Whether a business can be held to violate antitrust laws if it is shown that the business purchases too many or pays too much for materials in order to keep competitors from purchasing those materials at a fair price, or whether another standard should apply, such as the standard in Brooke Group, which requires showing that the business sustained a loss as a result of its action but was likely to make the money back once it had a monopoly.
Ross-Simmons Hardwood Lumber Co., Inc., a sawmill, went out of business when Weyerhaeuser, a giant in the forest industry, used its market share to drive up the price of sawlogs. The issue is in this case is whether the jury used the proper standard to find that Weyerhaeuser had violated the antitrust provisions of the Sherman Act. Weyerhaeuser argues that the Brooke Group standard should have applied, whereby a plaintiff must show that the defendant: (1) paid so much for raw materials that the price at which it sold its products did not cover its costs; and (2) had a “dangerous probability” of subsequently recouping those losses. Ross-Simmons advocates for the looser standard applied by the Ninth Circuit, whereby liability may be established by showing that the defendant purchased more raw materials “than it needed” or paid a higher price for those inputs “than necessary” so as to prevent competitors buying the materials at a “fair price.” The Court’s decision could result in a dramatic shift in either of two directions: it could either shield large corporations from suits related to the corporation’s influence on the market, or give small businesses a powerful weapon to wield against the pressures that a large corporation can exert.
Questions as Framed for the Court by the Parties
In Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993), the Court held that an antitrust plaintiff alleging predatory selling must prove that the defendant (I) sold its product at a price level too low to cover its costs and (2) had a dangerous probability of recouping its losses once the scheme of predation succeeded.
The question in this case is whether a plaintiff alleging predatory pricing may, as the Ninth Circuit held, establish liability by persuading a jury that the defendant purchased more inputs "than it needed" or paid a higher price for those inputs "than necessary," so as "to prevent the Plaintiffs from obtaining the [inputs] they needed at a fair price"; or whether the plaintiff instead must satisfy what the Ninth Circuit termed the "higher" Brooke Group standard by showing that the defendant (I) paid so much for raw materials that the price at which it sold its products did not [cover] its costs and (2) had a dangerous probability of recouping its losses.
From a bird’s eye view, a patchwork of green and hazy brown shapes weaves together much of the Pacific Northwest, especially the area surrounding the Columbia River, which serves as the border between Oregon and Washington. The logging industry has been active in the area for over a century, leaving that trademark quilt pattern as tracts of forest are harvested. After being cut down, a the fallen tree is a “sawlog.” Sawmills buy the sawlogs from the owners of the forestland, process the logs into timber, and sell the timber, which turns into a home, furniture, or a coat hanger, depending on the type of wood. Brief for Petitioner at 2–3. Most of the Pacific Northwest forest is softwood, which is ideal for construction. Brief for Respondent at 6. There is also hardwood, primarily alder, which is useful for making crafted wood products, like furniture and guitars. Brief for Petitioner at 3. The alder grows amidst the softwood forests and was undesirable in the region until the 1962 when the Ross-Simmons Hardwood Lumber Co. pioneered processing techniques for turning alder into high-quality timber. Brief for Respondent at 43 n. 41.
Ross-Simmons operated an alder sawmill in Longview, Washington on the banks of the Columbia River. Brief for Petitioner at 4. Even though Weyerhaeuser has been a major player in the Northwest forest industry since 1906, Weyerhaeuser did not enter the alder market until 1980. Brief for Respondent at 1. After unsuccessfully trying to buy Ross-Simmons’s sawmill in 1985, Weyerhaeuser built an alder sawmill right next door to Ross-Simmons’s. Id. The location of an alder sawmill is important; a sawmill must generally buy alder harvested within 100 miles of the mill because of the wood’s tendency to deteriorate and lose value when left in the elements. Brief for Petitioner at 3.
