In an unusual “predatory buying” case, the Ninth Circuit held that to succeed on a Sherman Act Section 2 claim, a plaintiff complaining of predatory buying need not meet the high standard of liability applicable to predatory pricing claims. Confederated Tribes of Siletz Indians of Oregon v. Weyerhaeuser Co., Nos. 03-35669, 03-35984, 2005 WL 1269668 (9th Cir. May 31, 2005). According to the Ninth Circuit, a plaintiff does not have to prove that the defendant operated at a loss and that a dangerous probability of the defendant’s recoupment of those losses existed to establish antitrust liability for predatory buying.

Weyerhaeuser Company operates, and Ross-Simmons Hardwood Lumber Company formerly operated until it went out of business in 2001, saw mills in the Pacific Northwest. Ross-Simmons, a pioneer in the alder-lumber business since 1962, brought suit against Weyerhaeuser, one of the world’s largest hardwood lumber manufacturers, alleging that Weyerhaeuser monopolized and attempted to monopolize the Pacific Northwest input market for alder saw logs through its purchases of saw logs. Id. at 2-3. At trial, Ross-Simmons proved with testimonial and other evidence that Weyerhaeuser attempted to eliminate competitors by driving up saw log prices and restricting access to saw logs through (1) predatory overbidding (i.e., paying a higher price on saw logs than necessary); (2) overbuying (i.e., buying more saw logs than it needed); (3) entering restrictive or exclusive agreements with saw log suppliers; and (4) making misrepresentations to state officials in order to obtain saw logs from state forests. Id. at 4-5. Ross-Simmons was awarded $78,769,218 in trebled damages at the jury trial.

On appeal, Weyerhaeuser challenged the denials of Weyerhaeuser’s motions for judgment as a matter of law or for a new trial on the basis that the court erred in not applying the prerequisites for establishing liability set forth in Brooke Group or by allowing the jury’s verdict to stand where there was insufficient evidence to prove the claims made against it. See Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993). The Ninth Court disagreed and held that Brooke Group does not control in the buy-side predatory bidding context.

Brooke Group’s Prerequisites for Liability in Predatory Pricing Claims Do Not Apply to Predatory Bidding Claims

In lower court, Judge Panner recognized that the recoupment standard used in Brooke Group was appropriate in sell-side predatory pricing cases because it prevents false positives and avoids deterrence of aggressive price competition that promotes consumer welfare. Confederated Tribes of Siletz Indians v. Weyerhaeuser, 340 F. Supp. 2d 1118 (D. Or. 2003)

These standards would not be appropriate however, Judge Panner held, in this case where Weyerhaeuser’s predatory conduct created a scarcity for essential inputs into Ross-Simmons’ sawmill operation. He observed that the antitrust laws are violated when its outbidding conduct goes beyond satisfying the defendant’s legitimate needs and is undertaken for the purpose of preventing competitors from obtaining the necessary inputs at reasonable prices. On the facts, by purchasing more logs than it needed for its business, Weyerhaeuser’s conduct, Judge Panner found, could not be considered legitimate. Judge Panner further observed that if actual recoupment were applied to a predatory buying case, a monopolist would only be subjected to liability if its scheme succeeds and competitors would be required to wait until they have already been driven out of the market before they could seek judicial relief.

The Ninth Circuit affirmed Judge Panner’s decision but focused on whether predatory buying could benefit consumer welfare or stimulate competition. It noted preliminarily that both the buy and sell sides of the market affect allocative efficiency and consumer welfare, and that antitrust law is just as concerned about the buy-side as the sell-side of the market. It observed that the high standard of liability set in Brooke Group takes into account that predatory pricing, which results in low prices, benefits consumers and can stimulate competition. The same effects do not result, it found, from predatory buying. In a predatory buying scheme, the court observed, a firm pays more for materials in the short term and thereby attempts to squeeze out those competitors who cannot remain profitable when the price of inputs increases. Id. at 14. No consumer benefit results during this predation period if the firm raises or maintains the same price level for its finished products. Even if consumers might temporarily benefit if the firm lowers prices during the predation period, the court noted, such a reduction in prices would place even greater pressure on competitors and thereby threaten competition in the relevant market. In the long run, the court surmised, the firm will charge consumers a higher price to recoup the higher costs it paid for its materials.

