Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co.

Supreme Court of the United States
2007 U.S. LEXIS 1333, 166 L. Ed. 2d 911, 549 U.S. 312 (2007)

ELI5:

Rule of Law:

A claim of predatory bidding under Section 2 of the Sherman Act must satisfy the same two-part test established for predatory pricing claims: 1) the plaintiff must prove that the predator's bidding on an input caused the cost of the relevant output to rise above the revenues generated in the sale of those outputs, and 2) the plaintiff must prove the defendant has a dangerous probability of recouping its losses through the exercise of monopsony power.

Facts:

Ross-Simmons Hardwood Lumber Co. (Ross-Simmons) and Weyerhaeuser Co. (Weyerhaeuser) were competing sawmills in the Pacific Northwest that purchased red alder sawlogs as a key input.
Weyerhaeuser entered the market in 1980 and, by 2001, was acquiring approximately 65% of the alder logs available for sale in the region.
From 1990 to 2000, Weyerhaeuser made over $75 million in capital investments to increase its production and efficiency, while Ross-Simmons made few such investments.
Between 1998 and 2001, the market price for alder sawlogs increased significantly while prices for finished hardwood lumber fell, cutting into sawmill profit margins.
During this period, Ross-Simmons suffered heavy financial losses.
In May 2001, Ross-Simmons shut down its mill, blaming Weyerhaeuser for intentionally driving up the price of sawlogs to anticompetitive levels to eliminate it as a competitor.

Procedural Posture:

Ross-Simmons sued Weyerhaeuser in U.S. District Court for monopolization under § 2 of the Sherman Act.
The District Court denied Weyerhaeuser's motions for summary judgment and for judgment as a matter of law, and it rejected Weyerhaeuser's proposed jury instructions based on the Brooke Group test.
A jury found in favor of Ross-Simmons and awarded a verdict of $26 million, which was trebled by the court to approximately $79 million.
Weyerhaeuser, as appellant, appealed the verdict to the U.S. Court of Appeals for the Ninth Circuit.
The Ninth Circuit affirmed the verdict, holding that the stringent Brooke Group standard did not apply to predatory bidding claims. Ross-Simmons was the appellee.
The U.S. Supreme Court granted certiorari to resolve the issue.

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Issue:

Does the two-part test for predatory pricing claims established in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp. also apply to predatory bidding claims brought under § 2 of the Sherman Act?

Opinions:

Majority - Justice Thomas

Yes, the two-part test for predatory pricing claims established in Brooke Group also applies to claims of predatory bidding. Predatory pricing and predatory bidding are analytically similar because they both involve the use of market power—monopoly on the sell-side and monopsony on the buy-side—to inflict short-term losses for the ultimate goal of reaping long-term supracompetitive profits. The Court reasoned that bidding up the price of inputs, like cutting the price of outputs, is often the very essence of competition and can be driven by legitimate, procompetitive reasons such as superior efficiency or hedging against future shortages. Applying a lax liability standard would risk chilling this legitimate competitive conduct. Therefore, to succeed on a predatory bidding claim, a plaintiff must prove both that the defendant's bidding caused its output prices to be below its costs and that there was a dangerous probability the defendant could recoup its losses by later exercising monopsony power to suppress input prices.

Analysis:

This decision harmonizes the legal standard for anticompetitive conduct on both the buy-side (predatory bidding) and the sell-side (predatory pricing) of the market under Section 2 of the Sherman Act. By applying the stringent Brooke Group test to predatory bidding, the Court established a very high bar for plaintiffs, making these claims exceptionally difficult to prove. The ruling signals a judicial preference for protecting aggressive competition, even if it results in the failure of less efficient rivals, over preventing potential anticompetitive harm. Future plaintiffs must now provide sophisticated economic evidence of both below-cost pricing on the output side and a clear path to recoupment through future monopsony power.

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