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WASHINGTON-Ross-Simmons Hardwood Lumber Co., the longest-running alder sawmill in the Pacific Northwest, was profitable for most of its 40 years in business. But it shut down permanently in 2001: Was it a victim of its own inefficiencies or of a market predator? A federal appellate court upheld a jury verdict that Weyerhaeuser Co., a forest products company, engaged in anti-competitive conduct including predatory bidding-paying too much for materials to drive out competition-to monopolize the alder industry in violation of Section 2 of the Sherman Act. That verdict resulted in nearly $80 million in damages for Ross-Simmons. But now the U.S. Supreme Court has agreed to decide whether the same tough standard for antitrust liability in predatory-selling claims must apply to predatory-buying claims. Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., No. 05-381. The case, to be heard on Nov. 28, is not just about alder logs, said California Deputy Attorney General Emilio Varanini, who filed an amicus brief on behalf of eight states supporting Ross-Simmons. What the Supreme Court decides, he said, will affect small businesses in particular and competition in general in markets for natural resources, agriculture and even high-tech goods. No one knows for certain how frequent predatory bidding, the flip side of predatory pricing, is, but it will not matter how “real” predatory bidding is if the approach taken by the 9th U.S. Circuit Court of Appeals prevails, said Weyerhaeuser’s high court counsel, Andrew Pincus of Chicago-based Mayer, Brown, Rowe & Maw’s Washington office. “The market will allocate inputs [supplies] to the most efficient user based on price, but if being the successful bidder can result in liability, that user will be chilled from doing the very thing our market system should lead him to do,” Pincus said. “You need some pretty clear rules so people know they can compete legitimately without fear of being punished later.” But not the rule sought by Weyerhaeuser and the large number of big businesses supporting its high court challenge, said Michael E. Haglund of Portland, Ore.’s Haglund Kelley Horngren Jones & Wilder, who is Ross-Simmons’ high court counsel. Weyerhaeuser and its supporters seek a rule that no plaintiff can meet, said Haglund and Varanini. “You have 23 to 24 big-business organizations jumping on the bandwagon of this case,” said Haglund. “It’s really part of big business’ agenda to achieve from the Supreme Court what it has not been able to do in Congress through amendments to the Sherman Act: take fact-finding in Sherman Act cases away from the jury by making everything a question of law. “If Weyerhaeuser prevails, the Supreme Court will have drawn a road map for legally monopolizing a raw material market.” Felling competitors In the western United States, softwoods (conifers whose needles do not fall on a seasonal basis) predominate. The only concentration of hardwood trees (deciduous trees, whose leaves fall in autumn and winter) sufficient to support a hardwood lumber industry is in the Pacific Northwest, often known as the alder region because 95% of the hardwood manufactured in western Oregon, Washington state and British Columbia is red alder. When Ross-Simmons entered the alder lumber business in 1962, it was considered an industry pioneer that grew to become the industry’s second-largest producer. Weyerhaeuser entered the alder lumber business in 1980 with the purchase of two sawmills in Washington. In about 15 years, the company had captured 65% of the alder log market; it now operates six alder sawmills. From 1998 to 2001, the price of alder sawlogs increased while the price of hardwood lumber decreased. As the margin between those prices narrowed, 31 alder sawmills in the Pacific Northwest, including Ross-Simmons, became unprofitable and closed. An illegal monopsony, also known as a buyer-side monopoly, occurs when a single buyer purchases most, or all, of the output of many suppliers. Ross-Simmons claimed that Weyerhaeuser had illegally used its monopsony power to bid up the purchase price of alder logs to supply its own sawmills and to drive out competing sawmills that could not afford to pay the high input prices. “They used a mix of tactics-exclusive contracts with large suppliers, acquisitions of competitors, pushing log prices up through manipulative bidding practices, and false representations to state agencies that were used to secure special exemptions that gave them access to public timber they would not otherwise have access to,” said Haglund. “This was more than just pushing log prices up.” Weyerhaeuser said that although Ross-Simmons blamed it for rising log prices that forced the company to fail, there was evidence that Ross-Simmons suffered from “substandard equipment, inefficient operations, increased natural gas prices, poor management and