and 2) a dangerous probability that the defendant will recoup its losses incurred in its predatory scheme by later lowering the prices paid for inputs below the competitive level, the Court requires courts to undertake 'a close analysis of both the scheme ' and the structure and conditions of the relevant market.' 127 S. Ct. at 1078 (quoting Brooke Group).

Finally, the Supreme Court's rejection of the Ninth Circuit's subjective standard for evaluating predatory bidding reflects the Court's continuing emphasis on crafting antitrust rules that minimize the risk of 'mistaken findings of liability [that] would 'chill the very conduct the antitrust laws are designed to protect.” 127 S. Ct. at 1075 (quoting Brooke Group). The Court found this to be a serious risk in the case of predatory bidding, particularly under a standard that allowed courts to condemn prices a jury or judge deemed 'higher than necessary,' because of the 'multitude of procompetitive ends served by higher bidding for inputs.' Id. at 1078. In the end, the Court found that 'the risk of chilling procompetitive behavior with too lax a liability standard is as serious here as it was in Brooke Group,' and therefore the Court has required the lower courts to use a stringent, objective standard in evaluating liability. Id.

W. Stephen Smith is a partner in the Washington, DC, office of Morrison & Foerster LLP. Co-chair of the firm's Antitrust Practice Group, Smith counsels clients on a wide range of antitrust issues. He may be reached at [email protected]. Jeny Maier is an associate in the office, and also practices in the Antitrust Practice Group.

Since the 2003-2004 term, the Supreme Court has heard a surprising number of antitrust cases ' nine in all ' reflecting its increasing interest in, and willingness to address, questions that significantly impact the business community. Equally remarkable is the array of issues the Court has addressed in these cases. In the past three years, the Court has heard cases concerning issues ranging from a unilateral refusal to deal with rivals ( Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko , 540 U.S. 398 (2004)), to pricing decisions by joint ventures ( Texaco, Inc. v. Dagher , 547 U.S. 1 (2006)), to claims of tying involving a patented product ( Illinois Tool Works, Inc. v. Independent Ink, Inc. , 547 U.S. 28 (2006)).

Of the four antitrust cases heard by the Court this term, one opinion has been issued so far ' the unanimous decision in Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co. , 127 S. Ct. 1069 (2007). Weyerhaeuser concerns conduct known as 'predatory bidding' ' deliberately bidding up the price of inputs to prevent competitors from procuring sufficient supplies to manufacture finished products. The Court's decision holds that the same stringent standard used to judge the lawfulness of predatory pricing must be applied to claims of predatory bidding as well.

Key Implications

While Weyerhaeuser specifically addresses the standards to be applied in determining whether buying practices are, in fact, predatory, the decision highlights two broader themes in the Court's recent antitrust jurisprudence. First, the decision reinforces the Court's view that the purpose of the antitrust laws is to promote consumer welfare, not to protect individual competitors. Second, the decision underscores the Court's belief that antitrust standards should be crafted so as to reduce the likelihood that courts will inadvertently condemn aggressive competition on the merits. The Weyerhaeuser decision:

• recognizes that 'myriad legitimate reasons ' ranging from benign to affirmatively procompetitive ' ' exist for outbidding rival firms in order to secure necessary inputs, and that these business activities should be encouraged, not punished, by the antitrust laws;
• provides companies with certainty that even aggressively competitive bidding practices will not be subject to antitrust condemnation so long as a bidder stays within the well-established legal borders of Brooke Group Ltd. v. Brown & Williamson Tobacco Corp. , 509 U.S. 209 (1993); and
• discourages the lower courts from giving credence to allegations of predation, by reemphasizing the Court's belief that 'predatory schemes are rarely tried, and even more rarely successful.'

Background

Ross-Simmons Hardwood Lumber Co., a sawmill operator in the Pacific Northwest, brought its case against Weyerhaeuser, one of the largest manufacturers of hardwood lumber in the world, alleging that Weyerhaeuser monopolized and attempted to monopolize the input market for alder sawlogs (the necessary input for production of hardwood lumber) in the Pacific Northwest in violation of
' 2 of the Sherman Act. Ross-Simmons Hardwood Lumber Co. v. Weyerhaeuser Co. , 411 F.3d 1030, 1033 (9th Cir. 2005). Ross-Simmons alleged that Weyerhaeuser monopolized the market by artificially increasing the price of alder sawlogs through overbidding and overbuying in order to restrict its competitors' access to these necessary inputs and, consequently, to drive them out of business. Id. at 1034.

After trial, the district court instructed the jury that if it found that Weyerhaeuser paid 'higher prices than necessary' for sawlogs, it could consider that to be an anticompetitive act for purposes of ' 2. Following the district court's instruction, the jury found for Ross-Simmons on both the monopolization and the attempted monopolization claims. After trebling the damage award, the court entered judgment against Weyerhaeuser for nearly $79 million.

The Ninth Circuit Decision

On appeal to the Ninth Circuit, Weyerhaeuser argued that it had no market power in the market for alder sawlogs, and that it had not committed any anticompetitive acts that were actionable under ' 2 of the Sherman Act. The court of appeals was thus presented with the question of the appropriate legal standard for determining ' 2 liability in claims of alleged 'predatory bidding' ' was the appropriate test the one used by the district court, or was the court required to apply the test for predatory pricing as set forth in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp.

