Court Opinion

ID: 9468799
Source: CourtListenerOpinion
Date Created: 2023-08-05 02:24:02.480646+00
Date Added: 2024-06-11T17:41:03.799748
License: Public Domain

WALLACE, Circuit Judge,
dissenting from denial to rehear en banc:
I dissent from the court’s refusal to rehear this case en bane. To prevent intracircuit conflict, panels of this court must follow precedent or urge the court’s active judges to overrule the precedent en banc. See, e.g., United States v. Smith, 645 F.2d 747, 748 (9th Cir. 1981) (Reinhardt, J., concurring specially), reheard en banc, No. 80-1380 (argued Dec. 18, 1981). Yet by failing to take this case en banc, we have sanctioned a decision which departs from the settled law of this Circuit. Through a strained and unpersuasive reading of prior cases, the majority seeks to harmonize the “novel” and “innovative” rule it invents, ante at 1058-1059 (Peck, J., dissenting), with the rule it, in effect, rejects. In addition, the majority’s holding is an unjustified departure from the economically-sound marginal cost rule. By permitting this result, the court not only approves the use of an amorphous, unpredictable test for predatory pricing, but also leaves district courts in the Circuit with no guidance as to which rule— the “marginal cost rule” or the Inglis reformulation — should apply to pretrial dismissal motions in antitrust cases. Therefore, I respectfully dissent.
I
Section 2 of the Sherman Act, 15 U.S.C. § 2, proscribes monopolization and attempts to monopolize. The three elements of an attempted monopolization claim — specific intent to control prices or destroy competition; predatory or anticompetitive conduct directed to accomplishing the unlawful purpose; and a dangerous probability of success — interact. Thus, specific intent and a dangerous probability of success may, in appropriate cases, be inferred from predatory or anticompetitive conduct.
If this were all the majority sought to articulate in Inglis, there would be no departure from our prior decisions. However, Inglis attempts a dramatic expansion of the types of anticompetitive or predatory conduct which will support an inference of the other two elements of a section 2 attempted monopolization claim. First, as Judge Peck recognized in his dissent, the majority’s opinion “departs sharply from this Circuit’s former rule that specific intent to monopolize, and hence probability of success, cannot be inferred from conduct alone unless the conduct is exclusionary or otherwise restrains trade.” Ante at 1059. Second, the majority’s opinion seeks to relegate the marginal cost rule, which represents a workable, predictable and efficient means of determining what sorts of pricing constitute predatory conduct under the Sherman Act, to the slag heap of discarded antitrust formulae, and to substitute in its place a subjective and amorphous test involving a shifting burden of proof which leaves to the jury, in nearly every case, decisional authority on attempted monopolization claims.
I do not disagree with the majority’s basic, abstract definition of predatory pricing: “Pricing is predatory only where the firm foregoes short-term profits in order to develop a market position such that the firm can later raise prices and recoup lost profits.” Ante at 1031, quoting Janich Bros., Inc. v. American Distilling Co., 570 F.2d 848, 856 (9th Cir. 1977), cert. denied, 439 U.S. 829, 99 S.Ct. 103, 58 L.Ed.2d 122 (1978) (Janich). I do believe, however, that in the majority’s attempt to “eschew dogmatic adherence to a particular, rigid test and to fashion broad and flexible objective standards concerned with accurately evaluating the purposes of business behavior,” ante at 1031 n.18, it has advocated an unworkable test for distinguishing price reductions that constitute legitimate, competitive responses to market conditions from price reductions that are predatory attempts to monopolize the relevant market. The result may well *1061deprive the American public of the benefits flowing from competition on the merits.
Under the majority’s test:
[T]o establish predatory pricing a plaintiff must prove that the anticipated benefits of defendant’s price depend on its tendency to discipline or eliminate competition and thereby enhance the firm’s long-term ability to reap the benefits of monopoly power. If the defendant’s prices were below average total cost but above average variable cost, the plaintiff bears the burden of showing defendant’s pricing was predatory. If, however, the plaintiff proves that the defendant’s prices were below average variable cost, the plaintiff has established a prima facie case of predatory pricing and the burden shifts to the defendant to prove that the prices were justified without regard to any anticipated destructive effect they might have on competitors.
