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Web address: http://www.nylj.com
Volume 237—no. 53
tuesday, march 20, 2007
Antitrust Trade
and
Practice
By Neal R. Stoll and Shepard Goldfein
I
Predatory Bidding “Mirrors” Predatory Pricing
n a recent antitrust decision, the U.S.
Supreme Court addressed whether the
similarities between predatory pricing and
predatory bidding required that the schemes
receive identical legal treatment.
The Court determined that because
predatory bidding “mirrors” predatory pricing
in significant ways, the Brooke Group standard for
predatory pricing should also apply to claims of
predatory bidding.1
Consequently, in Weyerhaeuser Co. v. RossSimmons Hardwood Lumber Co. (2007), decided
last month, the Court established that a plaintiff
in a predatory bidding case must show: (1)
below-cost pricing in the short term; and (2)
a “dangerous probability” of recoupment in the
long term.2
In considering its decision, the Court
cited articles by two well-known antitrust
commentators, Steven C. Salop and John B.
Kirkwood. What was not apparent in the opinion,
however, was that each of the cited articles had
proposed that Weyerhaeuser be resolved using
rule-of-reason analysis. By extending Brooke
Group to predatory bidding claims, the Court
soundly rejected the positions advanced by the
two authors.
This column first explains the relationship
between predatory pricing and predatory bidding
and the facts of Weyerhaeuser. It then outlines
the standards Salop and Kirkwood proposed for
evaluating claims for predatory bidding. Finally,
it discusses the reasons for the Court’s decision
to extend Brooke Group to predatory bidding
claims in Weyerhaeuser.
Predatory Acts and ‘Weyerhaeuser’
Predatory pricing and predatory bidding are
structurally similar anticompetitive schemes. In
the first phase of a predatory pricing campaign, a
firm reduces the prices of consumer goods in an
attempt to drive its rivals out of business. This
is followed by a recoupment phase when the
predator recovers its losses by increasing prices to
pre-predation levels. Similarly, in the first phase
Neal R. Stoll and Shepard Goldfein are
partners at Skadden, Arps, Slate, Meagher & Flom.
Kathleen P. Duff, an associate with Skadden,
Arps, assisted with the preparation of this article.
of a predatory bidding project, a firm strategically
overpays for products in the input market. Once
the firm has driven its competitors out of business
by raising their costs, it uses its monopsony power
in the input market to lower the price of inputs
and recover the losses it incurred during the
predation phase.
In its seminal predatory pricing decision,
Brooke Group, the Court determined that
plaintiffs alleging predatory pricing must show
that the defendant: (1) engaged in belowcost pricing in the short term; and (2) had
“dangerous probability” of recouping losses in
the long term.3,4 The Court applied this difficult
standard because it determined that the effort
and endurance required to pull off predatory
pricing strategies ensure that such “schemes are
rarely tried, and even more rarely successful.”5
Additionally, the Brooke Group Court recognized
that firms execute predatory pricing strategies
by lowering prices in the consumer market.
Since lowering prices often signals legitimate
competition, the Court enacted a high standard
to ensure that “mistaken findings of liability [do
not] ‘chill the very conduct the antitrust laws
are designed to protect.’”6
Though the predatory pricing standard has
been clear for 15 years, the Court had not
considered the legal components of a predatory
bidding claim until Weyerhaeuser. Weyerhaeuser
involved the production of alder lumber by saw
mills in the Pacific Northwest. Saw mills in that
region conduct business by purchasing alder saw
logs and processing them into finished lumber.
Logs can account for up to 75 percent of a mill’s
costs. Plaintiff Ross-Simmons Lumber Co. had
operated a single processing mill since 1962,
while Weyerhaeuser entered the alder lumber
production business in 1980 and currently
operates six mills in the region. Between 1998
and 2001, the price of alder sawlogs increased
and the price of finished lumber decreased.
When these conditions rendered its business
unprofitable, Ross-Simmons closed its mill and
sued Weyerhaeuser.7
Plaintiff proceeded on the theory that
Weyerhaeuser drove it out of business by
engaging in predatory bidding in violation of
§2 of the Sherman Act. Specifically, plaintiff
argued that Weyerhaeuser intentionally overpaid
for raw saw logs in order to raise the price its
competitors had to pay for logs. By artificially
“bidding up” these costs, the defendant reduced
Ross-Simmons’ operating margins to the point
where it could no longer stay in business.
Three Possible Standards
Since the issue at all levels of adjudication
in Weyerhaeuser was whether the Brooke Group
standard was applicable to Ross-Simmons’
predatory bidding claim, the case elicited much
discourse about whether the relationship between
predatory pricing and predatory bidding required
courts to treat them similarly.
Professor Salop’s view was that Brooke Group
should not apply to predatory bidding claims
because the standard would not accommodate
the subtle differences between the various types
of predatory bidding. In his article, “Buyer Power
and Antitrust: Anticompetitive Overbuying by
Power Buyers,” Mr. Salop posited that the Court
should apply a consumer welfare-based rule-ofreason analysis to resolve Weyerhaeuser and other
bidding cases.
