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Supreme Court Decision Update - Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Company, Inc.

veloco.jpgToday’s only unanimous opinion comes in the form of the long-titled Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Company, Inc. (PDF of the opinions). It’s a case about the exciting world of antitrust laws and monopolies, specifically as to what the test is for when there’s predatory bidding. And it’s also yet another bitch-slap to the Ninth Circuit.

QuizLaw Analysis: Sadly, predatory bidding has nothing to do with velocaraptors (see what I did there, with the “predatory”…that’s what this case has sunk me to). Instead, the Supremes unanimously hold that the same test that’s been applied to predatory pricing for over a decade is also the one that should be used with predatory bidding.

Predatory bidding, predatory pricing…what’re we talking about? Well, let’s get the background of the case first, before we get into the fun antitrust mumbo-jumbo, ok?

Ok, so what’s the background? In the Northwest, timber is a big industry, and red alder sawlogs are one of the types of logs processed up there. Sawmills can get these logs in three ways - by harvesting timberlands that they own, through long- or short-term agreements with the owners of timberlands, or by purchasing them on an open bidding market. Ross-Simmons is one such sawmill, which has been around since 1962. In 1980, Weyerhaeuser joined the market (and from now on, I’m calling Weyerhaeuser “Big W,” because I just can’t keep typing that name). Anyway, while Big W did well over the next 20 years, Ross-Simmons did not. The price of alder sawlogs (which are up to 75% of a sawmill’s costs) went up, while lumber prices fell. And Ross-Simmons got hit hard, eventually shutting its doors in May ‘01.

Ross-Simmons then sued Big W, claiming that Big W drove it out of business by bidding up the cost of the sawlogs to the point that Ross-Simmons couldn’t keep a profit. This was an antitrust suit under the Sherman Act, claiming monopolization and attempted monopolization based on Big W allegedly overpaying for these sawlogs to cause the prices to artificially raise.

This, Ross-Simmons argued, was illegal predatory bidding.

The trial court continually rejected Big W’s attempts to kill the predatory-bidding theory. At one time, Big W argued that Ross-Simmons had to meet the standards of a Supreme case from 1993, Brooke Group Ltd. v. Brown & Williamson Tobacco Corp. which was not about predatory bidding, but predatory pricing. The District Court denied this motion, and also rejected jury instructions which also relied on Brooke Group. Instead, the jury was told that Big W has committed antitrust violations if the jury decides that it tried to prevent Ross-Simmons from getting logs by buying more logs than necessary or paying a higher price than necessary. The jury ruled against Big W to the tune of $26 million.

Big W appealed to the Ninth Circuit, which affirmed the verdict. It ruled that predatory bidding and predatory pricing are similar, but that there are differences, and that “the concerns that led the Brooke Group Court to establish a high standard of liability in the predatory-pricing context do not carry over to this predatory bidding context with the same force.”

I’m lost. Can we talk about this predatory pricing business? Yeah, now would be the time. So predatory pricing is where someone lowers the price of their own product with the hope that competitors can’t afford to match the low prices, thus driving those competitors out of business. Then, the “predator” can jack the price way up. The Supremes looked at this practice in Brooke Group and set a high standard for a plaintiff to win on a claim of predatory-pricing. This is because “[t]he mechanism by which a firm engages in predatory pricing - lowering prices - is the same mechanism by which a firm stimulates competition,” and the court doesn’t want to “chill the very conduct [which] the antitrust laws are designed to protect.”

So a predatory pricing plaintiff must prove two things to win. They have to be able to show that the prices in question were below cost - the idea being that price cutting benefits consumers, so it should only be punished where it hurts competition, namely, when it’s below cost (because then there’s a loss on the sale, not a profit). The plaintiff must also, according to the Brooke Group Court, prove that the “bad guy company” was likely to make back its “investment in below-cost pricing” down the road, by jacking prices up after the competition is gone. This requirement is because “without a dangerous probability of recoupment of losses…it is highly unlikely that a firm would engage in predatory pricing” in the first place.

Ok, and what, exactly, is predatory bidding? Well that’s what Ross-Simmons claims Big W was doing. So predatory bidding is where a company uses their strong market power to bid up the price of supplies so that competitors can’t afford to buy them and stay in business. This results in a monopsony (whereas a monopoly is control of the sales side of the market, monopsony is control on the buying side of the market “and is sometimes colloquially called a ‘buyer’s monopoly’”). And once the competitors are gone, the “bad guy company” can try to bid the supply prices back down, and pull in nice fat profits which make up for the losses it took while the prices were high.

Boring, but makes sense. You ain’t whistling Dixie.

So where are we going with all this? Well, in a unanimous opinion, Thomas tells us that those two Brooke Group standards apply to predatory bidding, just like they apply to predatory pricing, because the underlying claims in each type of case are similar - there is a “close theoretical connection between monopoly and monopsony.” Two sides of the same coin, if you will:

Both 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.

And more importantly, they are both similar with respect to what the Brooke Groupe Court thought was significant. A rational business would rarely be willing to suffer short term losses in the hopes of getting bigger profits down the road, using either predatory scheme. And similarly, the actions underlying both predatory bidding and predatory pricing “are often ‘the very essence of competition,’” that is, “sellers use output prices to compete for purchasers [and] buyers use bid prices to compete for scarce inputs.” There are plenty of legit reasons why such pricing or bidding could take place, so Thomas says we should only approve claims of predatory bidding, as with predatory pricing, where it’s clear that anticompetitive shenanigans are going on.

Plus, it turns out that predatory bidding isn’t even as much a threat to consumers as predatory pricing, because, while predatory pricing only succeeds when a higher prices is charged to consumers, “a predatory bidding scheme could succeed with little or no effect on consumer prices because a predatory bidder does not necessarily rely on raising prices in the output market to recoup its loses.” That’s because the bad guy can just bid the buying prices way down later, and still sell to the consumer for the same price, all while reaping fat profits.

All of which is a long way of saying what? That the same test applies to both - the “two-pronged Brooke Group test should apply to predatory-bidding claims.” So the plaintiff in a predatory bidding case must first show “that the alleged predatory bidding led to below-cost pricing on the predator’s outputs.” That is, that the predator was taking a loss on its sales, because it was selling at below cost. As with predatory pricing, if the predator is still selling above-cost, it’s a potentially reasonable business decision which should be beyond the court’s reach, lest the court chill legitimate competitive conduct.

And second, a predatory-bidding plaintiff must also “prove that the defendant has a dangerous probability of recouping the losses incurred in bidding up input prices through the exercise of monopsony power.” Because, without such a likelihood, there’s no economic sense to the practice of predatory bidding.

Thus, the Ninth Circuit got it wrong, and the Supremes vacate the case and remand it.