Tuesday, February 20, 2007

Supreme Court Imposes Brooke Group Standard on Predatory Bidding Claim

This posting was written by Jeffrey May, editor of CCH Trade Regulation Reporter.

A unanimous U.S. Supreme Court has ruled that the test applied to claims of predatory pricing in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp. (1993-1 Trade Cases ¶70,277) applied to a defunct lumber mill's predatory bidding claim against lumber giant Weyerhaeuser Company.

The Supreme Court vacated a decision of the U.S. Court of Appeals in San Francisco (2005-1 Trade Cases ¶74,817), upholding a $26 million jury verdict against Weyerhaeuser (trebled to approximately $79 million) on the sawmill's monopolization claim.

Weyerhaeuser had argued that the sawmill's claim failed as a matter of law because it did not satisfy the Brooke Group standard. Under the Brooke Group test, a plaintiff seeking to establish competitive injury resulting from a rival's low or predatory prices was required to: (1) prove that the prices complained of were below an appropriate measure of its rival's costs and (2) demonstrate that the competitor had a dangerous probability of recouping its investment in below-cost prices.

Noting that predatory pricing and predatory bidding claims were analytically similar, the High Court ruled that, in order to succeed on its predatory bidding claim, the sawmill had to prove that: (1) the alleged predatory bidding led to below-cost pricing of the alleged predator's outputs (the predator's bidding on the buy side caused the cost of the relevant output to rise above the revenues generated in the sale of those outputs); and (2) the alleged predator had a dangerous probability of recouping the losses incurred in bidding up input prices through the exercise of monopsony power.

Both predatory pricing and predatory bidding claims involved the deliberate use of unilateral pricing measures for anticompetitive purposes. And both claims logically required firms to incur short-term losses on the chance that they might reap supracompetitive profits in the future, according to the Court.

The complaining sawmill blamed Weyerhaeuser for driving it out of business by bidding up input costs. It argued that Weyerhaeuser overpaid for alder saw logs to cause saw log prices to rise to artificially high levels as part of a plan to drive it out of business. As proof that this practice had occurred, the sawmill pointed to Weyerhaeuser's large share of the alder purchasing market, rising alder saw log prices during the alleged predation period, and Weyerhaeuser's declining profits during that same period.

During the nine-day trial, the jury was instructed that the sawmill could prove that Weyerhaeuser's bidding practices were anticompetitive acts if the jury concluded that Weyerhaeuser “purchased more logs than it needed, or paid a higher price for logs than necessary, in order to prevent the complaining sawmill from obtaining the logs they needed at a fair price.”

The trial court denied Weyerhaeuser's motions for judgment as a matter of law or for a new trial, which were based in part on Weyerhaeuser's argument that the sawmill had not satisfied the Brooke Group standard.

The appellate court affirmed the verdict against Weyerhaeuser. Because the sawmill conceded that it had not satisfied the Brooke Group standard, there was no support for the jury's verdict.

The decision—delivered by Justice Thomas—is Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., Inc., Docket No. 05-381, decided February 20, 2007.

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