Weyerhaeuser Co. V. Ross-Simmons Hardwood

Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co.

The landmark Supreme Court decision Weyerhaeuser Company vs. Ross-Simmons Hardwood Lumber Company, 411 F.3d 1030 (2005) has had a significant effect on the judicial landscape pertaining to antitrust law, even within the short several years sine it was issued. The case involved the legal issues of antitrust laws and monopolies, specifically as to what test was to be utilized when a predatory bidding occurs. Essentially, the Supreme Court held that the test used for over a decade to govern predatory pricing was the same test that should be applied to incidences of predatory bidding. Predatory pricing occurs when someone lowers the price of their own product with the hope that competitors cannot afford to match the low prices. If competitors cannot match the low price, the effect is that they are driven out of business, after which the predator can raise the prices higher than what they were set at prior to the predatory pricing scheme.

In the Brooke Group case, the Supreme Court ruled on the practice of predatory pricing, ultimately setting a high standard for a plaintiff to achieve in order to win on an action for predatory pricing. The Court reasoned that since "the mechanism by which a firm engages in predatory pricing, or lowering prices, is the same mechanism by which a firm stimulates competition" the Court is reluctant to "chill the very conduct which the antitrust laws are designed to protect." Thus, to prevail in a predatory pricing action, the Plaintiff must prove that the prices in question were below costs (under the thinking that being price cutting benefits consumers, it should only be punished when it actually harms competition) and that the price cutting company was likely to "make back its investment in below-cost pricing" latter by increasing its prices after eliminating its competition.

Predatory bidding, on the hand, occurs when a company uses their superior market power in order to bid up the price of supplies, making it impossible for the competition to afford to buy them, which is needed if they are to stay in business. This practice results in a buyer's monopoly in that the buyer controls the market. Once the competition is eliminated, the predatory bidder will typically bid the supply prices back down, thus creating a profit, which makes up for any losses accrued when the prices of supplies were high.

The Supreme Court decision in Weyerhaeuser held that predatory pricing and predatory bidding were essentially the same thing and therefore should be evaluated under the same test. However, the two actions are not similar at all in that one is controlled by the seller and the other by the buyer. Further, because predatory bidding is controlled by the buyer, it should not receive the same antitrust protectionist reasoning that the Supreme Court provided in its Brooke Group Decision. The result of this decision is a significant change in the applicability of the antitrust and monopoly laws of this nation.

Summary of the Case

Procedural Background

The case was heard on appeal from the Ninth Circuit Court of Appeals. Respondent Ross-Simmons sued petitioner Weyerhaeuser in district court on an action that Petitioner drove it out of business by bidding up the price of sawlogs to a level that prevented Respondent from being profitable. At trial, a jury ruled in favor of Respondent, finding that Petitioner's actions were monopolizing. The Court issued a test that stated Respondent could prove that Petitioner's bidding practices were anticompetitive acts if it was proved that Petitioner "purchased more logs than it needed, or paid a higher price for logs than necessary, in order to prevent Respondent from obtaining the logs they needed at a fair price."

Petitioner's appealed, arguing that the correct standard was the Brooke Group's standard for claims of predatory pricing. On appeal, the Ninth Circuit affirmed the District Court's ruling and test, reasoning that "buy-side predatory bidding and sell-side predatory pricing, though similar, are materially different in that predatory bidding does not necessarily benefit consumers or stimulate competition in the way that predatory pricing does."

The Supreme Court took the appeal on certiorari to decide on the specific issue of whether the test applied to claims of predatory pricing, laid out in Brooke Group Ltd. v. Brown & Williamson Tobacco Corporation, 509 U.S. 209 (1993) also applied to the to claims of predatory bidding. The Supreme Court ultimately ruled that the Brooke Group test does apply equally to predatory bidding, thus overruling the decision of the Court of Appeals and remanding the case back for proper resolution.

Factual Background

The central component of the case involves the acquisition of red alder sawlogs by the mills that process logs in the Pacific Northwest. The mills acquire the logs by either purchasing then through open bidding market, through standing short- and long-term agreements with various timber land owners, or by harvesting the timber from the land themselves. Respondent operates one of these hardwood-lumber sawmills and has been in business since 1962. Petitioner entered the same market in 1980 after acquiring an existing lumbar company and has rapidly increased its operation ever since. By 2001, Petitioner's mills were acquiring nearly sixty-five percent of all the alder logs being sold in the surrounding region.

The costs of logs represented seventy-five percent of Petitioner's total operating costs. On a whole, the costs of alder logs increased while the prices for the finished hardwood lumber fell, thus cutting into the company's overall profits. This trend was especially damaging to Respondent's business operations, eventually causing it to shut down its operation in 2001.

Respondent alleges that Petitioner was the cause of it going out of business. According to Respondent, Petitioner bid up input costs and thus creating a monopoly and being in breach of antitrust laws. Specifically, Respondent argues that Petitioner's actions are in violation of section two of the Sherman Act. (15 U.S.C. section 2).

In its petition, Respondent alleged that Petitioner used "its dominant position in the alder sawlog market to drive up the prices for alder sawlogs to levels that severely reduced or eliminated the profit margins of Wyerhaeuser's alder sawmill competition." Basing their action on a predatory-bidding theory, Respondent goes on to argue that Petitioner overpaid for adler logs with the specific intent of causing the prices to rise to "artificially high levels as part of a plan to drive (Respondent) out of business." Respondent refers to Petitioner's large share of the adler purchasing market owned, rising prices during this predation period, and their declining profits as proof of Petitioner's predatory intent.

