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

• Citation: 127 S.Ct. 1069,549 U.S. 312,75 USLW 4091,166 L.Ed.2d 911
• Decision Date: 20 February 2007
• Docket Number: No. 05-381.,05-381.
• Parties: WEYERHAEUSER COMPANY, Petitioner, v. ROSS-SIMMONS HARDWOOD LUMBER CO., INC.
• Court: United States Supreme Court

549 U.S. 312

127 S.Ct. 1069

166 L.Ed.2d 911

75 USLW 4091

WEYERHAEUSER COMPANY, Petitioner,

v.ROSS-SIMMONS HARDWOOD LUMBER CO., INC.

No. 05-381.

Supreme Court of the United States

Argued Nov. 28, 2006.

Decided Feb. 20, 2007.

Syllabus^*

Respondent Ross-Simmons, a sawmill, filed suit under § 2 of the Sherman Act, alleging that petitioner Weyerhaeuser drove it out of business by bidding up the price of sawlogs to a level that prevented Ross-Simmons from being profitable. The District Court, inter alia, rejected Weyerhaeuser's proposed predatory-bidding jury instructions that incorporated elements of the test applied to predatory-pricing claims in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 113 S.Ct. 2578, 125 L.Ed.2d 168. The jury returned a verdict against Weyerhaeuser. The Ninth Circuit affirmed, rejecting Weyerhaeuser's argument that Brooke Group's standard should apply to predatory-bidding claims.

Held: The test this Court applied to predatory-pricing claims in Brooke Group also applies to predatory-bidding claims. Pp. 1072-1078.

(a) Predatory pricing is a scheme in which the predator reduces the sale price of its product hoping to drive competitors out of business and, once competition has been vanquished, raises prices to a supracompetitive level. Brooke Group established two prerequisites to recovery on a predatory-pricing claim: First, a plaintiff must show that the prices complained of are below cost, 509 U.S., at 222, 113 S.Ct. 2578, because allowing recovery for above-cost price cutting could chill conduct-price cutting-that directly benefits consumers. Second, a plaintiff must show that the alleged predator had “a dangerous probabilit[y] of recouping its investment in below-cost pric [ing],” id., at 224, 113 S.Ct. 2578, because without such a probability, it is highly unlikely that a firm would engage in predatory pricing. The costs of erroneous findings of predatory-pricing liability are quite high because “ ‘[t]he mechanism by which a firm engages in predatory pricing-lowering prices-is the same mechanismby which a firm stimulates competition,’ ” and, therefore, mistaken liability findings would “ ‘ “chill the very conduct the antitrust laws are designed to protect.” ’ ” Id., at 226, 113 S.Ct. 2578. Pp. 1073-1075.

(b) Predatory bidding involves the exercise of market power on the market's buy, or input, side. To engage in predatory bidding, a purchaser bids up the market price of an input so high that rival buyers cannot survive, thus acquiring monopsony power, which is market power on the buy side of the market. Once a predatory bidder causes competing buyers to exit the market, it will attempt to drive down input prices to reap supracompetitive profits that will at least offset the losses it suffered in bidding up input prices. Pp. 1075-1076.

(c) Predatory-pricing and predatory-bidding claims are analytically similar. And the close theoretical connection between monopoly and monopsony suggests that similar legal standards should apply to both sorts of claims. Both involve the deliberate use of unilateral pricing measures for anticompetitive purposes and both require firms to incur certain short-term losses on the chance that they might later make supracompetitive profits. More importantly, predatory bidding mirrors predatory pricing in respects deemed significant in Brooke Group. Because rational businesses will rarely suffer short-term losses in hopes of reaping supracompetitive profits,Brooke Group's conclusion that “ ‘predatory pricing schemes are rarely tried, and even more rarely successful,’ ” 509 U.S., at 226, 113 S.Ct. 2578, applies with equal force to predatory-bidding schemes. And like the predatory conduct in Brooke Group, actions taken in a predatory-bidding scheme are often “ ‘ “the very essence of competition,” ’ ” ibid., because a failed predatory-bidding scheme can be a “boon to consumers,” see id., at 224, 113 S.Ct. 2578. Predatory bidding also presents less of a direct threat of consumer harm than predatory pricing, which achieves ultimate success by charging higher prices to consumers, because a predatory bidder does not necessarily rely on raising prices in the output market to recoup its losses. Pp. 1076-1078.

(d) Given these similarities, Brooke Group's two-pronged test should apply to predatory-bidding claims. A predatory-bidding plaintiff must prove that the predator's bidding on the buy side caused the cost of the relevant output to rise above the revenues generated in the sale of those outputs. Because the risk of chilling procompetitive behavior with too lax a liability standard is as serious here as it was in Brooke Group, only higher bidding that leads to below-cost pricing in the relevant output market will suffice as a basis for predatory-bidding liability. A predatory-bidding plaintiff also must prove that the defendant has a dangerous probability of recouping the losses incurred in bidding up input prices through the exercise of monopsony power. Making such a showing will require “a close analysis of both the scheme alleged by the plaintiff and the [relevant market's] structure and conditions,” 509 U.S., at 226, 113 S.Ct. 2578. P. 1078.

