Number 574 February 27, 2007

Client Alert

Latham & Watkins Litigation Department

Supreme Court Vacates $79 Million Monopolization Verdict and Clarifies Rule Regarding Predatory Bidding

On February 20, the Supreme Court This Client Alert briefly summarizes the issued its opinion in Weyerhaeuser Co. Weyerhaeuser case and key take-aways. v. Ross Simmons Hardwood Lumber 1 Co., the first of four antitrust cases it Summary of Weyerhaeuser will be deciding this term.2 The case provides important guidance to firms in Plaintiff Ross-Simmons operated a relation to their purchasing practices. It hardwood lumber sawmill in the Pacific also demonstrates the Court’s continued Northwest. Defendant Weyerhaeuser skepticism of predatory conduct claims also operated hardwood lumber under Section 2 of the Sherman Act and sawmills in the Pacific Northwest a reluctance to impose rules that might The Court and had amassed a large share of ” chill pro-competitive business behavior. unanimously and the purchasing market for alder, the The case involved allegations that the region’s primary hardwood. From 1998 unambiguously defendant overbid on key inputs in to 2001, the input cost of alder sawlogs held that the strict order to drive its weaker rival out of increased while the output price of Brooke Group the market. The plaintiff had secured hardwood lumber decreased. Caught in a $79 million jury verdict which the this squeeze, Ross-Simmons ultimately predatory pricing Ninth Circuit affirmed. The Supreme became unprofitable and went out standard applies Court reversed. The Court noted that of business in 2001. Ross-Simmons to predatory predatory bidding is analytically similar alleged that Weyerhaeuser drove it out to predatory pricing and thus should of business by purposefully bidding up bidding.“ be analyzed under the two-pronged the cost for alder sawlogs to artificially predatory pricing test that the Court high levels and buying more logs than established in 1993. That test creates necessary. a high hurdle for plaintiffs and thus Ross-Simmons sued in the Oregon the decision represents a clear victory District Court alleging that for large power buyers, giving them Weyerhaeuser was engaged in substantial leeway to bid aggressively monopolization and attempted for materials. The decision is also a monopolization in violation of victory for those who advocate bright Section 2 of the Sherman Act.3 Both line rules that businesses and their monopolization and attempted counsel can practically apply rather than monopolization require a showing of the more normative concepts set forth anticompetitive conduct. Predatory by the Ninth Circuit.

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schemes can constitute such conduct. benefit to consumers and stimulation The quintessential predatory scheme is of competition do not necessarily result predatory pricing where a competitor from predatory bidding the way they sells its goods at prices so low that other do from predatory pricing.7 The Ninth firms are forced out of the market. Once Circuit noted that consumers necessarily the predator has the market to itself, it benefit during the initial phase of hikes prices to monopoly levels during predatory pricing schemes when the a recoupment phase, making up for predator lowers prices to try and drive its earlier losses (and then some). In out its rival. In a predatory bidding a predatory bidding scheme, the type scheme, on the other hand, the predator alleged by Ross-Simmons, the predator can maintain or even raise the prices for seeks to drive its rivals out of the market its finished products while attempting not by lowering the prices of finished to squeeze out its competitors and no goods, but by bidding up the price for consumers would benefit.8 inputs and then once the rivals are The Supreme Court granted certiorari gone, exercising its “monopsony power” to decide whether the Brooke Group (market power on the buy-side) to predatory pricing test should apply depress the prices it must pay suppliers to claims of predatory bidding. during the recoupment phase. Weyerhaeuser was supported in the At trial the District Court instructed the Supreme Court by several amici curiae jury that Ross-Simmons could prove that including the United States antitrust Weyerhaeuser’s bidding practices were agencies which filed a brief arguing anticompetitive if the jury concluded that application of the Brooke Group that Weyerhaeuser “purchased more standard was preferable because logs than it needed, or paid a higher it would decrease the possibility of price for logs than necessary, in order to “false positives,” i.e. antitrust liability prevent [Ross-Simmons] from obtaining attaching to procompetitive behavior. the logs they needed at a fair price.” Weyerhaeuser, and several of the The jury returned $26 million verdict amici, argued that the Ninth Circuit’s against Weyerhaeuser which was rule which relied on subjective notions trebled to approximately $79 million. of what price is “fair” and how much Weyerhaeuser appealed. It argued, input was “necessary” was hopelessly among other things, that the District vague and provided inadequate Court’s verdict ran afoul of the Supreme guidance to juries and businesses. It Court’s 1993 predatory pricing decision would, they argued, lead executives in Brooke Group Ltd. v. Brown & worried about antitrust liability to Williamson Tobacco, Corp.4 In Brooke refrain from competing aggressively. Group, the Supreme Court held that a Ross-Simmons, also supported by amici predatory pricing plaintiff must show curiae, including several state Attorneys (1) that the defendant had engaged in General, argued that predatory bidding, below-cost pricing in the short term and especially on the facts of the case, (2) that the defendant had a dangerous was quite different than predatory probability of recouping its losses in the pricing, carrying less of a risk of “false long term.5 positives,” and that Brooke Group’s high standard of liability was not warranted. The Ninth Circuit rejected Weyerhaeuser’s argument and affirmed The Supreme Court did not accept the verdict.6 It held that the Supreme plaintiff’s argument. In the opinion, Court’s high liability standard for sell- authored by Justice Thomas, the Court side predatory pricing set forth in found that predatory pricing and Brooke Group did not apply to buy-side predatory bidding claims are analytically predatory bidding. It noted that the similar. The Court unanimously and

