The Roberts Supreme Court appears to be well on its way to reining in the outer reaches of private antitrust enforcement. In the term just concluded, all three antitrust cases heard by the Court resulted in reversals or vacating of judgments in favor of private plaintiffs in actions involving the Robinson Patman Act, joint ventures, and tying.1 Two of these decisions – the Dagher joint venture case and the Independent Ink tying case – were 8-0 (Alito did not participate) decisions, while the Volvo price discrimination opinion commanded the votes of seven justices. Near the end of its term, the Court also granted certorari on two decisions – one by the Ninth Circuit and the other by the Second Circuit – which likewise stretched private enforcement beyond its usual boundaries.
The Ninth Circuit decision is Ross-Simmons Hardwood Lumber Co, Inc. v. Weyerhaeuser Co., 411 F. 3d 1030 (9th Cir. 2005), cert. granted 2006 U.S. LEXIS 4908. This is a monopolization case by a competitor under Section 2 of the Sherman Act. Monopolization requires exclusionary conduct as well as monopoly power. Exclusionary conduct is, and always has been, an elusive concept since conduct which injures competitors often benefits consumers. Predatory pricing is an example of such conduct. Accordingly, the Supreme Court has held that such pricing is unlawful only where it is below some measure of cost,2 coupled with the ability to recoup the losses from the predation period after the monopolist has eliminated its rivals from the market. Brooke Group v. Brown & Williamson Tobacco Corp., 113 S. Ct. 2578 (1993). Not surprisingly, successful predatory pricing cases have been few and far between since Brooke Group.
Weyerhauser involves a rare species of exclusionary conduct – predatory buying. This occurs when the alleged monopolist pays an excessively high price for an input for the purpose of depriving its competitors of a source of supply or raising their costs. In Weyerhauser that input was sawlogs purchased by sawmills from timberland owners. The sawmills process the logs into finished lumber and sell such lumber. Plaintiff and defendant are competing sawmills. Plaintiff alleged that defendant Weyerhauser paid higher prices than necessary for the sawlogs, and this was an anticompetitive act.
The jury found in favor of plaintiff even though Weyerhauser was not operating at a loss in its sales of finished lumber. Both the District Court and the Ninth Circuit rejected Weyerhauser’s argument that the Brooke Group criteria should be applied to a predatory buying claim. Unlike Brooke Group predatory selling, said the Ninth Circuit, predatory buying does not involve low prices to consumers, the concern that formed the basis of Brooke Group’s restrictive two-part rule. Thus, the Ninth Circuit approved jury instructions which permitted a liability finding if plaintiff proved Weyerhauser "purchased more logs than it needed or paid a higher price for logs than necessary, in order to prevent the plaintiffs from obtaining the logs they need at a fair price." 411 F.3d at 1036 n. 8. There apparently was also evidence showing that Weyerhauser had a substantial (roughly 65%) share of the input market, that entry barriers were high and the supply of sawlogs inelastic.3
At a minimum, we should expect the Court to clarify the standard for predatory buying beyond the nebulous standard adopted by the Ninth Circuit. Basing liability on vague terms such as "higher than necessary" or "more than needed" provides little or no guidance for businesses or practitioners. It could also discourage price competition at the input level, which likewise is a concern of the antitrust laws. Indeed, the Department of Justice submitted an amicus curiae brief in support of the cert petition criticizing the Ninth Circuit’s "subjective and standardless test" and asserting that it will chill pro-competitive conduct. Whether the Supreme Court will go all the way with Weyerhauser and apply the Brooke Group criteria to predatory buying is an open question. There is scant authority on predatory buying, and the analytical model for predatory pricing does not translate well to the buy side since it may not involve liability for giving consumers low prices. Logic would suggest, however, that the standard adopted should be one which at least requires a showing of monopoly power on the sell side and perhaps that the high input prices caused defendant to sustain some loss on the selling side. Otherwise liability could attach to conduct that is economically rational and pro-competitive in the input market.
The Second Circuit decision which will be reviewed by the Supreme Court is Twombly v. Bell Atlantic Corp., et al., 425 F. 3d 99 (2d Cir. 2005). The issue in Twombly is the legal sufficiency of Section 1 conspiracy allegations in a Complaint. It has long been the law that conscious parallelism alone among competitors is not sufficient to meet the Section 1 conspiracy requirement. Theatre Enterprises, Inc. v. Paramount Film Distrib. Corp., 346 U.S. 537, 541 (1954). This is because competitors with similar information and economic interests will often make the same decisions, and that should not be sufficient for a Section 1 conspiracy. Rather, there must be additional "plus" factors such as evidence that the parallel behavior is against the individual defendants’ economic interests absent an agreement (e.g., raising prices at time of oversupply), or direct communications among the competitors at which they discussed prices or the restraint at issue. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 588 (1986); Apex Oil Co. v. DiMauro, 822 F.2d 246, 253-54 (2nd Cir. 1987).