inadequate capital reinvestment.” Weyerhaeuser, on the other hand, said it introduced “undisputed evidence” of the quality and efficiency of its sawmills and improvements that led to expanding mill capacity. “Our position is Weyerhaeuser was a more efficient user of logs,” said Pincus, the company’s counsel. “It would produce more product per log and therefore, from a consumer perspective, it was better for Weyerhaeuser to get as many logs as it could use, which would lead to more products.” In the high court, the two companies and their supporters also vigorously disagree on what the standard should be for determining illegal predatory bidding. The justices agreed to decide whether, as Weyerhaeuser argues, the same standard for predatory-pricing cases should apply. The high court announced the standard for predatory pricing-offering products at below-cost prices to pressure competitors-in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993). The decision sets out a two-part test: Plaintiffs must show (1) below-cost pricing and (2) that the alleged predator had a dangerous probability of recouping its losses through supracompetitive pricing in the long term once competition was eliminated. Pincus argued that claims of predatory buying are “in all relevant respects” identical to predatory-pricing claims, and so the Brooke Group test should apply. The 9th Circuit did not find the two identical. The appellate court said that Brooke Group “established a high liability standard for sell-side predatory pricing cases” because of its concern that consumers benefit from lower prices and that cutting prices often fosters competition. But, the court added, “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.” The court added that the instructions given to the jury “provided sufficient guidance regarding how to determine whether conduct was anticompetitive.” The jury was asked to determine whether Weyerhaeuser purchased more logs than “needed,” paid a higher price than “necessary,” and prevented the plaintiff from obtaining logs at a “fair” price. The 9th Circuit’s rule doesn’t provide the kind of guidance needed to avoid chilling legitimate conduct, said Pincus. And, he added, the 9th Circuit is wrong because “as a matter of economics,” there is a benefit to consumers: When prices are bid up, that stimulates more production upstream, which inevitably leads to lower prices for the ultimate consumer. But, the 9th Circuit said, when you have the dramatically different context of an inelastic raw materials market-no source of additional supply and thus no new suppliers to enter the market-and a buyer driving prices up, there is no benefit for consumers and no special reason for this rule to apply, said Haglund. Brooke Group was a pricing-only case, said Haglund, adding, “In a monopoly case that involves a complex, interconnected scheme of multiple conduct, it’s not appropriate to immunize one component of that scheme with a special, legal, safe harbor for big business.” Instruction too subjective The Bush administration and the business groups supporting Weyerhaeuser contend that the jury instruction upheld by the 9th Circuit is too subjective and would deter pro-competitive behavior. “If the line between lawful aggressive bidding and unlawful predatory bidding were to turn on a jury’s ex post assessment of whether the price paid for an input was excessive, large firms competing for inputs would rationally err on the side of caution, pull their competitive punches, and bid less aggressively,” argues the government. But California’s Varanini, counsel to the states supporting Ross-Simmons, said, “The Brooke Group test has a number of problems. Companies that had engaged in anti-competitive bidding would be let off the hook because the test is something nobody could meet.” The eight states are owners and sellers of natural resources, including hardwood lumber, and agricultural goods. They urge the high court to consider applying a type of “rule of reason” test set out in Aspen Skiing Co. v. Aspen Highland Co., 472 U.S. 585 (1985). Under that test, the court looks first to determine whether the conduct is exclusionary, and thus anti-competitive, and whether the conduct has pro-competitive effects. Brooke Group probably was the “hallmark” of high court cases in which the justices were very skeptical of predatory-pricing claims, said antitrust scholar Shubha Ghosh of Southern Methodist University Dedman School of Law. The decision cut back antitrust liability and also embraced an economic basis for limiting what the law is, Ghosh added. “In antitrust, the court is willing to look at economic theory in ways it is not willing to look at in other types of cases,” he said. “What’s interesting about Ross-Simmons’ argument is it’s using economic theory to actually expand [antitrust liability]. I don’t know what to predict.”

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