Amicus Curiae Brief — Weyerhaeuser v. Ross-Simmons Hardwood Lumber

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Supreme Court, U.S.

22) FILED

FOR ARGUMENE ‘0%

OCT 12 2006

IN THE OFFICE OF THE CLERK

Supreme Court of the Anited States

WEYERHAEUSER COMPANY,

Petitioner,

ROss-SIMMONS HARDWOOD LUMBER COMPANY, INC.,

Respondent.

ON WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

BRIEF FOR THE AMERICAN ANTITRUST INSTITUTE

AS AMICUS CURIAE 1N SUPPORT OF RESPONDENT

JONATHAN W. CUNEO JONATHAN L. RUBIN

CUNEO GILBERT & LADUCA, LLP Counsel of Record

$07 C Street, N.E. JONATHAN L. RUBIN, P.A.

Washington, D.C. 20002 1717 K Street, N.W., Suite 600

(202) 789-3960 Washington, D.C. 20036

(202) 415-0616

ROBERT H. LANDE

UNIVERSITY OF BALTIMORE

SCHOOL OF LAW

1420 North Charles Street

Baltimore, M.D. 21201

(410) 837-4538

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QUESTION PRESENTED

Whether a plaintiff alleging a combination of price and

non-price predatory buying practices leading to

monopolization of an input market may establish liability by

persuading a jury that defendant eliminated competition “on

some basis other than efficiency” under this Court’s Aspen

test; or whether the plaintiff instead must prove the

defendant paid so much for the input that the price at which

it sold its products did not cover its costs and created a

dangerous probability of anticompetitive recoupment under

this Court’s Brooke Group test.

TABLE OF CONTENTS

Page

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A. The Ninth Circuit’s Decision Is Consistent With

This Court’s Long-Established Section 2

REESE SEALE Selec: pM eee ae ERM LET MaT EI 6

1. The court of appeals correctly applied Aspen

Gi iecidecsccihontlichos den inilaidenatiagndbeiisilisephemiiteinedileiniciieh 6

2. The decision below is consistent with other

well-recognized indicia of anticompetitive

I ciisistitiintctintencicsicchiceiacicihicensltpeniciggababidbiaidapinvtniininl 8

B. There Is No Economic Or Legal Justification For

Extending Brooke Group To Bidding Practices

Se III icnincsinitsienisincinicchennentaiheiebeiesiiaantndaiipiiies 10

1. Brooke Group is based on an outdated

economic understanding of the rationality and

likelihood of sell-side price predation..................... 1}

CONCLUSION

ill

2. The Brooke Group test evolved from cases

involving allegations of coordinated

predation among multiple firms operating in

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3. The intolerable risks of chilling legitimate

price cutting present in Brooke Group are not

present in this case where the defendant

increased the price of raw materials paid by

I a

4. A cost-based test for buy-side predation is

IED inisintiiecettnicinciatveninteceninmasamniniisneciiin

. Cost-Based Tests Are Particularly Inappropriate

For Claims Involving Closely Connected

Combinations Of Price And Non-Price Conduct

On Either The Selling Or Buying Side, As With

The Combination Of Overbidding And

Overbuying Along With Other Non-Price

eB YE oa ae Sen en

. Indicia Of Anticompetitive Conduct Unlawful

Under Section 2 Of The Sherman Act Should Be

Sufficiently Robust To Avoid Not Only

Excessive “False Positives” But Equally

Undesirable Excessive “False Negatives.”...............04.. 23

. There Is Insufficient Judicial Experience With

And Empirical Analysis Of Overbidding,

Overbuying And Related Buying-Side Conduct

To Warrant Adoption Of A Single Predation Test

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TABLE OF AUTHORITIES

Cases: Page

American Tobacco Co. v. United States,

See I: Fe Cessation sincinennedednidamnilitiiilie cei tis 20

Aspen Skiing Co. v. Aspen Highlands Skiing Corp.,

SFE US... Fs Cee si itvsccssiiiioriamiataasaa 4,6,8

Brooke Group Ltd. v. Brown & Williamson

Tobacco Corp., 509 U.S. 209 (1993)... cccccceceeeeees passim

Cargill, Inc. v. Monfort of Colorado, Inc.,

BFP th SC Ca eeneievisvettiststnitcdadeiadiedibadia 11, 14,15

Concord Boat Corp. v. Brunswick Corp.,

BOT F.3D USIP COR Cle. FOG sccecseceinissteratacicteenionissomennein 9

Cont'l Ore Co. v. Union Carbide & Carbon Corp.,

SPOUTS. GOD CHIE cscctecsrccstsivthniinicinniiinueana 18,21, 22

FTC v. H.J. Heinz Co., 246 F.3d 708 (D.C. Cir. 2001)....... 17

George C. Frey Ready-Mixed Concrete, Inc. v. Pine

Hill Concrete Mix Corp., 554 F.2d 551

CBB Ce. TOT FT pisces ccicinsininsnesssinciistetiitiiahiahibediciandianhimbieiiiaias 20