First, Mr. Salop contrasted “predatory
overbuying,” which consists of overbuying in
the input market for the purpose of gaining
buyer-side market power in the input market,
with “raising rivals’ costs” (RRC) overbuying in
the input market for the purpose of acquiring
market power in the output market.8
Mr. Salop argued that defendants engaging in
predatory overbuying can benefit consumers in
the short term because they acquire more inputs,
these inputs generally lead to more outputs, and
more outputs generally lead to lower pricing in the
consumer market. Defendants engaging in RRC
overbuying, however, are more likely to harm
consumers because, in theory, their competitors
buy fewer inputs and ultimately produce fewer,
more-expensive outputs. Further, defendants,
with market power, can also raise their output
prices simultaneously with their overbuying of
inputs. Therefore, Mr. Salop concluded there
is less possibility of some redeeming phase of
consumer benefit.9
To accommodate the potentially different
effects of the two types of overbuying, Mr. Salop
proposed that courts in predatory bidding cases
make a preliminary determination of the type
of overbuying implicated, then apply one of
two tests to evaluate the claim. For predatory
overbuying cases, Mr. Salop proposed that courts
consider: (1) whether the defendant’s overbuying
artificially inflated input prices; (2) whether the
New York Law Journal
higher prices drove competitors from the market;
(3) whether the defendant gained monopsony
power and ability to recoup losses; and (4)
whether consumers were harmed. Also, Mr.
Salop submitted that incorporating the belowcost price test into this formulation would make
it less likely that the standard would discourage
legitimate competition.10
Mr. Salop offered a less-stringent standard for
defendants practicing RRC. He proposed that
courts evaluating RRC allegations determine:
(1) whether the defendant artificially inflated
input prices; (2) whether this caused competitors’
marginal costs to rise; (3) whether the defendant
firm gained market power in the output market;
and (4) whether consumers were harmed. Mr.
Salop would not require RRC plaintiffs to meet
the below-cost price test because he thought the
greater probability of consumer harm in these cases
warranted a lower standard.11
Like Professor Salop, Professor Kirkwood
also tried to convince the Court that it should
resolve predatory bidding claims using rule-ofreason analysis. In his article “Buyer Power and
Exclusionary Conduct: Should ‘Brooke Group’
Set the Standards for Buyer-Induced Price
Discrimination and Predatory Bidding?,” Mr.
Kirkwood acknowledged that predatory bidding
looks structurally similar to predatory pricing, but
concluded that because little is known about the
actual effects of predatory bidding, the consumer
welfare standard was superior to the Brooke
Group test.12
Mr. Kirkwood observed that the lack of
knowledge about predatory bidding made it
impossible to determine whether the practice
shared critical characteristics with predatory
pricing. He noted, “predatory bidding has been
analyzed much less extensively than predatory
pricing… [so] it is not clear that an attempt at
predatory bidding, if made in conducive market
conditions, is unlikely to be successful.”13 Thus,
until courts become more familiar with the effects
of predatory bidding, Mr. Kirkwood argued that
its legality should be determined using a rule-ofreason analysis.
Consequently, Mr. Kirkwood proposed that a
predatory bidding plaintiff be required to show
that: (1) the defendant raised the price paid by
its rivals for a critical input; (2) the price increase
hurts its rivals and made monopsony likely; (3) new
entrants would not undermine this monopsony
power; and (4) the benefits of defendant’s behavior
did not outweigh the bad effects on consumers.
In his view, a plaintiff capable of meeting this
test could “show competition and consumers are
likely to be harmed…[and in such cases it would
be] unwise to deny liability because the plaintiff
[could not] also show losses and recoupment.”14 Mr.
Kirkwood’s vision was that a more-lenient standard
would ensure proper deliberation of predatory
bidding claims pending research into whether
predatory pricing shared critical characteristics with
predatory bidding.
The defendants and the federal antitrust amici
took a contrary position and argued that predatory
pricing and predatory bidding shared meaningful
characteristics that warranted the extension of
Brooke Group in Weyerhaeuser. In their amicus
brief, the Federal Trade Commission and the U.S.
tuesday, march 20, 2007
Department of Justice argued, “the rationales for
Brooke Group’s stringent standard of proof for
predatory pricing claims are generally applicable in
the context of predatory buying clams as well.”15
In particular, overpaying in the input market,
like lowering prices in the consumer market, can
signify both a predatory scheme and legitimate
competition. In both cases, a “rule that attempted
to distinguish precisely between competitive and
anticompetitive bidding would be ‘beyond the
practical ability of a judicial tribunal to control
without courting intolerable risks of chilling
legitimate [conduct].’16 In the view of the federal
agencies, any rule less stringent than Brooke Group
could lead to false positives and thereby ‘chill
the very conduct the antitrust laws are designed
to protect.’”17
The ‘Weyerhaeuser’ Decision
Ultimately, the Court concluded that predatory
pricing and predatory bidding are close enough
to share the Brooke Group standard. Writing for
a unanimous Court, Justice Clarence Thomas
explained, “predatory pricing and predatory bidding
claims are analytically similar,” and “predatory
bidding mirrors predatory pricing in respects that
we deemed significant to our analysis in Brooke
Group.”18 The decision favorably cited Mssrs. Salop
and Kirkwood’s articles, but, obviously, did not
incorporate their actual recommendations into
its resolution.