Ante at 1035-1036 (emphasis added). This “standard” is not a formula or test for predatory pricing in any meaningful sense of those terms; rather, it merely restates the basic, abstract principle on which there is no disagreement, and injects into it the new variable of burden of proof, subject, of course, to the final decision of the jury. Not only is this standard wrong from an antitrust policy perspective, but it is inconsistent with the workable approach developed by this Circuit over the past five years to define predatory pricing — the “marginal cost rule.”
II
In my view, the fairly settled law of this Circuit prior to Inglis was that we had adopted the test advocated by Professors Areeda and Turner in their article Predatory Pricing and Related Practices Under Section 2 of the Sherman Act, 88 Harv.L.Rev. 697 (1975), qualified by refinements or exceptions that might be developed through case-by-case analysis. Since an efficient manufacturer will set prices where price equals or exceeds marginal cost, prices should be considered predatory only if they are less than the defendant’s marginal cost. Prices set at marginal cost can injure only less efficient manufacturers. Thus, “pricing at marginal cost is the competitive and socially optimal result,” id. at 711, quoted with approval in Janich, supra, 570 F.2d at 857 & n.9. Instead of making a new exception to the marginal cost rule, the majority’s opinion attempts to eliminate the rule because it concludes that it was not compelled to follow it, even though our previous cases have announced and confirmed it.
It takes only a brief review of these prior cases to demonstrate that this Circuit has adopted the marginal cost test as the standard for measuring what constitutes predatory pricing. In Hanson v. Shell Oil Co., 541 F.2d 1352 (9th Cir. 1976), cert. denied, 429 U.S. 1074, 97 S.Ct. 813, 50 L.Ed.2d 792 (1977) {Hanson), we affirmed a directed verdict entered in favor of the defendant where, as here, the plaintiff had introduced no evidence that the defendant’s prices were less than its marginal cost. In so doing we clearly stated the rule that predation
could be shown by evidence that Shell was selling its gasoline at below marginal cost or, because marginal cost is often impossible to ascertain, below average variable costs .... Hanson’s failure to show that Shell’s prices were below its marginal or average variable cost was a failure as a matter of law to present a prima facie case under § 2.
Id. at 1358-59 (emphasis added, footnotes omitted). In a footnote we restated this holding. “[Pjroof of pricing below marginal or average variable cost is [a] prerequisite to a prima facie showing of an attempt to monopolize .. . . ” Id. at 1359 n.6. We also articulated the reasoning supporting the marginal cost rule.
If its prices were above its costs, and nevertheless Shell’s [sic] did drive Hanson out of business, this can only be because Hanson was so inefficient that at prices at which Shell could make a reasonable profit he could not. The antitrust laws were not intended, and may not be used, to require businesses to price their products at unreasonably high prices (which *1062penalize the consumer) so that less efficient competitors can stay in business. The Sherman Act is not a subsidy for inefficiency.
Id. at 1358-59.
In Hanson, therefore, we established the general test for predatory pricing- — the marginal cost rule. We reaffirmed this test in Janich where we stated that “an across-the-board price set at or above marginal cost should not ordinarily form the basis of an antitrust violation.” 570 F.2d at 857 (footnote omitted). There, as in Hanson, we affirmed a directed verdict entered for the defendant where the plaintiff had been unable to show that the defendant set any of its prices below its marginal cost. “Janich did not produce evidence that American’s prices were below its average variable costs.” Id. at 858.1 In California Computer Prods., Inc. v. IBM Corp., 613 F.2d 727 (9th Cir. 1979) (California Computer), we followed Janich and Hanson by holding that failure to show that the defendant’s prices were less than its marginal or average variable costs was a failure as a matter of law to raise a prima facie ease of predatory pricing. Id. at 743. And just recently, in Murphy Tugboat Co. v. Crowley, 658 F.2d 1256 (9th Cir. 1981) (Murphy Tugboat), we affirmed a judgment n.o.v. granted for the defendant because the plaintiff had not alleged or shown that the defendant’s “marginal costs . . . ever exceeded [its] price.” Id. at 1259 (footnote omitted).
