On February 20, the Supreme Court issued a unanimous decision concerning the antitrust standards for judging predatory bidding claims under Section 2 of the Sherman Act. In Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., Inc., the Court held that an antitrust claimant must meet the standards established for predatory pricing claims to prevail on a predatory bidding claim. Predatory pricing, a traditionally suspect class of conduct under the antitrust laws, occurs when a dominant company sells its product below “an appropriate measure of cost” in order to drive out competitors so that it can then charge supracompetitive prices and recoup its short-term losses. Predatory bidding, a much less orthodox offense, occurs when a dominant firm pays an artificially high price for a necessary input in order to deprive competitors of that input and thereby prevent them from competing for subsequent purchases of the input and for sales in the downstream market for finished products incorporating that input.
In Weyerhaeuser, Ross-Simmons Hardwood claimed that Weyerhaeuser, its competitor in the market for finished hardwood lumber, intentionally overbid for red alder sawlogs, an input that accounts for seventy five percent of a sawmill’s hardwood lumber costs, in hopes of driving the plaintiff from the market. During the relevant time period, Weyerhaeuser acquired sixty five percent of the alder logs available in the region. While Weyerhaeuser was acquiring logs at increased prices, driving the price of inputs up, prices for finished hardwood lumber declined. Ross-Simmons brought suit alleging monopolization and attempted monopolization under Section 2 of the Sherman Act.
A jury found Weyerhaeuser guilty of monopolization under a predatory bidding theory and returned an award of $26 million, which was trebled to approximately $79 million. The Ninth Circuit affirmed the jury verdict. The Supreme Court granted certiorari to determine whether the antitrust standards for predatory pricing apply to predatory bidding claims.
The Supreme Court based its decision on the premise that “predatory-pricing plaintiffs and predatory bidding plaintiffs make strikingly similar allegations.” In particular, plaintiffs in both types of cases usually claim that a dominant firm engages in predatory activity to drive competitors from the market to enable the defendant subsequently to raise output prices or reduce input prices and reap supracompetitive profits. In a predatory pricing case, a dominant seller is alleged to have driven out competitors to gain monopoly power. In a predatory bidding case, a dominant purchaser is alleged to have driven out competing purchasers to gain monopsony power (i.e., a monopoly on the buyer’s side of the market).
While antitrust claimants have traditionally faced an uphill battle in predatory pricing cases, the Court suggested they will face even gloomier prospects in predatory bidding cases. Weyerhauser, therefore, will serve as a powerful shield for antitrust defendants accused of predatory bidding. In the Brooke Group case, the Supreme Court established a rigorous two prong test for judging predatory pricing claims: 1) that the prices complained of are below an appropriate measure of the defendant’s costs, and 2) the defendant has a dangerous probability of recouping its investment in below-cost prices. Now that Weyerhaeuser extends the Brooke Group standards to predatory bidding, an antitrust claimant alleging predatory bidding must show that 1) the defendant’s bid prices have caused the cost of the relevant output to rise above the revenues generated in the sales of the output, and 2) the defendant has a dangerous probability of recouping the losses through the exercise of monopsony power in the input market.
The first prong seeks to ensure that claims for predatory pricing or bidding do not chill legitimate competition. Indeed, predatory pricing usually results, at least initially, in low prices to consumers, which the antitrust laws typically favor. Similarly, predatory bidding results, at least initially, in higher prices to input suppliers – an outcome inconsistent with the competitive dangers associated with monopsony power. Bidding up the price may represent nothing more than vibrant competition among purchasers vying for scarce resources; just as drastic price reductions in the predatory pricing context may represent nothing more than competition for market share.
The second prong merely seeks to ensure that market conditions will allow the dominant firm to recoup the losses it has suffered from the initial phase of its predatory scheme. Otherwise, the scheme would make no economic sense. If competing sellers and purchasers can easily enter the market, and thereby prevent the dominant firm from restraining input prices or increasing output prices, the dominant firm will not be able to recoup its short-term losses. The failed scheme, however, will benefit other market participants—consumers in the case of failed predatory pricing and suppliers in the case of failed predatory bidding.
Although the Court extended Brooke Group to cover predatory bidding, this type of claim does not fit neatly into the Brooke Group mold. For instance, the Court suggested that monopsony power in the input market represented the antitrust harm to be avoided in this case. Monopsony power in the input market, however, would tend to injure suppliers and competing purchasers. Yet, the Court focused little attention on harm to these market participants. Rather, the Court focused much of its attention on the effects on the downstream output market, particularly the threat to consumers of the finished product. This focus followed undoubtedly from the effort to squeeze predatory bidding into the Brooke Group framework, which requires courts to consider the defendant’s economic losses and overall ability to profit from the allegedly predatory action—an analysis not possible if one only takes into account conditions in the input market. The Court’s opinion sheds little light on how courts should analyze monopsonization claims outside the predatory bidding context presented in this case.
The Court’s opinion in Weyerhaeuser also leaves many questions unresolved about how to apply the Brooke Group standard in predatory bidding cases. For instance, how should courts determine whether the defendant has suffered a loss as a result of its allegedly predatory conduct? Should courts look at whether a defendant suffered a loss based on accepted accounting principles? Or do claimants need to show that the defendant's revenue fell below average variable cost, marginal cost, average total costs or some other measure of cost? To some extent, these issues remain unresolved even in the predatory pricing context. The Court did not take this opportunity to provide needed guidance on these issues.