Weyerhaeuser continued to grow and opened more alder mills in the region. By 1998, it was purchasing 65% of the alder sawlogs available in the region. Confederated Tribes of Siletz Indians of Oregon v. Weyerhaeuser Co., 411 F.3d 1030, 1034 (9th Cir. 2005) [hereinafter “Weyerhaeuser”]. Beginning in 1998, Ross-Simmons started to experience difficulty, as the cost to buy sawlogs increased but the selling price of finished timber decreased. Id. Ross-Simmons became unable to cover its costs to produce timber and sustained losses. Id. By 2001, those losses totaled roughly $4.5 million, and Ross-Simmons was forced to shut down. Id..During this time period, Weyerhaeuser did not operate at a loss. Brief for Petitioner at 6.
Ross-Simmons sued Weyerhaeuser in the United States District Court for the District of Oregon under Section 2 of the Sherman Act. Ross-Simmons presented evidence that, between 1998 and 2001, Weyerhaeuser had attempted to monopolize the alder market in the Pacific Northwest by using a series of tactics to raise sawlog prices, such as entering into exclusive contracts with sawlog suppliers, buying more logs than necessary, and paying a higher price for logs than necessary. Weyerhaeuser, 411 F.3d at 1034. Ross-Simmons presented evidence to support that Weyerhaeuser intentionally tried to raise the cost of sawlogs so that smaller rivals, like Ross-Simmons, would be unable to operate at a profit and then eventually go out of business. Id.The judge instructed the jury: “One of Plaintiffs' contentions in this case is that the Defendant purchased more logs than it needed or paid a higher price for logs than necessary, in order to prevent the Plaintiffs from obtaining the logs they needed at a fair price. If you find this to be true, you may regard it as an anti-competitive act.” Id. at 1035, 1036 n. 8. Ross-Simmons won the verdict, and the court entered a judgment of $78 million against Weyerhaeuser. Id. at 1035.
Weyerhaeuser appealed to the United States Court of Appeals for the Ninth Circuit, arguing that the jury instruction was improper because it did not use the Supreme Court standard for predatory pricing from Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S.209 (1993). Weyerhaeuser, 411 F.3d at 1035. Weyerhaeuser also argued that there was insufficient evidence to support the jury’s finding that Weyerhaeuser engaged in anti-competitive conduct. Id. The Ninth Circuit rejected both arguments and affirmed the lower court’s judgment, holding that Brooke Group did not apply and that there was sufficient evidence to support the jury’s verdict. Id. at 1034–35, 1040.
Other cases were brought against Weyerhaeuser following the jury verdict for Ross-Simmons. These led to roughly $50 million in settlements and judgments. Those cases relied on the jury determination in this case and the standard that was applied. Bradley Meacham and Hal Bernton, Weyerhaeuser on Defense in Antitrust Trials, The Seattle Times, Feb. 12, 2004.
Fifty dollars! One hundred dollars! A thousand dollars! Sold! Anyone who has participated in an auction, in person or on e-Bay, knows what can happen when two people want the same thing. The price goes up, sometimes higher than it should. It sometimes seems as though the other person keeps bidding, simply so you will have to pay more. Unless they admit to it, though, such a motive can be very difficult to prove.
Ross-Simmons’s claim in this case is essentially that Weyerhaeuser was bidding simply to put Ross-Simmons out of business. A jury found that Weyerhaeuser violated the Sherman Act when it paid more than necessary for sawlogs to keep Ross-Simmons from purchasing them at a “fair price.” Weyerhaeuser, 411 F.3d at 1035–36.
Antitrust law is built around the concept that a business should succeed because the business makes its product better, faster, or cheaper than other businesses, and not as a result of a monopoly or underhanded tactics. Businesses compete with one another to improve the quality of their products and operations, which will benefit consumers by delivering a better product at lower cost. Large companies often have major advantages over small companies because the large-scale operation is more efficient and involves less cost per unit produced. Brief for Petitioner at 11. Here, Weyerhaeuser could afford to pay more for sawlogs because its other costs were lower. Id. at 7. But did Weyerhaeuser use that advantage improperly to eliminate competition? This question highlights the difficulty in determining whether a company violated antitrust law or was actually engaged in normal competitive practice. The standard used to determine improper conduct is a critical. Since antitrust law’s purpose is primarily to encourage competition, the employed standard should not chill competition. Brief for Petitioner at 2. When antitrust law is proposed to apply to an activity or practice, the implications of that application must be considered: will the result in the case and the standard that is created encourage competition or, in fact, discourage it? Id. at 10–11.