Thus, my reading of the case law prior to Inglis is that proof that a defendant’s prices were less than its marginal cost (or its average variable cost) was an essential element of a predatory pricing claim, whether brought under section 2 of the Sherman Act, see Hanson, Janich, and California Computer, or section 1 of the Sherman Act, see Murphy Tugboat. This rule was subject to several possible exceptions, which have not been precisely refined by this court because they have not been squarely presented for review. Cf. California Computer, supra, 613 F.2d at 743 (“refinement of the marginal or average variable cost test will be necessary as future eases arise”). On the one hand, prices above marginal or average variable cost may, in some instances, be considered predatory if (1) the price is below the defendant’s short-run profit maximizing price and high barriers to entry restrict competition in the relevant market, see Hanson, supra, 541 F.2d at 1358 n.5; or (2) if the price is a “limit price” set by a monopolist, see California Computer, supra, 613 F.2d at 743. On the other hand, prices below marginal or average variable cost may, in appropriate circumstances, be considered nonpredatory if (1) they are temporary, promotional prices set by a firm without appreciable market power in order to effect the entry of a new product into an existing market, see Areeda & Turner, supra, at 713-15; cf. Hanson, supra, 541 F.2d at 1359 n.6 (below marginal cost pricing is prima facie, but not conclusive, evidence of predatory pricing); (2) they were set in a good-faith effort to meet the lower price posted by a competitor, see California Computer, supra, 613 F.2d at 743; ILC Peripherals Leasing Corp. v. IBM Corp., 458 F.Supp. 423, 433 (N.D.Cal.1978), aff’d sub nom., Memorex Corp. v. IBM Corp., 636 F.2d 1188 (9th Cir. 1980) (per curiam); or (3) as Continental argued in Inglis, if the defendant is confronted with an “excess capacity" situation, see ante at 1035; Areeda & Turner, supra, at 710 & n.32.
Absent these exceptional situations, however, a predatory pricing claim requires proof of prices set below marginal or average variable cost.2 This is what Janich *1063holds when it states that prices set at marginal cost “should not ordinarily form the basis for an antitrust violation.” 570 F.2d at 857. If the majority in Inglis had followed Ninth Circuit precedent, it would have reaffirmed the marginal cost rule and, accordingly, affirmed the district court’s grant of the motion for judgment n.o.v. This would not be, as the majority insists, “rigid adherence to a particular cost-based rule.” Ante at 1035. Rather, it would merely confirm that the law of this Circuit is the marginal cost rule, a rule which includes within its scope the potential for evolution and change as future cases dictate.
Ill
One resultant benefit of the marginal cost rule is that it allows the courts to exercise some degree of control over the burgeoning antitrust litigation. Since the majority holds that average variable cost is a determination to be made by the jury, ante at 3930, it is difficult to see how, under this standard, a district court could ever keep a predatory pricing case away from the jury. As Judge Peck wrote in his dissent:
The majority allows automatic inferences, but cannot ensure that they will be drawn in the right direction. The way lies open for juries to infer pricing below average variable costs from the jurors’ preliminary view of the predatory nature of the defendant’s conduct, instead of vice-versa.
Ante at 1059.
The marginal cost rule prevents this sort of abdication of judicial responsibility in predatory pricing cases. In California Computer, for example, we affirmed a directed verdict entered for the defendant where the plaintiff had been unable to prove that the defendant’s prices were less than its marginal or average variable cost, or that the defendant’s conduct was anything other than a legitimate attempt to meet lower prices offered by the competition. We wrote that “[w]ere § 2 interpreted not to exempt price cuts from attack under these circumstances, there could be no adequate guidelines for a jury to decide the issue of whether the prices at issue were ‘reasonable.’ ” 613 F.2d at 743. Focusing as it does on a subjective characterization of the “tendency” of a defendant’s price, the Inglis reformulation fails to provide any guidelines, let alone adequate guidelines, for the jury. It was therefore no surprise that both parties in this case urged rehearing en banc because, quite aside from its substantive defects, the majority’s “standard” invites needless confusion of juries and offers little predictability to the business community.
