U.S. Supreme Court Decides Important Antitrust Case on Predatory Buying Practices

March 1, 2007 | Roger McEowen

farm

 

In a prior case, the Supreme Court outlined the elements a plaintiff must prove when alleging that the defendant engaged in predatory selling practices, in violation of Section 2 of the Sherman Antitrust Act. According to the Court, the plaintiff must show that the defendant sold its product at prices too low to cover its expenses, and had a dangerous probability of eventually recouping its losses. Yet, the Court did not state whether this test applies in the context of predatory buying (i.e., bidding), when a plaintiff alleges that a defendant has paid too much for raw materials (“inputs”).  That was the issue in this case where the plaintiff, a sawmill, claimed that the defendant, another sawmill, engaged in predatory bidding in violation of the Sherman Act by bidding up the price of sawlogs to prevent the plaintiff from being profitable. Both parties purchase alder sawlogs and process them into finished lumber that can be used in products such as furniture. Between 1998 and 2001, the price of alder logs increased, while the price of finished lumber decreased. By the end of this period, the defendant had obtained seventy-five percent of the market share for alder sawlogs in the Pacific Northwest (where both parties are located). During this same period, thirty-one sawmills – including a plant owned by the plaintiff - closed in the region. The district court instructed the jury that it constituted an “anti-competitive act” for the defendant to buy more logs than needed or pay more for sawlogs than necessary to prevent competitors from obtaining logs at a fair price. The jury found in favor of the plaintiff, awarding the company roughly $80 million.  Importantly, the trial court held that a predatory bidding claim was not subject to the same heightened scrutiny as was a predatory selling claim - and refused to apply the test set forth by the Supreme Court in its predatory selling case.

The defendant appealed, arguing that the jury instructions on predatory bidding were contrary to the Supreme Court’s holding in its prior case on predatory selling. The Ninth Circuit rejected this contention, holding that that Supreme Court opinion applied only to predatory selling claims and declined to extend that case to predatory buying schemes such as this one.The Ninth Circuit found persuasive, in part, the idea that consumers temporarily benefit from lower prices during predatory selling schemes, but not during predatory buying schemes. The defendant petitioned the Supreme Court for further review and the Supreme Court, upon the federal government’s request, agreed to hear the case.

The Supreme Court held unanimously that the theoretical and practical similarities of predatory pricing and predatory bidding warranted application of the predatory selling test to the plaintiff’s predatory-bidding claim. Thus, to show predatory bidding, the plaintiff must show that the defendant had a dangerous probability of recouping the losses incurred in bidding up log prices through the exercise of monopsony power. Bidding up log prices, by itself, did not establish predatory bidding since there were many legitimate reasons for such bidding, such as increased consumer demand and a hedge against future price increases. As such, the Court reversed the jury verdict in favor of the plaintiff and remanded the case for further proceedings. Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., Inc, 127 S. Ct. 1069 (2007), rev’g sub. nom., Confederated Tribes of Siletz Indians of Oregon v. Weyerhaeuser Co., 411 F.3d 1030 (9th Cir. 2005).