Antitrust Law Blog

This year the Roberts Supreme Court is continuing its renewed focus on antitrust law. Coming off a 2005-2006 term that resulted in three significant antitrust decisions,¹ the high court has now granted certiorari in four antitrust cases for the 2006-2007 term. Decisions in these cases should shed light on (1) the appropriate standards for predatory buying claims under Section 2; (2) the sufficiency of conscious parallelism allegations in a Section 1 conspiracy complaint; (3) the continued viability of the per se rule in resale price maintenance cases; and (4) the scope of antitrust immunity for conduct subject to federal securities regulation.

Predatory Buying: Weyerhaeuser v. Ross-Simmons Hardwood Lumber Co., Inc. (No. 05-0381)

With its review of Ross-Simmons Hardwood Lumber Co., Inc. v. Weyerhaeuser Co., 411 F.3d 1030 (9th Cir. 2005), the U.S. Supreme Court has a chance to clarify the standards applied to that rare antitrust creature: the predatory buying case. Plaintiff Ross-Simmons, a sawmill, claimed that its competitor, defendant Weyerhauser, paid an excessively high price for sawlogs -- the raw material that both mills purchased and processed into finished lumber -- in an attempt to raise the price of sawlogs and drive plaintiff out of business. Plaintiff claimed that such behavior constituted monopolization and attempted monopolization in violation of Sherman Act Section 2. At the conclusion of a jury trial, the court instructed jurors that if they found that the defendant paid higher prices than necessary for sawlogs, such conduct could be regarded as anticompetitive. The jury found for the plaintiff on both the monopolization and attempted monopolization claims, and awarded more than $78 million in damages after trebling.

On appeal, Weyerhaeuser argued that the court should apply the same limitations traditionally applied to claims of predatory pricing by sellers to claims of predatory buying by buyers. In Brooke Group v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993), the U.S. Supreme Court held that predatory pricing is unlawful only when it is below some appropriate measure of cost and the seller has the ability to recoup the losses incurred by this below-market pricing after it has eliminated its rival. Weyerhaeuser argued that the district court should have applied the same standard in its case and instructed the jury that overbidding for sawlogs could be anticompetitive conduct only if defendant operated at a loss and was likely to recoup those losses after eliminating competition.

The Ninth Circuit declined to apply such a standard. It reasoned that courts scrutinize claims of predatory sellingparticularly closely because low prices are generally a boon for consumers and courts are careful not to discourage behavior that might be procompetitive and benefit consumers. However, the Ninth Circuit found that no such concern exists in cases of predatory buying. Artificially high bids for input products do not stimulate competition and benefit consumers like artificially low pricing, the court found, and thus there is not the same need for a high standard of liability. Thus, the appeals panel approved the district court's instruction that permitted liability if the jury found that defendant "purchased more logs than it needed or paid a higher price for logs than necessary . . ."

That district court instruction offers little guidance for businesses and practitioners, and observers expect the high court to better define the standard for such cases. Such clarity was the focus of an amicus curiae brief filed by the Department of Justice, which objected to the Ninth Circuit's "subjective and standardless test." Some observers expect that the Supreme Court will adopt standards for predatory buying that require at least a showing of monopoly power, and perhaps a showing that the high input prices caused defendant to sustain some loss. Given the paucity of authority analyzing predatory buying cases, however, it is difficult to predict whether the Supreme Court will adopt the entirety of the Brooke Group criteria to predatory buying cases.

Weyerhauser was argued in the Supreme Court on November 28, 2006.

Conspiracy Pleading: Bell Atlantic Corp. v. Twombly (No. 05-1126)

The Supreme Court also has accepted review of Twombly v. Bell Atlantic Corp., 425 F.3d 99 (2d Cir. 2005), in which the Second Circuit examined the requirements necessary to plead a conspiracy in violation of Sherman Act Section 1. Courts have long required something more than mere "conscious parallelism" between competitors to prove conspiracy claims, and have required additional "plus" factors that suggest that the parallel behavior is the result of an agreement. Such plus factors include, for example, that the parallel behavior would be against the individual defendants' economic interests absent an agreement, or that the competitors communicated directly regarding price.

In Twombly, plaintiff consumers alleged that defendant incumbent local exchange carriers – the four "Baby Bells" – conspired to exclude competitors from, and not to compete against each other in, their respective geographic markets. The district court granted defendants' motion to dismiss for failure to state a claim because the complaint failed to allege sufficient "plus" factors that would tend to exclude independent self-interested conduct as an explanation for defendants' alleged parallel behavior. The Second Circuit reversed, emphasizing the use of notice pleading in federal courts and stating that claims should not be dismissed at the pleading stage unless it appears certain that plaintiff can prove no set of facts to support its claim. The Second Circuit found that while plaintiff should be required to show the existence of "plus" factors to survive a motion for summary judgment, at the pleading stage the courts should draw inferences in plaintiff's favor and allow conspiracy claims to proceed in light of Congressional policy in favor of vigorous enforcement of antitrust laws.

The rather starkly contrasting standards applied by the district court and the Second Circuit frame the issue for the Supreme Court well. Observers predict that it is unlikely the high court will modify the rule requiring that a plaintiff alleging a conspiracy plead something more than conscious parallelism. At the same time, the Supreme Court may conclude that the district court went too far in drawing inferences adverse to the plaintiff. To the extent it may definitively clarify the interplay between pleading rules and conspiracy standards, Twombly has the potential to be a landmark Supreme Court decision.

The Supreme Court heard oral argument in Twombly on November 27, 2006.