The majority seems to minimize the advantages of predictability offered by the marginal cost rule. If there are legitimate competitive reasons for pricing below marginal cost then this court should recognize those reasons by creating an exception to the marginal cost test. But is it more predictable to ask the jury, as the Inglis standard does, to measure the “anticipated benefits” of a defendant’s pricing policies, than to ask the district judge, on a motion for summary judgment or a directed verdict, to decide (1) whether the marginal cost rule applies, and (2) whether the defendant’s price was below its marginal cost? To me the answer is clearly no.
In addition, one should not overlook the added burden Inglis will place on the dis*1064trict courts. Disposing of unmeritorious and strike cases by the established marginal cost rule will, if the Inglis reformulation is followed, be at an end. From this perspective Inglis is not only a change in the law of this Circuit, but one with untoward consequences for the district courts.
IV
One may well wonder where this case leaves the district judge. Inglis did not, because it could not, overrule Hanson, Janich, California Computer and Murphy Tugboat. It merely distinguished them. Thus, I assume, a district judge will be free to follow them. If so, a district court may, consistent with Inglis, enter a directed verdict for the defendant where the plaintiff fails to establish that the defendant ever set prices below marginal or average variable cost. This would clearly be consistent with the marginal cost rule. Moreover, it would, in the majority’s own words, “not [be] inconsistent with the result[] reached in [Inglis]” because the plaintiff would not be “able to prove that the defendant had sacrificed greater profits or incurred greater losses than necessary, in order to eliminate the plaintiff.” Ante at 1036 (footnote omitted).
As the law of this Circuit now stands, four of our decisions apply the marginal cost rule and one does not. I would think it would be difficult for this court to reverse a district judge because he or she chose to follow precedent adopted and applied by us in four cases over the past five years, rather than a newer standard advocated in an opinion which professes consistency with those four older decisions.
Needless to say, I do not believe the district judge should be presented with such an obvious conflict. It would be far more appropriate for us to eliminate this dilemma by clarifying Inglis with an en banc rehearing. Therefore, I respectfully dissent from the court’s failure to do so.

. Since marginal cost is often impossible to determine, Janich followed Hanson and Areeda & Turner in holding that average variable cost may be used as an evidentiary substitute for marginal cost. 570 F.2d at 858.

. The majority’s attempt to distinguish our previous cases is therefore not valid. The tempering language the majority isolates from Hanson, ante at 1033, represents two potential exceptions to the marginal cost rule. Contrary to the majority’s assertion, both Janich and Hanson adopted and applied the marginal cost test; both cases affirmed directed verdicts entered for the defendant because the plaintiff had been unable to demonstrate that prices were ever set below marginal or average variable cost. The language the majority quotes from California *1063Computer, ante at 1033, does not alter the fact that the panel in that case followed Hanson by holding that failure to show that the defendant’s prices were less that its marginal or average variable cost was a failure as a matter of law to raise a prima facie case of predatory pricing. 613 F.2d at 743. Furthermore, it is eminently clear from the context of the language the majority quotes that “other aspects” of a monopolist’s conduct may be considered predatory even if its pricing practices are not. After all, predatory pricing is not the only sort of anticompetitive conduct which will support a section 2 claim of monopolization or attempted monopolization. Nor, finally, is Murphy Tugboat distinguishable from Inglis on its facts. In both cases, the plaintiffs failed to show that the defendants’ marginal costs ever exceeded their prices. In Inglis, however, the plaintiff will be able to get its case to the jury, something the plaintiff in Murphy Tugboat was unable to do because of the marginal cost rule.