Decision

On the question of whether the Brooke Group test applies to claims of predatory bidding, the United States Supreme Court, in a unanimous decision, held that it does. In reaching this decision, the Court relied heavily on its Brooke Group decision and reasoning.

In Brooke Group, the Court ruled on what a plaintiff must show in order to prevail in a predatory pricing action brought under section two of the Sherman Act. The Court established two prerequisites for prevailing in such an action. "First, a plaintiff seeking to establish competitive injury resulting from a rival's low prices 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 dangerous probability of recouping its investment in below-cost prices." The Court reasoned that the first prong of the test was necessary because "as a general rule, the exclusionary effect of prices above a relevant measure of cots either reflects the lower cost structure of the alleged predator, and so represents competition on the merits, or is beyond the practical ability of a judicial tribunal to control." Likewise, the second prong of the test was necessary, according to the Court, "because, without a dangerous probability of recoupment, it is highly unlikely that a firm would engage in predatory pricing." In summary, the Court stated that the two prong test of Brooke Group consisted of "essential components of real market injury that were not easy to establish." In other words, the burden of proof for the plaintiff in such an action was set quite high.

When faced with the question of whether this same high burden of proof, and thus the same two pronged test, applied to situations of predatory bidding, the Court held that it did. The Court did acknowledge that a predatory bidding action differed from a predatory pricing action in that a predatory bidding action "does not present a situation of suppliers suing a monopsonist buyer under section two of the Sherman Act, nor does it present a risk of significantly increased concentration in the market in which the monopsonist sells." Nonetheless, the Court held that "predatory pricing and predatory bidding claims are analytically similar" and thus the same two-prong test shall apply.

The Court reaches this conclusion by looking at the similarities, as opposed to the distinct differences, that exist between a monopoly and a monopsony, citing Khan v. State Oil Co., 93 F. 3d 1358 (CA7 1996) for its statement that "monopsony pricing is analytically the same as monopoly...pricing and is so treated by the law." Based on this determination that the two concepts are analytically similar, the Court thus concludes that therefore "similar legal standards should apply to claims of monopolization and to claims of monopsonization." Reasoning that predatory-pricing is fundamentally an act of monopolization and that predatory-bidding is fundamentally an act of monopsonization, and that both claims involve the deliberate use of unilateral pricing measures for anticompetitive purposes, the Court finds that the logically same legal standard should therefore govern actions brought on both.

Based on this reasoning, the Court concludes that "the general theoretical similarities of monopoly and monopsony combined with the theoretical and practical similarities of predatory pricing and predatory bidding convince us that our two-pronged Brooke Group test should apply to predatory-bidding claims." Accordingly, under the first prong, in a predatory-bidding action the plaintiff must prove that "the alleged predatory bidding led to below-cost pricing of the predator's outputs." To meet this burden, the Court states that "only higher bidding that leads to below-cost pricing in the relevant output market will suffice as a basis for liability for predatory bidding." Under the second prong of the test, the plaintiff must prove that "the defendant has a dangerous probability of recouping the losses incurred in bidding up input prices through the exercise of monopsony power." Because in the case at hand Respondent failed to meet the standard of proof as established by Brooke Group, they cannot prevail in its predatory-bidding theory of liability.

Consequences of the Weyerhaeuser Decision

The Supreme Court relies heavily on the previously mentioned reasoning for its Brooke Group decision. However, since the Brooke Group decision, significant scholarly research has essentially undermined the Brook Group's underlying economic assumption, thus meaning that Weyerhaeuser and all subsequent cases are ruled on false pretenses of reality.

According to in-depth research conducted by numerous modern economist, along with the American Antitrust Institute and the Forest Industry Participants, the factual premises of the Brooke Group decision holding that predatory pricing was economically irrational, rare and rarely successful has since been disproved. The court based its Brooke Group decision on this presumption, making the Brooke Group test an appropriate protection against the "threat of a spate of false positive results that would chill procompetitive conduct in the form of lower prices for consumer." However, this underlying rational was based on faulty research.

Even in 1976, Judge Posner warned "literature on predatory pricing had been excessively influenced by a 1958 pathbreaking article on the Standard Oil Trust." Richard Posner, Antitrust Law: An Economic Perspective (1976). More so, prominent economist Alfred Kahn stated in 2006 that "only the economically brainwashed can deny that price discrimination has also been used as a means of predation, to the ultimate injury of consumers." Further, such noteworthy economist as Boton, Brodley and Riordan concluded: "It is now the consensus view in modern economics that predatory pricing can be successfully and fully rational business strategy. In addition, several sophisticated empirical studies have confirmed the use of predatory pricing strategies. The courts, however, have failed to incorporate the modern writing into judicial decisions, relying instead on earlier theory that is no longer generally accepted."

Whereas at the time of the Brooke Group decision predatory pricing was not common and thus did not effect competition, such is no longer the case. Since the time of the Brooke Group decision, predatory pricing has developed as a widely used and strategic form of business competition, thus harming the consumer by eliminating competition- which is what the antitrust laws are suppose to protect against. For example, the government itself has moved to regulate the airline industry against their industry-specific predatory strategies that are based on predatory pricing.