Vertical Price Fixing: Leegin Creative Leather Products, Inc. v. PSKS, Inc. (No. 06-0480)

An unpublished decision of the Fifth Circuit, PSKS, Inc. v. Leegin Creative Leather Prods., Inc., 171 Fed. Appx. 464 (2006), presents the Court with an opportunity to revisit the nearly 100-year old rule that vertical minimum resale price maintenance agreements are per se violations of Sherman Act Section 1. Since the high court's decision in Dr. Miles Medical Co. v. John D. Park & Sons, Co., 220 U.S. 373 (1911), agreements between distributors and suppliers establishing minimum resale prices have been found illegal under Section 1 without inquiry into potential pro-competitive effects or market power.

Leegin, a manufacturer of women's leather fashion accessories, instituted a "Brighton Retail Pricing and Promotion Policy," stating it would do business only with retailers following its suggested retail prices for its Brighton-brand products. Leegin subsequently launched a marketing initiative designed to provide incentives to promote the Brighton brand pursuant to which retailers had to pledge to "follow the Brighton Suggested Pricing Policy at all times." When Leegin learned that plaintiff retailer PSKS had violated Leegin's pricing policy by placing PSKS' entire line of Brighton products on sale, Leegin suspended sales of Brighton products to PSKS.

PSKS sued under Section 1, claiming that Leegin and its retailers had entered into illegal price-fixing agreements. At trial, the district court excluded as irrelevant Leegin's proffered expert testimony that economic conditions did not dictate the per se rule's application and that Leegin's pricing practices were pro-competitive, justifying the rule of reason's application.  In the absence of that testimony, the jury sided with PSKS and awarded $3.6 million in damages after trebling. The Fifth Circuit affirmed, citing Dr. Miles as controlling precedent.

In support of its petition for certiorari, Leegin argued that Dr. Miles was based on faulty economics and that the rule of reason should be applied to vertical minimum resale price maintenance claims. Under a rule of reason analysis, Leegin would have had the opportunity to show that its policy was pro-competitive and that it lacked market power, and PSKS would have had the burden to show that Leegin had actually harmed competition in the relevant market.  Leegin's request for rule of reason treatment finds support in the Supreme Court's modern trend away from per se analysis in similar contexts, such as vertical non-price restraints and maximum resale price maintenance agreements.

Given the makeup of the Roberts Court and recent trends towards the rule of reason, many observers expect the Dr. Miles per se standard to fall by the wayside. In deciding Leegin, the Court also could revisit the "Colgate" doctrine, which generally insulates suppliers from liability for unilateral price maintenance policies. In any event, the Court's decision should provide fresh guidance for suppliers as to the legality of steps they can take to manage retail prices for their products.

Oral argument is set for March 26, 2007 in Leegin.

Implied Antitrust Immunity: Credit Suisse First Boston Ltd. v. Billing (No. 05-1157)

Finally, the Supreme Court (minus Chief Justice Roberts, who recused himself without explanation) has agreed to review the Second Circuit's decision in Billing v. Credit Suisse First Boston Ltd., 426 F.3d 130 (2005), a case closely watched by Wall Street. In what the Second Circuit described as an alleged "epic Wall Street conspiracy," plaintiff investors alleged that the nation's leading underwriting firms entered into illegal contracts with purchasers of securities distributed in initial public offerings ("IPOs"), thereby grossly inflating the price of the securities after the IPOs in the so-called "aftermarket" and violating Sherman Act Section 1. Specifically, plaintiffs claimed that the investment banks conspired to manipulate the IPO market with "tie-ins" -- requiring investors to buy less attractive securities from the same underwriters -- and with "laddering" – forcing investors to buy additional quantities of the same stock in the aftermarket at prearranged escalating prices.

Defendants argued that, even if plaintiffs' allegations were true, only the securities laws could provide a remedy. The district court agreed and granted defendants' motion to dismiss, holding that, regarding the alleged conduct, the securities laws impliedly repealed federal antitrust laws and preempted state antitrust laws. The lower court found that implied immunity was appropriate because the Securities and Exchange Commission, both directly and through its pervasive oversight of the National Association of Securities Dealers and other self-regulatory organizations, either expressly permits the conduct alleged or has the power to regulate the conduct such that a failure to find implied immunity would "conflict with an overall regulatory scheme that empowers the [SEC] to allow conduct that the antitrust laws would prohibit."

After a detailed examination of the law of implied immunity, the Second Circuit reversed, finding no specific Congressional intent to immunize the challenged conduct, either express or implied. The Second Circuit rejected defendants' argument that implied antitrust immunity arises from a potential specific conflict between the antitrust laws and the securities laws, and further held that the securities laws were not sufficiently "pervasive" to immunize defendants' alleged conduct.

Interestingly, during the Second Circuit appeal process, the SEC argued in favor of antirust immunity and the Department of Justice opposed it. However, the SEC and DOJ filed a joint amicus brief urging the Supreme Court to accept certiorari and criticizing the analysis of both the district court and the Second Circuit. These regulators proposed their own standard for analyzing implied immunity claims on a motion to dismiss: to withstand the motion, the complaint must allege facts providing concrete notice and giving rise to a reasonably grounded expectation that the alleged antitrust offense can be established without relying on activities that are authorized under the regulatory scheme or inextricably intertwined with such immune activities. Whatever standard the Supreme Court ultimately endorses, the Billing decision should be highly instructive for Wall Street and those operating in other highly regulated industries.

The Supreme Court will hear oral argument in Billing on March 27, 2007.

Authored by:

Michael W. Scarborough

(415) 774-2963

mscarborough@sheppardmullin.com

 Tyler M. Cunningham

(415) 774-3208

tcunningham@sheppardmullin.com