The issue before the Supreme Court is where to set the bar for proving antitrust violations, when the plaintiff alleges that the defendant used its control of the market to drive up the price of raw materials and eliminate competitors who will not be able to afford the materials. Weyerhaeuser argues that the standard used by the jury was improper because it does not give adequate guidance to jurors and could chill competition by leaving uncertainty as to when a company can use its advantage to compete for the materials it needs. Brief for Petitioner at 11–12. Weyerhaeuser proposes the higher Brooke Group standard, which requires that a plaintiff alleging antitrust violations prove that the business sustained a loss but was likely to make the money back once its competitors have gone out of business. Id. Ross-Simmons argues that the Brooke Group standard is inappropriate because the factors used to justify that standard are not present in this case. Brief for Respondent at 25–26. Further, the use of the Brooke Group standard would preclude the punishment of companies that did not lose money, even if they used anti-competitive tactics to drive competitors out of business. Id. at 15–18, 40.
To those supporting Ross-Simmons, there must be a more flexible standard that will punish companies that used anti-competitive tactics to drive competitors out of business, but did not lose money in the process. Weyerhaeuser dictates the price paid for alder sawlogs in the Pacific Northwest because it buys nearly 70% of them. Brief for Respondent at 7, 15–16. If Weyerhaeuser continued to raise prices while still being profitable, it could, without reprimand, force the rest of its competitors out of business and create a monopsony (a buyer’s monopoly), especially given the difficulties of entering the industry. Brief of Amici Curiae Forest Industry Participants Supporting Respondent at 21. This would allow Weyerhaeuser to then drop the price paid for sawlogs, allowing it to earn more profit but without necessarily passing that savings onto consumers. Brief of the Amicus Curiae States of California, Oregon, Arizona, Iowa, Louisiana, Montana, West Virginia in Support of Respondent (hereinafter “Brief of States”) at 16. This is the type of situation that the Sherman Act was meant to prevent. The fear is that a victory for Weyerhaeuser will leave smaller businesses vulnerable to large companies who will use their influence in the market to squeeze out smaller competitors. In addition, the profits for landowners who sell sawlogs would plummet as Weyerhaeuser uses its market share to control prices. This would likely dissuade landowners from replanting alder or devoting attention to it, leading to a decline in quantity and quality. Brief of States at 17.
Those supporting Weyerhaeuser and the application of the Brooke Group standard argue that there must be a clear objective test, otherwise the competition and innovation envisioned by the Sherman Act will be defeated. The lack of a clear test could discourage large companies from investing in more efficient systems, which would allow them to buy more materials because of the lower operating costs. Without a clear test, companies would have to risk the possibility of a lawsuit whenever they increase the demand for raw materials. In other words, companies would lose most of the incentive to be more efficient, which would run counter to the purposes of the Sherman Act. Brief of Economists as Amici Curiae in Support of Petitioner at 10. Investment in technology could slow due to a fear that there will be fewer rewards to be reaped. A number of large corporations have supported Weyerhaeuser, joining the refrain that the standard used by the jury was so vague that juries could easily find many businesses that are actually engaged in pro-competitive behavior to be in violation of antitrust law and subject to treble damages, like the $70 million dollars in this case. Brief for Amici Curiae AT&T Inc., Bellsouth Corporation, General Electric Company, Qwest Communications International Inc., and Verizon Communications Inc. in Support of Petitioner at 3.
Whatever standard the Court deems appropriate, it will be the first hurdle to bringing suit. Weyerhaeuser and supporters fear that if they lose, the lower standard will allow many frivolous lawsuits to proceed, opening a gaping wound in the wallets of large corporations. On the other hand, Ross-Simmons’s supporters fear that the Brooke Group standard will apply, raising the bar so high that very few claims will get very far.
