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In the U.S. Supreme Court’s Feb. 20 decision, Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., the court unanimously ruled that the 9th U.S. Circuit Court of Appeals had used the wrong legal standard when analyzing predatory buying. The Supreme Court unanimously held that in order for a buyer to be held liable under the Sherman Act for predatory buying, the plaintiff must satisfy the strict requirements previously established for predatory pricing claims over 14 years ago by the Supreme Court in Brook Group Ltd. v. Brown & Williamson Tobacco Corp. In Weyerhaeuser, Ross-Simmons Hardwood Lumber, a Vancouver, Wash., sawmill, alleged that Weyerhaeuser, a competitor, violated Section 2 of the Sherman Act by engaging in predatory buying, purchasing more raw materials than needed at prices higher than necessary by using its “market power on the buy side or input side of the market.” Weyerhaeuser and Ross-Simmons operated saw mills that purchased and processed logs into finished lumber. Specifically, both mills purchased alder sawlogs, the Pacific Northwest region’s predominant hardwood. Ross-Simmons alleged that Weyerhaeuser overpaid for alder sawlogs, an essential input, and failed to use the lumber it purchased. Ross-Simmons contended that Weyerhaeuser used its dominant position in the market to bid up the price of sawlogs to supracompetitive prices, preventing other companies from competing, and eventually driving Ross-Simmons out of business. In setting forth the facts of record, the Supreme Court noted that Weyerhaeuser’s entry in the market had resulted in increased overall production of sawlogs and that Weyerhaeuser had invested in “state-of-the-art technology” while, “by contrast, Ross-Simmons appears to have engaged in little efficiency-enhancing investment.” At trial, Ross-Simmons presented evidence that: Weyerhaeuser controlled a dominant share of the sawlog purchasing market, sawlog prices increased during the period, and Weyerhaeuser’s profits declined during the same period. The jury returned a verdict for Ross-Simmons of $26 million, which was trebled to $79 million. The trial court instructed the jury that paying unnecessarily high prices for logs can be an anticompetitive act in violation of the Sherman Act. The jury’s instructions did not require the plaintiff to establish that the defendant would eventually recoup its losses. The 9th Circuit affirmed the lower court’s verdict, stating that a party could prove predatory buying in violation of the Sherman Act by establishing that a defendant bought more than needed at prices higher than necessary in order to prevent competitors from buying needed materials at fair prices. The 9th Circuit rejected Weyerhaeuser’s contention that the two-pronged standard for predatory pricing should be applied to predatory buying. Weyerhaeuser argued that the two-prong test established in 1993 by the Supreme Court in Brooke Group for predatory selling should equally apply to the allegations against it for predatory buying. In Brooke Group, the Supreme Court established two prerequisites for predatory selling, stating that there must be proof that the defendant sold its product at a price level too low to cover its cost, and the defendant had a dangerous probability of recouping its losses. The court in Brooke Group required a plaintiff to show that the alleged predatory-selling defendant had a dangerous probability of recovering its losses in below-cost pricing. Without such a probability, the court stated, it is highly unlikely that a firm would engage in predatory pricing. The court in Brooke Group was particularly concerned that, if not careful, there could be a stifling of the very kind of price competition that the antitrust laws were intended to protect, causing lower, not increased, selling prices. Weyerhaeuser argued that in the case of predatory buying, there must similarly be proof (which is difficult to present) that the defendant suffered a loss in the short term and that it had a dangerous probability of recouping its loss in the long term. The 9th Circuit rejected Weyerhaeuser’s reliance on Brooke Group and held that a violation of the Sherman Act for predatory buying could be established by showing merely that the defendant bought more than it needed at prices higher than necessary so as to prevent others from buying their needs at fair prices. The Supreme Court disagreed, ruling that the Brooke Group test does apply to predatory buying as well as predatory selling. Reversing the 9th Circuit, a unanimous Supreme Court held that a buyer who bids up the price of an essential input in order to deny its rivals access to that input cannot be held liable under the Sherman Act unless the plaintiff also satisfies the same requirements applied to predatory selling claims in Brook Group. The Supreme Court based its decision on similarities it found between predatory selling and predatory buying . Specifically, the court found three ways in which predatory selling and predatory buying are similar, which were relied upon by the court in establishing the stringent test articulated in Brooke Group. First, a rational business rarely makes the financial sacrifice necessary for either predatory buying or predatory selling. Second, the actions taken in predatory