Weyerhaeuser argued that regardless of whether a case involves 'sell-side' predatory pricing or 'buy-side' predatory bidding, the same legal standard ' Brooke Group ' should apply. The Ninth Circuit disagreed, finding that predatory bidding cases are distinguishable from predatory pricing cases because the consumer benefit (in the form of lower prices) does not necessarily result from predatory bidding in the same way it does from predatory pricing. 411 F.3d at 1037. The court held that a plaintiff bringing a ' 2 monopolization claim based on predatory bidding need not satisfy Brooke Group's high standard of showing that the defendant operated at a loss, and that it had a dangerous probability of recouping its loss after eliminating its competition. Id. at 1038. Instead, the Ninth Circuit affirmed the jury's damage award based on the instruction that if it found that 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,' then the jury should find that Weyerhaeuser committed an anticompetitive act for purposes of ' 2. Id. at 1037 n.8.

The Supreme Court Decision

The Supreme Court unanimously reversed the Ninth Circuit's open-ended holding that a company engages in anticompetitive predatory bidding if it pays 'a higher price than necessary' in order to prevent its competitors from obtaining necessary inputs 'at a fair price.' Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co. , 127 S. Ct. 1069 (2007). Instead, the Court held that the test applied to claims of predatory pricing in Brooke Group also applies to claims of predatory bidding. Therefore, a predatory bidding plaintiff 'must prove that the alleged predatory bidding led to below-cost pricing of the predator's outputs,' and that 'the defendant has a dangerous probability of recouping the losses incurred in bidding up input prices through the exercise of monopsony power.' 127 S. Ct. at 1078.

In reaching the conclusion that the two-pronged Brooke Group test should be used in the predatory bidding context, the Court's analysis focused on the similarities between the predatory pricing and predatory bidding conduct. Both predatory pricing and predatory bidding claims 'involve the deliberate use of unilateral pricing measures for anticompetitive purposes,' and both claims 'logically require firms to incur short-term losses on the chance that they might reap supracompetitive profits in the future.' 127 S. Ct. at 1076.

In addition, the Court found that predatory bidding activities mirror predatory pricing activities in three ways that the Court in Brooke Group found significant to its analysis:

• predatory bidding or pricing is a highly unlikely competitive strategy, as a rational business will rarely make the financial sacrifice necessary to engage in either type of conduct;
• the actions taken in allegedly predatory bidding and predatory pricing schemes are often 'the very essence of competition,' and legal rules should not deter such conduct; and
• 'ailed predatory bidding or predatory pricing schemes may often result in lower consumer prices. 127 S. Ct. at 1077.

Given the analytical similarities between predatory pricing and predatory bidding, the Court was convinced that the demanding two-pronged Brooke Group test should also apply to predatory bidding claims.

Analysis and Implications

First, the Weyerhaueser decision makes clear that the antitrust laws will rarely constrain decisions regarding the prices at which businesses purchase inputs. The Court found that 'high bidding [for inputs] is essential to competition and innovation on the buy side of the market.' 127 S. Ct. at 1077. It therefore imposed a stringent legal standard, the elements of which 'are not easy to establish,' for predatory bidding liability. Id. at 1075.

Second, the Court held that bidding behavior will not be condemned simply because it harms a rival. Rather, there must be a showing of harm to consumers. The Court emphasized, however, that predatory bidding 'presents less of a direct threat of consumer harm than predatory pricing' because the consumer is not the party from whom a successful predatory bidder would 'recoup' its losses. 127 S. Ct. at 1078. Moreover, the Court found that 'actions taken in predatory-bidding schemes are often 'the very essence of competition.” Id. at 1077 (quoting Brooke Group). The opinion identified several 'affirmatively competitive' reasons why a buyer might deliberately bid up the price of inputs ' e.g., as part of a strategy to gain market share in the output market, or as a hedge against the risk of future rises in the cost of the input (or against the risk of future shortage), or as a response to increased consumer demand for the company's outputs. Finally, the Court observed that failed predatory bidding schemes 'can be a 'boon to consumers” because they 'lead[] to the manufacture of more outputs.' Id. at 1077.

Third, the Court's holding sets a very high bar for establishing a predatory bidding violation, and requires compelling economic evidence to satisfy that standard. By imposing a test that requires a plaintiff to prove: 1) below-cost pricing of the defendant's outputs; and 2) a dangerous probability that the defendant will recoup its losses incurred in its predatory scheme by later lowering the prices paid for inputs below the competitive level, the Court requires courts to undertake 'a close analysis of both the scheme ' and the structure and conditions of the relevant market.' 127 S. Ct. at 1078 (quoting Brooke Group).

Finally, the Supreme Court's rejection of the Ninth Circuit's subjective standard for evaluating predatory bidding reflects the Court's continuing emphasis on crafting antitrust rules that minimize the risk of 'mistaken findings of liability [that] would 'chill the very conduct the antitrust laws are designed to protect.” 127 S. Ct. at 1075 (quoting Brooke Group). The Court found this to be a serious risk in the case of predatory bidding, particularly under a standard that allowed courts to condemn prices a jury or judge deemed 'higher than necessary,' because of the 'multitude of procompetitive ends served by higher bidding for inputs.' Id. at 1078. In the end, the Court found that 'the risk of chilling procompetitive behavior with too lax a liability standard is as serious here as it was in Brooke Group,' and therefore the Court has required the lower courts to use a stringent, objective standard in evaluating liability. Id.

W. Stephen Smith is a partner in the Washington, DC, office of Morrison & Foerster LLP. Co-chair of the firm's Antitrust Practice Group, Smith counsels clients on a wide range of antitrust issues. He may be reached at [email protected]. Jeny Maier is an associate in the office, and also practices in the Antitrust Practice Group.