The Court has could decide this case in a few ways. Besides making the binary decision of whether or not Brooke Group applies, the Court could potentially announce a new rule tailored to the economic concerns related to the predatory pricing that was alleged in this case. Since Roberts become Chief Justice, the Court has granted certiorari to a larger number of business-related cases than it has in previous years. Shahenn Pasha, High Court Loads Up On Business Cases, CNNmoney.com, Jul. 11, 2006. This case could be a good indication of how friendly the Court will be to business interests and how the individual members of the Court stand on these types of issues.
An Antitrust Primer
A monopoly is defined as a persistent market situation where a single company or group owns all or nearly all of the market for a given type of product or service. Monopolies are characterized by an absence of competition, which often results in high prices for consumers. By contrast, a monopsony occurs when there is only one buyer of a product or service, and many sellers. Absent meaningful competition, both the monopolist and the monopsonist enjoy what is commonly referred to as market power, or the ability to unilaterally alter the market price of a good or service.
Economists and, for that matter, lawyers often use the term “elasticity” in discussing monopolies and monopsonies. In its simplest sense, elasticity refers to a change in one variable in response to a change in another variable. Price elasticity, a concept of considerable importance to the Weyerhaeuser case, measures the rate of response of quantity demanded due to a change in price. The greater the extent to which demand falls as price rises, the greater the price elasticity of demand. For example, the demand for a product with many close substitutes is considered elastic because a small price rise will cause consumers to switch to competing brands. On the other hand, there are some goods or services—such as salt or, according to Ross-Simmons, alder sawlogs—that buyers cannot consume less of or find substitutes for even if prices should rise. The price elasticity for such products is, by contrast, inelastic.
The Sherman Act, which together with the Clayton Act forms the foundation of federal antitrust law, outlaws all contracts, combinations, and conspiracies that unreasonably restrain interstate and foreign trade. 15 U.S.C. § 1. With respect to monopolies, the Act further provides: “Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony.” 15 U.S.C. § 2. Being a federal statute, the application of the Sherman Act is constitutionally limited to trade or commerce between the states or with foreign nations. Most states, however, have similar statutes prohibiting monopolistic conduct, price fixing agreements, and other acts in restraint of intrastate trade or commerce. In Washington, for instance, both the state constitution and the Unfair Business Practices–Consumer Protection Act prohibit anticompetitive behavior.
While significant antitrust cases are legion, one in particular—Brooke Group Ltd. v. Brown & Williamson Tobacco Corp.—bears mentioning here. 509 U.S. 209 (1993). In Brooke Group, a predatory pricing case involving cigarette manufacturers,Brooke Group filed suit against Brown & Williamson, alleging that the latter’s volume rebates to wholesalers amounted to price discrimination that had a reasonable possibility of injuring competition in violation of the Robinson Patman Act. Id. at 212–19. Finding for Brown & Williamson, the Supreme Court held that, whether a claim alleges predatory pricing under § 2 of the Sherman Act or primary line price discrimination under the Robinson Patman Act, the two prerequisites to recovery remain the same. Id. at 222. First, a plaintiff must prove that the prices complained of are below an appropriate measure of its rival’s costs. Second, a plaintiff must demonstrate that the competitor had “a reasonable prospect, or, under §2 of the Sherman Act, a dangerous probability, of recouping its investment in below cost prices.” Id. at 222, 224. The distinction between “reasonable prospect” and the higher standard of “dangerous probability” is at the heart of Weyerhaeuser’s arguments.
In the main, Weyerhaeuser argues that the two-part Brooke Group test should apply with full force to claims of predatory buying, which it claims are in all relevant respects identical to predatory selling claims. See Brief for Petitioner at 10–12, 14–37. Because a buyer’s competitive instinct is to bid up price, Weyerhaeuser warns, the challenged conduct in this case is indistinguishable from core competitive behavior—meaning that in the buying as in the selling context “false positives” will suppress beneficial and desirable competition. Id. at 11. In short, buyers will refrain from healthy and aggressive behavior for fear of violating the Act.
