Opinion ID: 3031963
Heading Depth: 4
Heading Rank: 1

Heading: Inapplicability of Brooke Group

Text: [1] Monopoly power exercised on the buy-side of the market is called “monopsony” power, and can violate § 2 of the Sherman Act.4 Both sides of the market affect allocative efficiency, and hence consumer welfare.5 Antitrust laws are thus concerned with competition on the buy-side of the market as much as on the sell-side of the market.6 4 See United States v. Syufy Enters., 903 F.2d 659, 663 n.4 (9th Cir. 1990) (“Syufy II”); ROGER D. BLAIR & JEFFREY L. HARRISON, MONOPSONY: ANTITRUST LAW AND ECONOMICS at 68-81 (1993) (discussing monopsonist behavior that violates the Sherman Act). 5 See BLAIR & HARRISON, supra note 5, at 36-61 (explaining the social welfare losses that result when a dominant buyer or collusive buyers set a non-optimal price for inputs). 6 See, e.g., Mandeville Island Farms, Inc. v. Am. Crystal Sugar Co., 334 U.S. 219, 227, 235-36 (1948) (explaining that price fixing by a buyer’s cartel violates §§ 1 and 2 of the Sherman Act); Am. Tobacco Co. v. United States, 328 U.S. 781, 801-04 (1946) (stating that a conspiracy to increase prices of cheaper tobacco and thereby drive out manufacturers of lowerpriced cigarettes violated § 2 of the Sherman Act); Reid Bros. Logging Co. v. Ketchikan Pulp Co., 699 F.2d 1292, 1298 n.5 (9th Cir. 1983) (discussing that a conspiracy to bid more for logs to drive competitors out was 5822 ROSS-SIMMONS HARDWOOD v. WEYERHAEUSER [2] Weyerhaeuser argues that, regardless of whether a case involves sell-side predatory pricing or buy-side predatory bidding, the same standard of liability should apply. Weyerhaeuser invites the court to borrow the standard of liability set forth in Brooke Group, a sell-side predatory pricing case. In Brooke Group, the Court created a high standard of liability, holding that a plaintiff bringing a claim under § 2 of the Sherman Act based on predatory sell-side pricing must show that: (1) “the prices complained of are below an appropriate measure of its rival’s costs,” and (2) “a dangerous probability” existed that the rival would later “recoup[ ] its investment in below-cost prices” once it stopped such pricing.7 Thus, to establish liability under Brooke Group, a plaintiff had to show that its competitor operated at a loss and was likely to recoup its losses. Weyerhaeuser contends that the same standard should apply in buy-side predatory bidding cases. Specifically, Weyerhaeuser argues that the jury instructions were erroneous because the court did not instruct the jury that overbidding for sawlogs could be anticompetitive conduct only if Weyerhaeuser operated at a loss and a dangerous probability of its recoupment of losses existed.8 Similarly, Weyerhaeuser argues that, as a matter of law,9 the alleged anticompetitive conduct); Nat’l Macaroni Mfrs. Ass’n v. FTC, 345 F.2d 421, 426-27 (7th Cir. 1965) (holding that an agreement of macaroni producers to reduce the amount of durum wheat purchased as an input for pasta production was per se unlawful); see also Blair & Harrison, supra note 5, at 68-81 (discussing cases). 7 Brooke Group, 509 U.S. at 222, 223-24. 8 The relevant jury instruction, as finally formulated, stated: 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. 9 Los Angeles Land Co. v. Brunswick Corp., 6 F.3d 1422, 1425 (9th Cir. 1993) (stating that the issue of “whether specific conduct is anticompetitive in violation of the Sherman Act is one of law”). ROSS-SIMMONS HARDWOOD v. WEYERHAEUSER 5823 predatory overbidding was not actionable anticompetitive conduct under the Sherman Act because Ross-Simmons did not satisfy the two Brooke Group requirements. We reject Weyerhaeuser’s arguments regarding the applicability of Brooke Group. The Brooke Group Court established a high liability standard for sell-side predatory pricing cases because of its concern with the facts that consumers benefit from lower prices and that cutting prices often fosters competition.10 The Court stated that “[l]ow prices benefit consumers regardless of how those prices are set, and so long as they are above predatory levels, they do not threaten competition.”11 The Court further recognized that above-cost pricing is either “competition on the merits, or is beyond the practical ability