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Businesses troubled by their competitors’ price cuts have had scant recourse to the antitrust courts. In Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 227 (1993), the U.S. Supreme Court adopted the dominant economic view that price cuts injure competition only if they are below an appropriate measure of cost and if there is a dangerous probability that the alleged predator will be able to recoup its investment in below-cost prices by raising prices above competitive levels later. The Brooke Group decision was followed by a string of lower-court dismissals of predatory pricing and primary-line price discrimination cases, most prominently the U.S. Department of Justice’s high-profile predation suit against American Airlines. See U.S. v. AMR Corp., 335 F.3d 1109 (10th Cir. 2003). Courts have been concerned that it is almost impossible to distinguish between beneficial and predatory price cuts: Lowering prices temporarily is one method an established competitor can use to drive rivals out of a market, but low prices are also principal indicators of a competitive market. Predatory pricing claims thus carry a high risk of “false positives” that, if left unchecked, would have the unintended and ironic consequence of deterring firms from lowering prices. In Brooke Group, the court sought to minimize the risk of deterring competitive price cuts by establishing a very high and strictly objective standard for predatory pricing claims. The U.S. government’s monopolization cases against Microsoft Corp. demonstrated that, notwithstanding Brooke Group, it was still possible to bring a viable claim for predatory conduct if pricing was not the primary focus of the claim. Both cases included pricing elements, but the claims were based on Microsoft’s conduct, not its pricing. The first complaint, settled by consent decree, challenged contract terms that allegedly excluded Microsoft competitors by imposing costs on customers who wished to purchase some of their requirements from those competitors. See U.S. v. Microsoft Corp., Final Judgment, 1995-2 Trade Cas. (CCH) P71,096 (D.D.C. 1995) (holding entry of the final judgment to be “in the public interest”). The second case focused heavily on the charge that Microsoft bundled its Internet browser with its operating system in order to foreclose customer access to the rival Netscape browser. Although Microsoft charged nothing for its browser, the case focused on allegedly exclusionary license restrictions and product integration, rather than on assertions that the zero price for the Microsoft browser was itself exclusionary. See U.S. v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001) (en banc). The Microsoft cases showed a way around the Brooke Group strictures: Plaintiffs could categorize marketing actions as nonprice predatory conduct rather than focusing on pricing conduct, even if it was germane to their claim. Recent decisions from four different federal circuits illustrate the trend: the 3d U.S. Circuit Court of Appeals in LePage’s Inc. v. 3M, 324 F.3d 141 (3d Cir. 2003); the 6th Circuit in Spirit Airlines v. Northwest Airlines Inc., 431 F.3d 917 (6th Cir. 2005); the 10th Circuit in AMR Corp.; and the 9th Circuit in Confederated Tribes of Siletz Indians of Oregon v. Weyerhaeuser Co., 411 F.3d 1030 (9th Cir. 2005). Contrary to the run of defense verdicts in predatory pricing cases, plaintiffs won three of these four cases in which nonprice conduct allegations were paramount, though the Supreme Court is currently considering whether to grant certiorari in Weyerhaeuser. LePage’s addressed a monopolist’s (3M’s) efforts to foreclose its competitors from distribution outlets by using price-related measures such as bundled rebates conditioned on exclusivity, as well as nonprice measures such as exclusive dealing contracts, to replace its competitors’ private-label tape on the shelves of retail store customers. LePage’s acknowledged that 3M had not sold below cost. 3M argued that under Brooke Group, a monopolist cannot be liable for any type of monopolizing conduct except for pricing below cost. The 3d Circuit disagreed, holding that the predation consisted of nonpricing conduct not subject to the price-cost test of Brooke Group. The court likened the bundled rebates to anti-competitive tying arrangements, instead of viewing them as methods of spreading costs over a larger base, and condemned them as monopolizing conduct. The airline cases At about the same time, the 10th Circuit was considering what to do with an airline that dramatically lowered its prices while expanding its capacity in order to respond to low fares offered by a new entrant low-cost airline. AMR Corp., 335 F.3d 1109. American Airlines had significantly lowered prices and increased capacity to respond to competition on four city-pair routes originating from its hub at Dallas/Fort Worth. Even though American had approximately 70% of the passenger traffic on the route, the court turned immediately to the application of the Brooke Group test and affirmed the district court’s judgment that American had not engaged in below-cost pricing. Of particular interest, however, was the lower court’s dismissal (affirmed by the 10th Circuit) of the Justice Department’s argument that American also had engaged in nonprice anti-competitive conduct, i.e., its dramatic addition of capacity to the route to absorb the increased demand created by the fare wars with the low-cost airline. The Justice Department claimed that the economic purpose of this “capacity dumping” was primarily to keep its rival’s costs high by preventing it from achieving profit-maximizing flight loads. The 10th Circuit dismissed the argument in a footnote, stating that “prices and productive output are two sides of the same coin,” and holding that the output increase must be analyzed “in terms of [its] effect on price and cost.” Id. at 1116 n.6. The court thus subsumed the conduct issues within the cost-price test of Brooke Group. Faced with nearly the same situation, the 6th Circuit, in Spirit Airlines v. Northwest Airlines Inc., 431 F.3d 917 (6th Cir. 2005), came out the other way. In 1995, Spirit Airlines introduced service that competed aggressively with Northwest on two routes where Northwest had a market share of more than 70%. When Spirit offered low fares, Northwest matched. In addition, Northwest