One reason the Court extended Brooke Group
to predatory bidding claims was its conclusion that
predatory pricing and predatory bidding schemes
are similarly likely to fail. Since both schemes
require firms to gamble on recovering costs in
the long run, the Court inferred that “successful
monopsony predation is probably as unlikely as
successful monopoly predation.”19 Apparently,
the Court was not as cautious as Mr. Kirkwood
when it came to predicting a firm’s ability to bid
its competitors out of business.
The Court also was convinced that the
similarities in the mechanisms by which predatory
pricing and predatory bidding are executed required
application of Brooke Group to Weyerhaeuser.
Specifically, since it can be difficult to determine
illegal behavior from competitive behavior during
the first phase of each scheme, the Court perceived
that a lower standard than Brooke Group in bidding
cases could chill competition. The observation
that there are “myriad legitimate reasons”
why an input buyer might bid up input prices,
including miscalculation, as part of risk strategy,
or in response to increased consumer demand,
compounded this decision and demonstrated
reluctance to adjudicate every action taken by
defendant’s business.20
Finally, the Court resolved the consumer
welfare issue by determining that predatory bidding
schemes are more benign than predatory pricing
schemes. Failed bidding schemes can benefit
consumers because firms with more inputs typically
produce more, cheaper outputs. Predatory bidding,
however, is actually less inherently dangerous than
predatory pricing because “a predatory bidder does
not necessarily rely on raising prices in the output
market to recoup its losses.”21 Interestingly, the
Court cited Mr. Salop on this proposition yet
ignored his distinction between the different types
of predatory overbidding and their potential effects
on the consumer market.
Conclusion
After Weyerhaeuser, a predatory bidding
plaintiff must allege: (1) below-cost pricing in
the short term; and (2) a “dangerous probability”
of recoupment in the long term. Ross-Simmons
failed to prove that defendant’s overpaying for saw
logs led to below-cost pricing in the output market
and that defendant had a dangerous probability
of recouping its losses.
Now, overpaying in the input market becomes
suspect only when it leads to below-cost pricing
in the output market. This result is consistant
with the Court’s decision in Spectrum Sports,
which held that a firm cannot be held liable for
behavior characterizing attempted monopolization
in the absence of an actual dangerous probability
of monopolization of a particular market.22 Both
cases stand for the proposition that conduct must
be evaluated in terms of its actual rather than
theoretical effects.
Mssrs. Salop and Kirkwood have earned
the curious honor of having had their research
favorably cited in a decision that stands for a very
different outcome than those championed in
their articles. Given the historical infrequency of
predatory bidding schemes, however, the result in
Weyerhaeuser is one the rest of antitrust community
can live with comfortably.
•••••••••••••
••••••••••••••••
1. Weyerhaeuser v. Ross-Simmons Lumber Co., 549 US
(2007); Brooke Group Ltd. v. Brown & Williamson Tobacco
Corp., 509 US 209, 226 (1993).
2. See generally Weyerhaeuser, 549 US (2007)
3., 4. Brooke Group, 509 US at 222-225.
5. Id. at 226 (quoting Matsushita Elec. Industrial Co. v.
Zenith Radio Corp., 475 US 474, 589 (1986)).
6. Id. (quoting Cargill, Inc. v. Monfort of Colorado, Inc., 479
US 104, 122 n. 17 (1986)).
7. Weyerhaeuser, 549 US at 1-2.
8. Mr. Salop characterizes predatory bidding schemes as
“overbuying” schemes. For the purposes of this article, the
practices are identical. Steven C. Salop, “Buyer Power and
Antitrust: Anticompetitive Overbuying by Power Buyers,” 72
Antitrust L.J. 669, 669 (2005).
9. Salop, at 675-680.
10. Id. at 689-694.
11. Id. at 690-697.
12. See generally John C. Kirkwood, “Buyer Power and
Exclusionary Conduct: Should ‘Brooke Group’ Set the
Standards for Buyer-Induced Price Discrimination and
Predatory Bidding?,” 72 Antitrust L.J. 625 (2005).
13. Kirkwood, at 655.
14. Id. at 661.
15. Brief of amicus curiae United States, at 11-14,
Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., 126
SCt 714 (Nov. 28, 2005) (No. 05-381).
16. Id. at 13 (quoting Brooke Group, 509 US at 226).
17. Id.
18. Weyerhaeuser, 549 US at 9.
19. Id. at 10 (quoting R. Blair & J. Harrison, “Monopsony”
66 (1993)).
20. Id.
21. Id. at 11. (citing Salop, “Buyer Powers”).
22. Spectrum Sports, Inc. v. Shirley McQuillan, 506 US 447,
459 (1993).
This article is reprinted with permission from the
March 20, 2007 edition of the New York Law
Journal. © 2006 ALM Properties, Inc. All rights
reserved. Further duplication without permission is
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www.almreprints.com. #070-03-07-0038