buying and predatory selling are often “the very essence of competition.” Third, failed predatory buying or selling can often result in lower (not higher) prices for consumers. The Supreme Court found these analytical similarities convincing in determining that the Brooke Group test should also apply to predatory buying claims. Justice Clarence Thomas, writing for the unanimous court, stated that “both claims involve the deliberate use of unilateral pricing measures for anticompetitive purposes,” and “both claims logically require firms to incur short-term losses on the chance that they might reap supracompetitive profits in the future.” These similarities led the Supreme Court to adapt its two-pronged Brooke Group test for predatory selling to apply to predatory buying, which had made it significantly more difficult for plaintiffs to successfully bring predatory selling claims. Thomas stated that a plaintiff must prove “that the alleged predatory bidding led to below-cost pricing of the predator’s outputs. That is, the predator’s bidding on the buy side must have caused the cost of the relevant output to rise above the revenues generated in the sale of those outputs.” Fulfilling the second prong of the test, a plaintiff must also prove “that the defendant has a dangerous probability of recouping the losses incurred in bidding up input prices through the exercise of monopsony power. Absent proof of likely recoupment, a strategy of predatory bidding makes no economic sense because it would involve short-term losses with no likelihood of offsetting long-term gains.” The Supreme Court understood that it was establishing a strict standard but held that such a standard was necessary because of what it determined to be the “multitude” of legitimate reasons for a company to engage in high bidding. “[T]he risk of chilling pro-competitive behavior with too lax a liability standard is as serious here as it was in Brook Group. . . . Consequently, only higher bidding that leads to below-cost pricing in the relevant output market will suffice as a basic for liability for predatory bidding.” Thomas for the court stated that “actions taken in a predatory-bidding scheme are often, ‘the very essence of competition,’” quoting Brook Group. As examples of the economic realities at play in predatory buying, the court stated: “Just as sellers use output prices to compete for purchasers, buyers use bid prices to compete for scarce inputs. There are myriad legitimate reasons – ranging from benign to affirmatively pro-competitive – why a buyer might bid up input prices. A firm might bid up inputs as a result of miscalculation of its input needs or as a response to increased consumer demand for its outputs. “A more efficient firm might bid up input prices to acquire more inputs as a part of a pro-competitive strategy to gain market share in the output market. A firm that has adopted an input-intensive production process might bid up inputs to acquire the inputs necessary for its process. Or a firm might bid up input prices to acquire excess inputs as a hedge against the risk of future rises in input costs or future input shortages. There is nothing illicit about these bidding decisions. Indeed, this sort of high bidding is essential to competition and innovation on the buy side of the market.” Essentially, Weyerhaeuser now requires that for a predatory buying case to succeed the plaintiff must prove that the defendant’s above market-price purchases caused the plaintiff to suffer losses. Second, the plaintiff must prove that the defendant, through the exercise of monopsony market power, had a dangerous probability of recouping the losses incurred in bidding up input prices. This new, stricter standard for proving predatory buying as a violation of the Sherman Act is a victory for those U.S. companies who compete by using their market power to aggressively buy raw materials. The standard articulated in Weyerhaeuser gives companies more room to bid aggressively for raw materials. There is now a higher standard of proof for establishing that such buying is a violation of the Sherman Act. Hopefully, applying this standard to predatory buying will do what the court intended it to do – preserve, protect and encourage competition. The new standard is obviously intended to encourage companies to compete for raw materials, without fear of violating the federal antitrust laws. However, the end result maybe, as occurred with Ross-Simmons, that impacted competitors are driven out of business thereby resulting in less (not more) competition. CARL W. HITTINGER is a partner in the litigation group at DLA Piper in its Philadelphia office, where he concentrates his practice in complex commercial litigation with particular emphasis on antitrust and unfair competition matters. Hittinger is also a frequent lecturer and writer on antitrust issues and has extensive experience counseling clients on all aspects of civil and criminalantitrust law. He can be reached at 215-656-2449, or [email protected] LESLI C. ESPOSITO is a senior associate with DLA Piper in Philadelphia where she focuses her litigation practice on antitrust and unfair competition matters. She was formerly a senior attorney with the Federal Trade Commission’s bureau of competition.

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