The Complaint in Twombly alleged that the incumbent local exchange carriers ("ILECs") – the four "Baby Bells" – conspired not to compete with each other in their respective geographic markets and to prevent competing local exchange carriers ("CLECs") from entering those markets. Plaintiff alleged that such conduct would be "anomalous" in the absence of an agreement, that defendants had the ability and incentive to conspire, and thus there was a conspiracy in violation of Section 1. While the Complaint did not allege any direct evidence of an agreement not to compete or exclude new entrants, it did allege that the ILECs had opportunities for direct communications in industry meetings, and had negotiated similar unfair agreements with the CLECs and provided poor quality connections to those networks Twombly, 425 F.3d at 103-4.
The backdrop for this alleged conspiracy is the 1996 Telecommunications Act which was designed to open both the local and long distance markets to competition. It mandated that the ILECs provide access to their telecommunications infrastructure to the CLECs on reasonable and nondiscriminatory terms. Prior to that time, the 1982 settlement of the AT&T case gave them monopoly power over local telephone services in their respective markets. The Supreme Court earlier dealt with this statutory framework in Verizon v. Trinko decision, 540 U.S. 398 (2004). Trinko concluded that an ILEC’s refusal to give access to CLECs did not give rise to a Section 2 claim. While the issue in Twombly is much different, this regulatory background may play a significant role in the Supreme Court’s decision.
The regulatory background did play an important role in the District Court opinion which granted defendant’s motion to dismiss for failure to state a claim. Twombly v. Bell Atlantic Corp., 313 F. Supp. 2d 174, 182-187 (S.D.N.Y. 2003). Based in large part on the regulatory history and background of the telecommunications market, the District Court concluded that parallel decisions by defendants to impede competition from the CLECs and not to enter each other’s territory was consistent with their individual economic interests. It noted that, while the "overly neat" allocations of territories may raise an inference of conspiracy in most markets, such an inference was not justified here given the history of regulatory monopoly in the industry. A conspiracy inference was also undermined by the fact that if an ILEC became a CLEC in another ILEC’s market, it would be entering an "entirely different business" in which it would be reliant on their competitor’s infrastructure.
The Second Circuit reversed. It emphasized that the Federal Rules permit notice pleading, that claims should not be dismissed at the pleading stage unless it appears beyond doubt that plaintiff can prove no set of facts to support his claim, and at the pleading stage all inferences must be drawn in plaintiffs’ favor. It viewed the District Court’s detailed analysis at the pleading stage as inconsistent with these principles. The Complaint was sufficient despite the absence of plus factors4 since it sets forth the temporal and geographic parameters of the alleged illegal activity and the identity of the key participants. Since a court could not conclude that there is "no set of facts" that would permit plaintiff to prove that the particular parallelism was the product of collusion rather than coincidence, the allegations were sufficient to state a conspiracy claim. The Second Circuit stated that, had this been a summary judgment motion, the plaintiff would need to show the existence of plus factors. Twombly, 425 F.3d at 114. At the pleading stage, however, the Second Circuit concluded that a balance should be struck in favor of permitting such claims to proceed in light of the Congressional policy of vigorous enforcement of the antitrust laws despite the burden on the courts and the colossal expense for defendants of litigating potentially merit less claims. If that balance is to be recalibrated, said the Second Circuit, it is for Congress or the Supreme Court to do so.
It appears likely that the Supreme Court may do some "recalibration" here. The stark contrast between the District Court and the Second Circuit in their application of the same pleading standards focuses the pleading issue well. It is doubtful that the Court will modify the rule that conscious parallelism is not sufficient to state a conspiracy claim, and will require the specific pleading of some "plus" factors for a plaintiff to survive a motion to dismiss in a conspiracy claim. At the same time, however, it may conclude that the District Court went too far in drawing inferences adverse to plaintiff from the regulatory background, or possibly the inferences it did draw were not justified in the current environment. The interplay between pleading rules and conspiracy standards, coupled with the impact of the regulatory framework, make Twombly potentially a landmark decision.
1. Volvo Trucks North America, Inc. v. Reeder-Simco, GMC, Inc. 126 S. Ct. 860 (2006) (raising the bar on the competitive injury requirement in Robinson-Patman cases); Texaco, Inc. v. Dagher, 126 S. Ct. 1276 (2006) (joint pricing of products of joint venture not price fixing); Illinois Tool Works v. Independent Ink, Inc., 126 S. Ct. 1281 (2006) (no presumption of market power where patent or copyright is the tying product).
2. The Supreme Court has not determined the appropriate measure of costs for predatory pricing, but most of the circuits use some form of marginal or average variable cost.
3. The Ninth Circuit acknowledged that rising prices for inputs may encourage new entrants or market expansion in the input market but dismissed this concern because it concluded the sawlog market was inelastic. It based this conclusion on the fact that the supply of sawlogs remained stable or declined, and citing Zerbc, Monopsony & The Ross Simmons Case, 72 Antitrust L.J. 717 (2005).
4. In a footnote, the Second Circuit also stated that, by alleging that defendants’ noncompetition with each other would be against their individual self interest, the plaintiffs may have pleaded a plus factor. Twombly, 425 F. 3d at 118 n.15.
Carlton A. Varner