On February 20, 2007, the Supreme Court held that the test for determining liability for predatory pricing, which has been established law for more than a decade since the Supreme Court’s holding in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993), also applies to predatory purchasing. Specifically, in Weyerhaeuser Co. v. Ross-Simmons Hardwood Co., 127 S. Ct. 1069 (2007), the Court held that antitrust liability for predatory purchasing requires that the plaintiff demonstrate (1) the defendant paid so much for inputs that the revenues generated by the sale of the outputs are less than the input costs, and (2) that the defendant has a dangerous probability of recouping the losses incurred in bidding up the input prices through the exercise of its buying, or monopsony, power. This standard, and the Court’s skepticism that successful predatory purchasing cases will be brought, make predatory purchasing cases much more difficult for plaintiffs.
Background: the Demise of Ross-Simmons and the District Court Litigation
In the mid and late 1990s, Ross-Simmons, a family-owned fixture in the Pacific Northwest’s alder lumber industry since 1962, noticed an unusual market trend as its larger rival Weyerhaeuser’s share of the market for alder sawlogs steadily climbed to more than 65 percent: raw material prices were increasing, but finished product prices were decreasing. Indeed, by 2001, Ross-Simmons had lost nearly $4.5 million, and, after nearly 40 years in business, the company was forced to shut down – a victim, it alleged, of Weyerhaeuser’s anticompetitive conduct.
In its complaint, Ross-Simmons claimed that Weyerhaeuser violated Section 2 of the Sherman Act by attempting to monopolize, and monopolizing, the input market for alder sawlogs in the Pacific Northwest. Specifically, Weyerhaeuser allegedly drove up sawlog prices by predatory overbidding (paying more for sawlogs than necessary) and overbuying (buying more sawlogs than needed). Weyerhaeuser countered that it had acted lawfully and that the smaller Ross-Simmons failed because of substandard equipment, inefficient operations, poor management and inadequate capital.
At the close of the two-week jury trial, the district court instructed the jury as follows:
One of the Plaintiffs’ contentions in this case is that the defendant purchased more logs than it needed or paid a higher price for logs than necessary, in order to prevent Plaintiffs from obtaining the logs they needed at a fair price. If you find this to be true, you may regard it as an anticompetitive act.
Weyerhaeuser objected to this instruction and argued that the jury should instead be instructed to apply the test for predatory pricing articulated by the Supreme Court in Brooke Group that would have required the plaintiff to demonstrate (1) the alleged predation resulted in below-cost pricing and (2) that the defendant had a dangerous probability of recouping the losses incurred in its anticompetitive conduct. The district court overruled Weyerhaeuser’s objection, and the jury returned a verdict against Weyerhaeuser on the attempted monopolization and monopolization claims and awarded Ross-Simmons $26,256,406, trebled to $78,769,218.
The Ninth Circuit Upholds the Challenged Jury Instruction
The Ninth Circuit acknowledged that it was facing a legal question of first impression in determining whether the prerequisites set forth in Brooke Group should apply to predatory purchasing as well as predatory pricing. The court, which prefaced its holding by stating that antitrust law is equally concerned with monopoly power exercised by either buyers or sellers “because both involve allocative efficiency, and hence consumer welfare,” held that the jury was properly instructed and that Brooke Group does not control in the buy-side predatory purchasing context.
The court’s refusal to adopt the Brooke Group test for predatory purchasing was rooted in its conclusion that the Supreme Court established a high liability standard for sell-side predatory pricing cases because consumers benefit from lower prices and that cutting prices often promotes competition. Benefit to consumers and stimulation of competition, the court stated, do not necessarily result from predatory purchasing the way they do from predatory pricing.
The Supreme Court’s Ruling
On June 26, 2006, the Supreme Court granted certiorari, and the U.S. Department of Justice and the Federal Trade Commission, among others, urged the Court to overturn the Ninth Circuit’s ruling they claimed would result in judges and juries serving as standardless regulators of companies’ purchasing decisions. On February 20, 2007, the Court reversed and vacated the judgment that the lower courts had entered in Ross-Simmons’ favor. In a unanimous decision, written by Justice Thomas, the Court held that the two-pronged Brooke Group test that applies to predatory-pricing antitrust claims also applies to predatory purchasing. Accordingly, a plaintiff alleging a predatory-purchasing violation of Section 2 of the Sherman Act must prove that such activity 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. The Court, as in Brooke Group, did not attempt to define the appropriate measure of cost (i.e., average variable, average cost, total cost or some other appropriate measure of cost) and that issue will likely be explored by lower courts.
In applying the Brooke Group test to the relatively rare context of predatory purchasing, the Supreme Court clarified in its Weyerhaeuser decision the applicable standard for antitrust liability. Given the difficulty plaintiffs have had in satisfying Brooke Group’s requirements for predatory pricing claims to demonstrate below-cost pricing and that the defendant has a dangerous probability of recouping its losses, it is likely that predatory purchasing claims also will now be more difficult for plaintiffs. In fact, the Supreme Court expressed skepticism of there ever being a likely successful predatory purchasing case, just as it expressed skepticism in Brooke Group of there ever being a successful predatory pricing case, given that rational businesses will prefer not to suffer short term losses for the mere possibility of recovering profits later. Certainly, the Court’s legal standards for such cases almost assure the unlikely success of such claims.