of a judicial tribunal to control without courting intolerable risks of chilling legitimate price-cutting.”12 As a result, the Court did not want to make the standard of liability “so low that antitrust suits themselves became a tool for keeping prices high.”13 [3] We recognize that in buy-side predatory bidding cases, as in sell-side predatory pricing cases, the price level itself is the anticompetitive weapon. However, an important factor distinguishes predatory bidding cases from predatory pricing cases: benefit to consumers and stimulation of competition do not necessarily result from predatory bidding the way they do from predatory pricing.14 We turn now to the short-term and long-term effects of predatory bidding. 10 Brooke Group, 509 U.S. at 223, 226. 11 Id. at 223 (internal quotation marks and citation omitted). 12 Id. (citation omitted). 13 Id. at 226-27. 14 See Wash. Alder LLC v. Weyerhaeuser Co., 2004 WL 1717650, at  (D. Or. July 27, 2004) (“Consumers don’t benefit from higher raw material prices, or by logs rotting in the lumber yard. Nor is deliberately driving log prices up, simply to deprive competitors of logs, likely to be confused with legitimate competition.”); John B. Kirkwood, Buyer Power 5824 ROSS-SIMMONS HARDWOOD v. WEYERHAEUSER In a predatory bidding scheme, a firm pays more for materials in the short term, and thereby attempts to squeeze out those competitors who cannot remain profitable when the price of inputs increases.15 No consumer benefit results during this predation period if the firm raises or maintains the same price level for its finished products. Although consumers might temporarily benefit if a firm lowered prices during the predation period, a reduction in prices would place even greater pressure on competitors, thereby increasing the threat to competition arising from the predatory bidding.16 Thus, even though a short-term benefit to consumers might occur in some predatory bidding situations, serious concerns about the threat to competition would concurrently arise in those situations. Moreover, predatory bidding claims do not directly and Exclusionary Conduct: Should Brooke Group Set the Standards for Buyer-Induced Price Discrimination and Predatory Bidding?, 72 ANTITRUST L.J. 625, 655 (2005) (“[I]t seems indisputable that any negative impact of a predatory bidding case on downstream price competition is less direct and less certain than the impact of a predatory pricing case, which is a direct assault on a seller’s decision to lower prices to its customers.”); id. at 667 (stating that “because predatory bidding cases attack a firm’s decision to increase prices, not reduce them, they do not represent a direct assault on price cutting”); Richard O. Zerbe, Jr., Monopsony and the Ross-Simmons Case: A Comment on Salop and Kirkwood, 72 ANTITRUST L.J. 717, 724 (2005) (stating that consumer harm can be presumed in the instant case because it involves “a limited, relatively inelastic, resource-based input market [for alder logs] and a much broader output market”). But see Steven C. Salop, Anticompetitive Overbuying by Power Buyers, 72 ANTITRUST L.J. 669, 702 (2005) (stating that “[t]he difficulty of distinguishing an anticompetitive overbuying strategy from a competitive purchase expansion can be similar to the difficulties in predatory pricing matters” and that in some situations, “it may be difficult for a court to know whether the firm is attempting to predate or simply competing in the input market with rivals who are also purchasing the inputs”). 15 Kirkwood, supra note 15, 72 ANTITRUST L.J. at 652. 16 In this case, the price of finished lumber decreased while the cost of sawlogs increased during the alleged predation period. It is unclear from the record whether lumber prices decreased because of a decision Weyerhaeuser made, or for other reasons. ROSS-SIMMONS HARDWOOD v. WEYERHAEUSER 5825 challenge a firm’s decision to cut prices; instead, they focus on a firm’s decision to raise the cost of inputs. Therefore, the concerns the Brooke Group Court expressed about depriving consumers of the temporary benefit of low prices do not necessarily apply when predatory bidding is at issue.17 In the long run, to carry out a predatory bidding scheme successfully, a firm would have to recoup the higher