The Supreme Court and predatory bidding - lessons for the EU

Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co. Inc. (20 February 2007)

Defendant and plaintiff were competitors, both operated sawmills and purchased red alder sawlogs for their mills. Some of the logs are purchased through long term contracts, some are obtained from the mill owner’s property, and some are acquired through bidding. Plaintiff alleged that defendant placed bids at very high prices, forcing the price of logs to go up, thereby forcing plaintiff to pay more for his logs too, which forced plaintiff to increase his sales prices. The result was that defendant’s predatory strategy drove plaintiff out of business. In the lower courts plaintiff was successful in an action based on s.2 Sherman Act, in particular the courts did not think that predatory bidding was comparable to predatory pricing, so the strict standards set out by the Supreme Court in Brooke Group (1993) did not apply.

The Supreme Court disagreed, ruled that predatory bidding is judged by the same standards as predatory pricing, and because plaintiff admitted it was unable to prove the elements required by Brooke Group, the claim was unsuccessful. The judgment comes a short time after the CFI ruled on predatory pricing (see earlier entry in this blog) and holds two lessons for the EU: (1) how to use economics to analyse disputes; (2) how to write judgments.

(1) The use of economics

First, the Court explored whether predatory bidding (the exercise of monopsony power; that is, buyer power) is comparable to predatory pricing. The logic is similar: in a first period the predator engages in a measure that raises rivals’ costs (here by bidding high, increasing the price of the inputs and forcing competitors to pay more); in a second period, once competitors have been driven out of business, the predator uses its monopsony power to force sellers of input to lower the prices. As with predatory pricing, the first period represent’s the predator’s ‘investment’ – he suffers losses of profit and his dominance allows him to survive while competitors go out of business. The second period is when he recovers that investment by getting low prices for the inputs, recovering the losses made in the first. Accordingly, the legal standard for predatory bidding should be the same as that for predatory pricing.

Second, the Court held that aggressive commercial tactics are the very essence of competition, and that there were a myriad of reasons why buying inputs at high prices could be innocent, or even pro-competitive: (1) miscalculation of input needs; (2) a response to increased consumer demand; (3) a more efficient firm might bid up input prices to gain market share in the output market; (4) a firm that adopted an input intensive production process might bid to increase the inputs; (5) a firm might buy a lot of inputs today to hedge against future shortages. ‘There is nothing illicit about these bidding decisions. Indeed, this sort of high bidding is essential to competition and innovation.’

Third, the Court noted that like predatory pricing, a failed attempt of predatory bidding is benign. The monopsonist who buys more goods, will be in a position to sell more to consumers, and provided he does not have monopoly power on the selling side, this means that consumers get more goods at competitive prices.

Two things follow from this analysis: (a) predatory bidding is a high risk strategy that has many efficiency justifications; (b) a failed attempt to achieve the rival’s exclusion does not harm consumers. Therefore, a high standard of proof is necessary or there is a ‘risk of chilling pro-competitive behaviour with too law a liability standard.’

The legal test therefore is the same as for predatory pricing: (1) the predatory bidding results in below cost output sales; (2) there is a dangerous probability that the losses in the first period will be recouped through the exercise of monopsony power.

When will European courts think about aggressive commercial behaviour in this way?

Even those who think that a more lenient standard should apply and that Europe is right to be tougher on predators might take an interest in the lower court’s decision. The 9th Circuit held that three things needed proof: anticompetitive conduct through predatory overbidding, intended specifically to eliminate competition, and a dangerous probability of achieving monopoly power .

On intention, the court used evidence which in my mind is more compelling than that in the Wanadoo case. The court used three types of evidence: (1) Defendant’s anticompetitive conduct itself, (2) the testimony of Defendant’s employees, and (3) Defendant’s business projections regarding sawlog prices. Note that (2) is trial based testimony, not internal memoranda. Note also how items (1) and (3) show that Defendant had calculated what it would take to outs plaintiff. This evidence is much more specific than that which the CFI relied upon.

(2) Judicial Style

This decision is 16 pages of a pdf file. The first paragraph is a concise statement of the key points. The facts are examined in a succinct manner. Quotes from previous cases are brief and to the point. Academic literature is mentioned. The case can easily be read, and understood, while commuting on the tube. It is unfortunate that the style of judgment in the European Courts cannot be as clear and as concise.

Interestingly perhaps, the Court eschews mention of wider debates about the nature of S.2 monopolisation claims, a topical issue in light of the current hearings on single firm conduct. Perhaps the Court thinks it best if the law develops incrementally rather than setting out general standards for anticompetitive behaviour like the no economic sense test, or the as efficient competitor test.