The court also took into account that, while it was possible that raising input prices could encourage new firms to enter the supply side of the market and expand output so that consumers benefit in the long run through price decreases and product improvements, these effects would not be seen in this case. As a natural resource of limited annual supply, the supply of alder saw logs could not increase significantly. The court thus proceeded to find that buy-side of the alder saw log market was relatively inelastic. Id. at 16. Having made these findings, the court held that the higher standard for establishing liability for predatory pricing articulated in Brooke Group did not apply to predatory buying. Thus, Ross-Simmons did not have to satisfy the Brooke Group prerequisites whereby a plaintiff must first prove that a defendant operated at a loss and that a dangerous probability of the defendant’s recoupment of those losses existed.

Thus, in cases where a plaintiff seeks relief for a defendant’s buy-side predatory buying. no extra measures are needed to ensure that lawful, aggressive competition is not unduly restrained by the application of the antitrust laws.

The Jury Verdict Condemning Weyerhaeuser to Liability Under Section 2 of the Sherman Act Was Based on Sufficient Evidence

Having found that the Brooke Group prerequisites to liability did not apply in this case, the Ninth Circuit considered Weyerhaeuser’s claim that Ross-Simmons’ evidence was insufficient to support the jury’s verdict.

To establish attempted monopolization under Section 2 of the Sherman Act, a plaintiff must show that the defendant (1) engaged in predatory or anticompetitive conduct; (2) had a specific intent to onopolize; and (3) a dangerous probability of the defendant’s achievement of monopoly power in the relevant market existed. Id. at 24-25, citing Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 456; Rebel Oil Co. v. Atlantic Richfield Co., 51 F.3d 1421, 1432-33 (9th Cir. 1995). Applying a Ninth Circuit decision, the court stated that a plaintiff must additionally prove causal antitrust injury. Rebel Oil, Id. at 1433.

While there were other indicators of anticompetitive conduct, the court held that the evidence of overbidding was itself sufficient to support the jury’s finding that Weyerhaeuser engaged in anticompetitive conduct.

Unlike other courts, however, the Ninth Circuit did not appear have any qualms in applying specific intent to the attempted monopolization claim. See A.A. Poultry Farms, Inc. v Rose Acre Farms, Inc. 881 F.2d 1396, 1402 (7th Cir. 1989) (affirming grant of defendant’s motion for judgment notwithstanding the verdict on Robinson-Patman claims). For example, in Rose Acre Farms, Judge Posner held that “intent is not a basis of liability (or a ground for inferring the existence of such a basis) with respect to an alleged predator,” since, among other reasons, “a desire to extinguish one’s rivals is entirely consistent with, often is the motive behind, competition.” Id. Without addressing this issue, the Ninth Circuit found that evidence of Weyerhaeuser’s anticompetitive conduct, testimony of its employees, and business projections regarding saw log prices showed that Weyerhaeuser specifically intended to monopolize.

As to the third element, dangerous probability of achieving monopoly power, the court observed that monopoly power is the power to control prices or exclude competition. In this instance, the court found that the direct evidence – testimony of Weyerhaeuser’s employees showing that Weyerhaeuser had the power to influence prices and had used its power to raise the price of saw logs – was by itself sufficient to support the jury’s finding of a dangerous probability of achieving monopoly power. Weyerhaeuser at 32-33. In addition, the circumstantial evidence of Weyerhaeuser’s 65 percent market share and barriers to entry and expansion (31 competitors had gone out of business during the relevant time period and capital costs and limited availability of supply barred would-be entrants or expansion in the industry) supported the jury’s finding. Id. at 34-38.

Since substantial evidence supported the jury’s finding of attempted monopolization, the court did not address the jury’s finding of actual monopolization.

Review of Damages Award and Attorneys’ Fees and Costs

A damages award that is based on a reasonable estimate of damages, not on speculation, the court stated, will be upheld. Id. at 39. Ross-Simmons’ damages models properly relied upon the fundamental assumption that Weyerhaeuser maintained artificially high costs in the saw log market during the damages period” Id. at 40. Testimony about lost profits and data regarding Weyerhaeuser’s average profit margin prior to the predatory period supported Ross-Simmons’ estimate. The court thus upheld Ross-Simmons’ damages award.

The court also upheld the award of attorneys’ fees. Unless a lower court abuses its discretion or committed a clear error of law, the court held, attorneys’ fees awards will not overturned. Id. at 41. As the prevailing party, Ross-Simmons was entitled to attorneys’ fees and costs.

Authored by:
Heather M. Cooper