As Weyerhaeuser points out, the dangerous probability or “recoupment” standard is demanding: the plaintiff must show that the predatory selling would have “the intended effects on the firm’s rivals” and “that there is a likelihood that the predatory scheme alleged would cause a rise in prices above a competitive level that would be sufficient to compensate for the amounts expended on the predation, including the time value of the money invested in it.” See id. at 11 (quoting Brooke Group, 509 U.S. at 225). According to Weyerhaeuser, recoupment presents a clear, objective standard for separating lawful and unlawful conduct on the buy-side. See id. at 18. Moreover, the recoupment standard, Weyerhaeuser contends, has the potential to provide a practical means of screening out insubstantial claims without the expense and other burdens of a full-blown trial, which is no small matter given the fact that courts and juries are, in Weyerhaeuser’s view, “profoundly ill-equipped to determine what is a ‘reasonable’ or ‘fair’ price.” See id. at 10, 17.
Citing recent scholarship, Weyerhaeuser observes that a company’s decision to purchase an input such as sawlogs at arguably excessive prices ordinarily has a number of legitimate, pro-competitive explanations. See id. at 20. “[I]ncreased purchases could be driven by . . . the firm adopting a new production process that uses the input more intensively” or “could reflect changes in inventory policy, such as where the firm chooses to hold more inventories to reduce the likelihood of shortages or to hedge against future input price increases.” Id. at 20 (quoting Steven C. Salop, Anticompetitive Overbuying by Power Buyers, 72 Antitrust L.J. 669, 682-83 (2005)). Here, Weyerhaeuser asserts, the record shows that, as a result of extensive capital investments, its sawmills were able to produce a larger amount of saleable lumber per log than some of its competitors. See id. at 21. Thus, it could afford to pay more for each log and continue to make a profit while its less efficient competitors faced a harder time making a profit at the same prices. Id.
Weyerhaeuser concluded its principal argument with a metaphorical flourish: “Having had one bite at the predatory buying apple and failing to offer any probative evidence in support of its predation claim, plaintiff is not entitled to a retrial on that claim.” Id. at 12. Ross-Simmons’ remaining Section 2 allegations and “potpourri” of anticompetitive claims, Weyerhaeuser maintains, are insubstantial and devoid of merit. See id. at 12, 44–50.
According to Ross-Simmons, “[t]he version of the facts and issues presented by [Weyerhaeuser] is so misleading and materially incomplete that [Ross-Simmons] is compelled to restate the case from start to finish.” Brief for Respondent at 1. And that it does. In Ross-Simmons’s version, Weyerhaeuser was not an efficient, guileless competitor ready and able to pay top-dollar for alder sawlogs, but rather a ruthless, scheming predator engaged in a “deliberate multi-tactic scheme to monopolize the alder industry.” See id. at 1–4. Having entered the alder lumber business in 1980 with the purchase of two sawmills, Weyerhaeuser controlled 75% of the Pacific Northwest alder sawlog market by 2001, a figure without precedent in the forest industry. Id. at 1, 7. This was accomplished, Ross-Simmons contends, primarily through competitor acquisitions, exclusive supply agreements, and exclusionary bidding practices. Id. at 1. “This case,” Ross-Simmons insists, “is no false positive.” Id. at 3.
Ross-Simmons takes particular issue with Weyerhaeuser’s claim that the alder sawlog market is quintessentially elastic. See id. at 18. See also Brief for Petitioner at 32–34. Because alder, whose long-term production cycle is measured in decades not years, is almost always harvested as a by-product of the region’s much more dominant softwoods, the alder sawlog market, Ross-Simmons asserts, is “classically inelastic.” Id. at 6, 20-21. In doing so, Ross-Simmons endorses the view of the Ninth Circuit which stated that, regardless of the general standard governing predatory buying claims, the Brooke Group standard should not apply because the relatively inelastic nature of the alder log market does not readily allow for market expansion. Ross-Simmons Hardwood Lumber Co. v. Weyerhaeuser Co., 411 F.3d 1030, 1038 (9th Cir. 2005). Higher log prices, it held, would not increase supply and therefore consumers would not benefit from increased price competition among log buyers. Id. at 1037. See also Brief for Respondent at 28; Brief for Petitioner at 32.