 Number 574 | February 27, 2007 Latham & Watkins | Client Alert

unambiguously held that the strict Take-Aways from Brooke Group predatory pricing Weyerhaeuser standard applies to predatory bidding. Specifically, it held that “a plaintiff • Businesses, even those with high must prove that the alleged predatory market shares, have wide latitude to bidding led to below-cost pricing of the bid aggressively for inputs without predator’s outputs. That is, the predator’s fear of Sherman Act section 2 liability. bidding on the buy side must have • The Court remains highly skeptical of caused the cost of the relevant output to predation claims. rise above the revenues generated in the • Truly predatory bidding behavior, sale of those outputs . . . A predatory- marked by below-cost pricing of bidding plaintiff also must prove that the outputs and a dangerous probability defendant has a dangerous probability of recouping the losses incurred in of recouping the losses incurred in bidding up input prices through the bidding up input prices through the exercise of monopsony power remains exercise of monopsony power.” illegal. The Court repeated the frequently • The Court appears unwilling to adopt quoted passage from Brooke Group that rules that will potentially chill pro- “predatory pricing schemes are rarely competitive behavior. tried, and even more rarely successful,” • Weyerhaeuser marks another pro- and extended this view to predatory business, pro-defendant antitrust bidding. Indeed, the Court noted that decision from the Roberts Court. predatory bidding was even less of a Endnotes threat to consumers than predatory 1 549 U.S. ___ (2007) (Case No. 05-381). pricing because a predatory bidder does not necessarily rely on raising 2 The others are Bell Atlantic Corp. v. Twombly prices in the output market to recoup (Case No. 05-1126), Credit Suisse First Boston its losses. The Court noted that there Ltd. v. Billing (Case No. 05-1157) and Leegin were myriad legitimate reasons why a Creative Leather Products, Inc. v. PSKS, Inc. buyer might bid up input prices. These (Case No. 06-480). include a miscalculation of its input 3 15 U.S.C. § 2. needs, a response to increased consumer demand, gaining market share in the 4 509 U.S. 209 (1993). output market, and hedging against 5 509 U.S. at 222. future input price increases or shortages. The Court noted that there was nothing 6 Confederated Tribes of Siletz Indians of Or. illicit about such bidding decisions. The v. Weyerhaeuser Co., 411 F.3d 1030 (9th Cir. Court remanded the case for further 2005). proceedings consistent with its opinion. 7 Id. at 1037-38.

8 Id.

 Number 574 | February 27, 2007 Latham & Watkins | Client Alert

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 Number 574 | February 27, 2007