costs it had paid for its materials. If it succeeded in driving out competition, during this recoupment period the firm would likely pay less for its materials while charging consumers a higher price.18 The firm would have little incentive to pass on the benefit of lower input prices to consumers when it possessed greater market power and needed to recoup the higher costs it had paid for its materials. Thus, the overall effect of a predatory bidding scheme would result in harm to consumers.19 [4] Although in some situations rising input prices might encourage new companies to enter the supply side of the market and expand output, thereby increasing innovation and efficiency so that consumers benefit in the long run through price decreases and product improvements, this is not such a situation. The nature of the input supply at issue here does not readily allow for market expansion. The evidence shows that, during the alleged predation period, the supply of alder sawlogs remained relatively stable or declined. Nothing suggests this situation will change — alder sawlogs are “a natural resource of limited annual supply in a relatively inelastic market.”20 Thus, at least in this case, predatory bidding is less likely than predatory pricing to result in a benefit to consum17 See Brooke Group, 509 U.S. at 223, 226-27. 18 See Kirkwood, supra note 15, 72 ANTITRUST L.J. at 653. 19 We note that the recoupment phase of a predatory bidding scheme mirrors the recoupment phase of a predatory pricing scheme. See id. 20 See Zerbe, supra note 15, 72 ANTITRUST L.J. at 722 (explaining that the alder sawlog market is “highly inelastic,” in part because the alder harvest is a byproduct of the more important softwood harvest). 5826 ROSS-SIMMONS HARDWOOD v. WEYERHAEUSER ers or the stimulation of competition. As a result, the concerns that led the Brooke Group Court to establish a high standard of liability in the predatory pricing context do not carry over to this predatory bidding context with the same force. Therefore, the standard for liability in this predatory bidding case need not be as high as in predatory pricing cases. Accordingly, we hold that the high standard of liability in Brooke Group does not apply here because this case involves predatory bidding in a relatively inelastic market, not predatory pricing. Our decision in Reid Bros. Logging Co. v. Ketchikan Pulp Co.21 provides further support for our holding today that the prerequisites in Brooke Group do not apply here. Although the Supreme Court decided Brooke Group after we decided Reid Bros.,22 Brooke Group involved a different factual situation and did not overrule Reid Bros.23 In Reid Bros., we affirmed a finding of liability under § 1 of the Sherman Act that was based in part on a predatory buying claim.24 The plaintiff in Reid Bros. argued that the defendants conspired to bid preclusively on timber sales at higher prices than necessary to block the plaintiff from buying necessary timber.25 The defendants argued that the district court erred by finding predatory bidding when there was no evidence that the high prices paid for timber would prevent the defendants from covering their marginal costs on the ultimate sale of the processed timber.26 We rejected the defendants’ argument and held that 21 699 F.2d 1292. 22 See United States v. Gay, 967 F.2d 322, 327 (9th Cir. 1992) (stating that we must view our decisions in light of intervening Supreme Court decisions closely on point). 23 See Brooke Group, 509 U.S. at 214-16. 24 Reid Bros., 699 F.2d at 1297-98. Section 1 of the Sherman Act prohibits “[e]very contract, combination . . . , or conspiracy[ ] in restraint of trade or commerce.” 15 U.S.C. § 1. 25 See Reid Bros., 699 F.2d at 1297-98. 26 Id. at 1298 n.5. ROSS-SIMMONS HARDWOOD v. WEYERHAEUSER 5827 such a “blind application of a numerical test would only frustrate the intent of the Sherman Act.”27 This statement that a rigid, numerical test should not apply when a buy-side overbidding scheme was at issue further supports our holding that Brooke Group is inapplicable here. Thus, our conclusion that Brooke Group does not apply is consistent with our precedent. We now turn to the effect our conclusion has on Weyerhaeuser’s arguments for a new trial and for judgment as a matter of law.