increased the percentage of its seats available at those fares, and immediately and substantially increased its capacity on the routes with new flights and larger planes. Several months later, Spirit was forced to abandon the routes. Soon thereafter, Northwest increased its fares to levels at or even above those it had charged prior to Spirit’s entry into the market. The 6th Circuit reversed the grant of summary judgment to Northwest, finding that Northwest lowered its prices below cost to drive Spirit Airlines out of the two markets and that Spirit had presented evidence of high barriers to entry and Northwest’s actual recoupment of its losses. This purported to be a straightforward application of the Brooke Group test, though Northwest had merely matched Spirit’s fares and the court’s measurement of costs was rather controversial. The case stands out, however, because the court also considered Northwest’s capacity increase to be nonprice-predatory conduct designed to raise Spirit’s costs and drive it out of the market. Id. at 953. Contrary to the 10th Circuit’s rationale that prices and productive output are “two sides of the same coin” and thus both subject to the Brooke Group price-cost test, the 6th Circuit likened Northwest’s “capacity dumping” to the predatory bundled rebates held illegal in LePage’s. Even if Northwest’s prices were above cost, the court concluded, its expansion of capacity on the routes at issue could support a finding of exclusionary conduct and monopolization. Id. ‘Predatory purchasing’ Confederated Tribes of Siletz Indians of Oregon v. Weyerhaeuser Co., 411 F.3d 1030 (9th Cir. 2005), petition for cert. filed, (U.S. Sept. 23, 2005) (No. 05-381) continued the unusual run of plaintiff victories. Weyerhaeuser Co. was alleged to be the most powerful purchaser of alder sawlogs (the input for sawmills to produce finished lumber) in the Pacific Northwest, acquiring within the alleged five-year predation period approximately 65% of the alder sawlogs available for lumber processing in that area. The plaintiffs, rival sawmill operators, alleged that Weyerhaeuser bought the sawlogs at above-market prices and in unreasonably large quantities in order to raise the costs of rival lumber mills. The plaintiffs claimed that the purpose of this price squeeze was to drive them out of business so that Weyerhaeuser could later recoup its overpayments by reducing future prices paid to log suppliers. The 9th Circuit introduced a doctrine of “predatory purchasing” that it applied without reference to the price-cost test of Brooke Group. The district court had ruled that monopolization could be found if Weyerhaeuser acted contrary to its immediate economic interests by purchasing more logs “than it needed” or paying more for those logs “than necessary” to keep the plaintiff from purchasing logs at a fair price. Id. at 1035. Affirming a jury verdict against Weyerhaeuser, the 9th Circuit held that adherence to the Brooke Group standard is unwarranted in predatory-purchasing cases because, unlike predatory pricing by a seller, paying more for an input than necessary carries with it no benefits to the consumer. Id. at 1037-38. In essence, Weyerhaeuser established a “fairness” standard for evaluating claims of predatory buying that replaces the Brooke Group standard. Petition for certiorari Weyerhaeuser has petitioned the Supreme Court for review. The solicitor general has recommended that the court grant certiorari and reverse, and the court is expected to rule on the petition on June 26. In the interim, Weyerhaeuser‘s “fairness standard” has made some waves, with a leading antitrust scholar labeling the district court’s jury instruction incorporating the standard “an antitrust disaster of enormous proportions.” Herbert Hovenkamp, “The Law of Exclusionary Pricing,” 2 Competition Policy International 21, 37 (Spring 2006). Hovenkamp explains that the new fairness standard will penalize rational business behavior such as buying more of an input than is immediately needed in order to hedge against future scarcity. Other critiques have noted, as Weyerhaeuser itself stated in its petition for certiorari, that a jury should not be placed in the position of determining what is a “fair price” to pay for an input, or how much of an input it is “reasonable” to purchase. Petition for Certiorari, No. 05-381, at 7. Characterizing nonsales price decisions that affect costs (and thus price) as nonprice activity not governed by the Brooke Group standard may indeed limit the ability of firms with large market shares to structure their costs in the most efficient manner. As Hovenkamp has observed, the “fair price” and “necessary quantity” inquiries of Weyerhaeuser may pose an unacceptable risk of false positives in industries characterized by periods of short supply and the need to stockpile resources to avoid supply disruptions that could result in price spikes. Hovenkamp, at 38. Yet these business justifications should not prevent courts from identifying conduct that excludes competitors without cause from the competitive playing field. The Weyerhaeuser petition gives the Supreme Court an opportunity to resolve some of these tensions. Notably, the Supreme Court has weighed in three times just this term to reject expansionist theories of antitrust liability. Independent Ink Inc. v. Illinois Tool Works Inc., 126 S. Ct. 1462 (2006) (no presumption that a patent confers market power in tying cases); Texaco Inc. v. Dagher, 126 S. Ct. 1276 (2006) (pricing coordination among parties to a fully integrated joint venture not a per se illegal conspiracy); Volvo Trucks N. Am. Inc. v. Reeder-Simco GMC Inc., 126 S. Ct. 860 (2006) (recovery under the Robinson-Patman Act in competitive solicitation limited to actual competitors for the solicitation). Thus, Weyerhaeuser may present an opportunity for the court to weigh in on-and limit or verify-the string of plaintiff successes in predatory conduct cases in which output-affecting conduct has been cast by the reviewing courts as unrelated to price and not subject to the Brooke Group price-cost test. Jim Weiss, John Longstreth and Brian McCalmon are partners at Preston Gates Ellis & Rouvelas Meeds, the Washington office of Preston Gates & Ellis. Scott Lindsay and Courtney Gregoire, associates at the firm, provided assistance in preparing this article.

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