The Supreme Court Establishes a Standard for Predatory Bidding

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John H. Preston has worked on many antitrust cases involving the forest products industry.  He also specializes in the antitrust analysis of health care cases and telecommunications cases.

Earlier this year, the U.S. Supreme Court decided Weyerhaeuser v. Ross-Simmons Hardwood Lumber in favor of defendant Weyerhaeuser. Plaintiff Ross-Simmons had alleged, inter alia, that Weyerhaeuser had engaged in predatory bidding for alder sawlogs in the Pacific Northwest in violation of §2 of the Sherman Antitrust Act. Both Weyerhaeuser and Ross-Simmons purchased alder sawlogs to produce finished lumber at their saw mills. According to Ross-Simmons, Weyerhaeuser paid excessively high prices to raise log costs and thus drive Ross-Simmons out of business. Ross-Simmons closed its saw mill in 2001 following financial losses attributed to rising alder sawlog input prices and declining finished hardwood output prices.

The main legal issue concerned whether the Supreme Court’s Brooke Group standard for determining predatory pricing in an output market should also apply to alleged predatory bidding in an input market. The Brooke Group standard is a two-part analysis. The first part requires that the plaintiff show that the defendant’s alleged predatory prices were below “an appropriate measure” of its costs. The second part requires that the plaintiff show that there is a “dangerous probability” that the defendant will be able to recoup the losses from its below-cost pricing once the defendant’s rivals have been eliminated.

As applied to input markets, the first part of the Brooke Group analysis would require that plaintiff show that the overbidding for inputs resulted in below-cost pricing in the relevant output market. In the Weyerhaeuser case, Ross-Simmons would have had to have shown that Weyerhaeuser’s prices for finished lumber were below Weyerhaeuser’s costs of producing finished lumber.

With respect to recoupment, the second part of the Brooke Group analysis, a monopsonist theoretically could recoup its losses from predatory overbidding in the input market or in the downstream output market. For recoupment to succeed in the downstream output market, the monopsonist must use its buying market power to foreclose essential inputs to its downstream competitors to drive them out of business. In Weyerhaeuser, however, the jury found that finished alder lumber was not a distinct product market and that the broader finished hardwood lumber market was competitive. Therefore, Weyerhaeuser, as an alleged predatory purchaser of alder sawlogs, would have had to recoup its lost profits entirely from the input market by forcing the purchase price of alder sawlogs below the competitive level once the competing buyers had been eliminated from the market.

The Supreme Court found that Ross-Simmons “conceded that it has not satisfied the Brooke Group standard” as applied to alleged predatory bidding by Weyerhaeuser. At trial, Weyerhaeuser provided evidence that it had sold finished lumber at a profit during the alleged predatory period. No evidence was provided that Weyerhaeuser could have recouped below-cost prices had they occurred. Nonetheless, the jury awarded Ross-Simmons over $26 million, which was trebled to $79 million.

Not surprisingly, Ross-Simmons’ District Court victory in April 2003 spurred additional suits by other Pacific Northwest saw mill competitors of Weyerhaeuser. In 2004, Weyerhaeuser settled two cases with five saw mill plaintiffs for a total of $49 million. In 2005, Weyerhaeuser settled a suit by five additional saw mill plaintiffs for $13 million. In settling these suits, Weyerhaeuser paid $62 million in total to ten saw mill competitors whose key liability theory was ultimately rejected by the Supreme Court.

In 2005, a jury awarded plaintiff Washington Alder trebled damages of $16 million, a decision that Weyerhaeuser appealed to the Circuit Court. In addition, a class action suit was filed in 2004 on behalf of purchasers of finished alder lumber even though the jury in the Ross-Simmons case had found that the downstream output market was broader than finished alder lumber and that Weyerhaeuser had not monopolized or attempted to monopolize this broader hardwood lumber market. Both the Washington Alder and class action cases were stayed pending the U. S. Supreme Court decision.

In upholding the jury’s decision against Weyerhaeuser, the Ninth Circuit Court of Appeals had decided that the Brooke Groupstandard for predatory pricing did not apply to alleged predatory bidding. The Circuit Court had reasoned that the Brooke Groupstandard applied only in circumstances where consumers might benefit from lower prices during the alleged predatory period. The Circuit Court dismissed the possibility that higher prices paid to suppliers of alder sawlogs might represent competition on the merits yielding beneficial economic effects by spurring an increase in the supply of alder sawlogs.

Instead of applying a rigorous predatory bidding standard in the Weyerhaeuser case, the Circuit Court approved the vague and subjective standards applied by the District Court in its jury instructions. The District Court had instructed the jury that it could find liability 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.” In relying on vague standards, such as “purchased more logs than it needed,” “paid a higher price for logs than necessary,” and “fair price,” these jury instructions did not provide an analytical methodology to distinguish between competitive and anticompetitive conduct by Weyerhaeuser in its purchases of alder sawlogs.

The Supreme Court rejected these vague standards and ruled that the Brooke Group predatory pricing analysis applied equally to predatory pricing of outputs and predatory bidding for inputs. Thus, the Supreme Court reversed the Circuit Court and remanded the case to the lower courts for further consideration.