Apropos of Weyerhaeuser’s main complaint, Ross-Simmons argues against imposing the Brooke Group requirements for predatory pricing onto the existing requirements for Section 2 liability for predatory bidding. See Brief for Respondent at 25–26, 37–40. Citing a dearth of case law, data, and scholarship on which the Court may rely and Weyerhaeuser’s multifaceted course of anticompetitive conduct, Ross-Simmons asserts that none of the conditions that produced Brooke Group exist in this case. See id. at 25. Weyerhaeuser and the various amici, Ross-Simmons contends, ignore the modern consensus view of economic and legal scholarship that has undermined Brooke Group’s central economic assumptions that predatory pricing is economically irrational, rare, and rarely successful. See id. at 26. Moreover, the creation of a rigid and absolute test is, in Ross-Simmons’ opinion, inconsistent with the Court’s historic preference for a “rule of reason” test entailing a careful balancing established Section 2 principles. See id. at 26, 30, 37, 39.
Ross-Simmons maintains that, ultimately, the legal question presented in this case is one of statutory interpretation and that “[t]here is nothing in the general terms of Section 2 or in the intent of the Sherman Act to support the proposition that Congress intended to carve out a safe harbor for all monopsonists . . . so long as they do not lose money while in the act.” Id. at 26. As to Weyerhaeuser’s assertion that the Court could dismiss any outstanding allegations, reversing the jury’s general verdict, Ross-Simmons contends that outright reversal of the Ninth Circuit’s decision on Brooke Group would result in remand to consider whether to affirm the jury’s verdict based on the viability of other factual bases for liability, including overbuying. See id. at 48–50.
The Supreme Court’s decision will establish a standard of liability for predatory buying under Section 2 of the Sherman Act. On the one hand, Weyerhaeuser is urging the Court to apply the Brooke Group standard whereby a plaintiff must show that the defendant: (1) paid so much for raw materials that the price at which it sold its products did not cover its costs; and (2) had a “dangerous probability” of subsequently recouping those losses. On the other hand, Ross-Simmons is advocating for the relatively lower and looser standard of the Ninth Circuit whereby liability may be established by persuading a jury that the defendant purchased more raw materials “than it needed” or paid a higher price for those inputs “than necessary” so as to prevent competitors buying the materials at a “fair price.”
Weyerhaeuser contends that, left standing, the overall effect of the Ninth Circuit standard will be to deter companies from making efficient purchasing decisions, thereby chilling competitive behavior. Such inefficiencies, it adds, will actually harm rather than help consumers. It is the fear of Ross-Simmons, however, that in adopting the more stringent Brooke Group standard the Court would essentially be granting big businesses safe harbor from the strictures of the Act, much to the detriment of their smaller competitors. Whatever the reality may be, the Court’s decision is certain to have important ramifications for businesses both large and small.
Written by: Michael Fornasiero & Dylan Letrich
- Brief for the United States as Amicus Curiae Supporting the Petitioner
- Brief of the Chamber of Commerce of the United States of America and the American Forest and Paper Association as Amici Curaie Supporting Petitioner
- Brief Amici Curiae of Law Professors in Support of Petitioner
- Brief for Amici Curiae Business Roundtable and National Association of Manufacturers in Support of Petitioner
- Brief of Amici Curiae Timberland Owners and Managers Supporting Petitioner
- Brief for the American Antitrust Institute as Amicus Curiae in Support of Respondent
- www.alderantitrust.com: links to all briefs, exhibits, and joint appendix, as well as proceedings in other cases against Weyerhaeuser for antitrust violations.
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