(e) Because Ross-Simmons has conceded that it has not satisfied the Brooke Group standard, its predatory-bidding theory of liability cannot support the jury's verdict. P. 1078.

411 F.3d 1030, vacated and remanded.

THOMAS, J., delivered the opinion for a unanimous Court.

Andrew J. Pincus, Washington, DC, for petitioner.

Kannon K. Shanmugam, for the United States as amicus curiae, by special leave of the Court, supporting the petitioner.

Michael E. Haglund, Portland, OR, for respondent.

Stephen V. Bomse, M. Laurence Popofsky, Heller, Ehrman, White & McAuliffe LLP, San Francisco, CA, Kevin J. Arquit, Joseph F. Tringali, Simpson, Thacher & Bartlett LLP, New York, NY, Andrew J. Pincus, Counsel of Record, Charles A. Rothfeld, Nickolai G. Levin, Mayer, Brown, Rowe & Maw LLP, Washington, DC, Sandy McDade, Guy C. Stephenson, Weyerhaeuser Company, Federal Way, WA, for Petitioner.

Roy Pulvers, Lindsay, Hart, Neil & Weigler, LLP, Portland, OR, Michael E. Haglund, Counsel of Record, Michael K. Kelley, Shay S. Scott, Haglund, Kelley, Horngren, Jones & Wilder LLP, Portland, OR, for Respondent.

Justice THOMAS delivered the opinion of the Court.

Respondent Ross-Simmons, a sawmill, sued petitioner Weyerhaeuser, alleging that Weyerhaeuser drove it out of business by bidding up the price of sawlogs to a level that prevented Ross-Simmons from being profitable. A jury returned a verdict in favor of Ross-Simmons on its monopolization claim, and the Ninth Circuit affirmed. We granted certiorari to decide whether the test we applied to claims of predatory pricing in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 113 S.Ct. 2578, 125 L.Ed.2d 168 (1993), also applies to claims of predatory bidding. We hold that it does. Accordingly, we vacate the judgment of the Court of Appeals.

I

This antitrust case concerns the acquisition of red alder sawlogs by the mills that process those logs in the Pacific Northwest. These hardwood-lumber mills usually acquire logs in one of three ways. Some logs are purchased on the open bidding market. Some come to the mill through standing short- and long-term agreements with timberland owners. And others are harvested from timberland owned by the sawmills themselves. The allegations relevant to our decision in this case relate to the bidding market.

Ross-Simmons began operating a hardwood-lumber sawmill in Longview, Washington, in 1962. Weyerhaeuser entered the Northwestern hardwood-lumber market in 1980 by acquiring an existing lumber company. Weyerhaeuser gradually increased the scope of its hardwood-lumber operation, and it now owns six hardwood sawmills in the region. By 2001, Weyerhaeuser's mills were acquiring approximately 65 percent of the alder logs available for sale in the region. App. 754a, 341a.

From 1990 to 2000, Weyerhaeuser made more than $75 million in capital investments in its hardwood mills in the Pacific Northwest. Id., at 159a. During this period, production increased at every Northwestern hardwood mill that Weyerhaeuser owned. Id., at 160a. In addition to increasing production, Weyerhaeuser used “state-of-the-art technology,” id., at 500a, including sawing equipment, to increase the amount of lumber recovered from every log, id., at 500a, 549a. By contrast, Ross-Simmons appears to have engaged in little efficiency-enhancing investment. See id., at 438a-441a.

Logs represent up to 75 percent of a sawmill's total costs. See id., at 169a. And from 1998 to 2001, the price of alder sawlogs increased while prices for finished hardwood lumber fell. These divergent trends in input and output prices cut into the mills' profit margins, and Ross-Simmons suffered heavy losses during this time. See id., at 155a (showing a negative net income from 1998 to 2000). Saddled with several million dollars in debt, Ross-Simmons shut down its mill completely in May 2001. Id., at 156a.

Ross-Simmons blamed Weyerhaeuser for driving it out of business by bidding up input costs, and it filed an antitrust suit against Weyerhaeuser for monopolization and attempted monopolization under § 2 of the Sherman Act. See 26 Stat. 209, as amended, 15 U.S.C. § 2 (2000 ed., Supp. IV). Ross-Simmons alleged that, among other anticompetitive acts, Weyerhaeuser had used “its dominant position in the alder sawlog market to drive up the prices for alder sawlogs to levels that severely reduced or eliminated the profit margins of Weyerhaeuser's alder sawmill competition.” App. 135a. Proceeding in part on this “predatory-bidding” theory, Ross-Simmons argued that Weyerhaeuser had overpaid for alder sawlogs to cause sawlog prices to rise to artificially high levels as part of a plan to drive Ross-Simmons out of business. As proof that this practice had occurred, Ross-Simmons pointed to Weyerhaeuser's...