Thursday, November 30, 2006

High Court Considers Proper Standard in Predatory Buying Case

This posting was written by John Scorza, CCH Washington, D.C. Correspondent.

In oral arguments November 28, the U.S. Supreme Court considered the question of what standard a plaintiff alleging predatory buying must meet to prevail under Section 2 of the Sherman Act.

The case involves Ross-Simmons Hardwood Lumber Co., a pioneer in the alder lumber industry that went out of business in 2001, and lumber products giant Weyerhaeuser Co. Ross-Simmons sued Weyerhaeuser, claiming Weyerhaeuser purchased more logs than it needed at an inflated price in an effort to eliminate competition. Ross-Simmons prevailed in a jury trial of its monopolization and attempted monopolization claims and was awarded nearly $79 million in damages.

On appeal, the Ninth Circuit (2005-1 TRADE CASES ¶74,817), upheld the jury verdict, ruling that the standard for a predatory pricing claim articulated by the Supreme Court in Brooke Group Ltd. v. Brown & Williams Tobacco Corp. (1993-1 TRADE CASES ¶70,277) did not apply to a case that alleged “predatory bidding” in violation of Section 2 of the Sherman Act.

The Brooke Group decision maintained that a plaintiff asserting predatory pricing must prove that the defendant suffered a short-term loss from the pricing and had a dangerous probability of recouping its loss through “supracompetitive” pricing after the elimination of competition. The appeals court upheld instructions that allowed a jury to find a Section 2 violation based on factors such as “fairness” and “necessity.”

The issue before the Supreme Court revolves around the jury instructions. The jury was told it could find that an anticompetitive act occurred if Weyerhaeuser purchased more logs “than it needed” or paid a higher price “than necessary” to prevent competitors from obtaining the logs they needed at a fair price.

Representing Weyerhaeuser, Andrew J. Pincus said that the question was “whether the standards adopted in Brooke Group to determine whether a seller’s prices violate the antitrust laws because they are too low also should apply in assessing the claim that the buyer’s purchase prices are illegally high.”

Weyerhaeuser maintains that the proper standard is the stricter one established by the court in Brooke Group. A predatory pricing case, Brooke Group would require Ross-Simmons to show that Weyerhaeuser paid so much for the raw materials that (1) the price at which it sold its products did not cover its costs and (2) the company had a “dangerous probability” of recouping its losses. Weyerhaeuser claims the stricter standard is a much clearer test.

Chief Justice John G. Roberts Jr. appeared hesitant to apply the Brooke Group standard to this case. The alleged anticompetitive activity in Brooke Group was low pricing, which benefits consumers. But that situation was not present in this case, he said. “So isn’t that a reason not to think that we should apply to Brooke Group test to this situation?” he asked.

Pincus responded that when competition drives up the prices of logs, the sellers of those logs benefit. Consumers too may benefit, he said, because of the expectation that a buyer bidding more can make more efficient use of the product and generate more output, ultimately resulting in lower prices for consumers. Weyerhaeuser, he said, had achieved such efficiencies. Pincus noted that the court in past cases has said that “price competition generally, a free and open price competition, will produce lower prices and better goods and services.”

Arguing for the federal government, in support of Weyerhaeuser, Kannon K. Shanmugam urged the court to adopt the Brooke Group test. Shanmugam said a claim of predatory bidding is the “flip side” of a claim of predatory pricing, so the Brooke Group standard for predatory pricing claims should apply to predatory bidding claims as well.

On behalf of Ross-Simmons, Michael E. Haglund countered that the Brooke Group test is not the proper standard in predatory buying cases. It is not justified “because raising input prices, unlike cutting output prices, is moving prices in the wrong direction for consumers,” Haglund told the court.

While acknowledging that the jury instructions may not have been perfect, Haglund said “the instructions on the whole” provided sufficient guidance to the jury. To improve the instructions, Haglund suggested the following language: “Paid a higher price than necessary to move the log market to higher levels than otherwise would have prevailed in order to injure competition.”

The case is Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co. Inc., No. 05-381, cert. granted June 26, 2006. A transcript of the oral argument appears at:

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