M&M Medical Supplies & Serv., Inc. v. Pleasant

Valley Hosp., Inc., 981 F.2d 160 (4th Cir. 1992) ............ 9

Mandeville Island Farms, Inc. v. Am. Crystal

Sugar Co., 334 U.S. 219 (1948) oo... cece RLF 22, 23

Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio

Corp., 473 U.S. S74 (1966) ..0.02000c00sss00s000000. 11,12, 13,14

Cases—Continued: Page

Neumann vy. Reinforced Earth Co.,

ee I OI, MIEN BOER ceesnrceeecenesssnreccesenccsescessnense 9

Poller v. Columbia Broad. Sys. Inc.,

tlc dessictesnintelaniedncnminnnennaninses 20

Reid Bros. Logging Co. v. Ketchikan Pulp Co.,

Sy Pe EE Ne WOME sninccrsnncsescccrescssacceseonsseceees 21

Spirit Airlines, Inc. v. Northwest Airlines, Inc.,

431 F.3d 917 (6th Cir. 2005) .......... cece cceeteeeeeeeees 20, 21

Stearns Airport Equip. Co. v. FMC Corp.,

free ene 9

Swift & Co. v. United States,

SL ee squaneetuiniseiniiies 21

United States v. AMR Corp.,

33S F.3d 1109 (10th Cir. 2003) ...........0...ccrccrcccrcscesssoees 12

United States v. New York Tel. Co.,

PI: HERETO IR ciaintctacintstccansnsccesievnees steseiisblicitianiion i8

Verizon Commc'ns Inc. v. Law Offices of

Curtis V. Trinko, LLP, 540 U.S. 398 (2004)......... 7, 8, 24

Statutes:

ERR AT SPREE ee ee a ae nC 2

yo} | le | eS piihiinieatiuidinsinaiatetciebitnbaliiiemiia 26

SE Ee a ee 14

Miscellaneous: Page

ROGER D. BLAIR & JEFFREY L. HARRISON,

MONOPSONY: ANTITRUST LAW AND ECONOMICS

Pe ict siciniiceistshatiaaveitnaniiniceniacbehniianigninascchidaienin passim

Patrick Bolton et al., Predatory Pricing: Strategic

Theory and Legal Policy, 88 GEO. L.J. 2239

Joseph F. Brodley & George A. Hay, Predatory

Pricing: Competing Economic Theories and the

Evolution of Legal Standards, 66 CORNELL L.

Pe iciitadhinienitesitcishaiasinaplitiinaianiisasaciiuiainisipein 16

Malcolm R. Burns, New Evidence of Price-cutting,

10 MANAGERIAL & DECISION ECON. 327 (1989) .......... 13

Peter C. Carstensen, Predatory Pricing in the Courts:

Reflection on Two Decisions, 61 NOTRE DAME L.

A a Oe ee ee 16

Richard Craswel! & Mark R. Fratrik, Predatory

Pricing Theory Applied: The Case of

Supermarkets v. Warehouse Stores, 36 CASE W.

Thin: Sey aides ceeriecstininiedslecercicincitaiiancttbiithseapianeit 13

David Easley et al., Preying for Time, 33 J. INDUS.

RE ee 12

Andrew I. Gavil, Exclusionary Distribution

Strategies by Dominant Firms: Striking a Better

Balance, 72 ANTITRUST L.J. 3 (2004)... 24, 25

Herbert Hovenkamp, Exclusion and the Sherman Act,

po Re ER S| Se are 26

Vil

Miscellaneous—C ontinued: Page

Jonathan Jacobson & Gary Dorman, Joint

Purchasing, Monopsony and Antitrust, 36

NUR, Bb CUE Pasccesccnideccenscoscrestsotsntceninsaneanees 28

Jonathan Jacobson & Gary Dorman, Monopsony

Revisited: A Comment on Blair & Harrison, 37

pg TR A , eee 26, 28

John B. Kirkwood, Buyer Power and Exclusionary

Conduct: Should Brooke Group Set the Standards

for Buyer-Induced Price Discrimination and

Predatory Bidding? , 72 ANTITRUST L.J. 625

SII ies hnddiasioiadedisinietandsodd tesindidlpttaiianintinaecnesniintiniagiiaioa 15-16

Alvin K. Klevorick, The Current State of the Law

and Economics of Predatory Pricing, 83 AM.

i dliate tislinnaaticcsnsasiseintiliiial 12

A. Douglas Melamed, Exclusive Dealing Agreements

and Other Exclusionary Conduct - Are There

Unifying Principles? , 73 ANTITRUST L.J. 375

i einiscl idiita lt aicesee echt ptsciiegataealeg pttialibnlneeivattaia 8, 24

Paul Milgrom & John Roberts, Predation,

Reputation, and Entry Deterrence,

I a aa 13

Janusz A. Ordover & Garth Saloner, Predation,

Monopolization, and Antitrust,

| HANDBOOK INDUS. ORG. 537 ............cccccccecceceseeeceeeeees 12

Mark S. Popofsky, Defining Exclusionary Conduct:

Section 2, the Rule of Reason, and the Unifying

Principle Underlying Antitrust Rules, 73

FE Cal. IE Ccccsepeirercsevtcencnsinidisansciiiie 23-24

Vill

Miscellaneous—Continued: Page

Garth Saloner, Predation, Mergers, and Incomplete

Information, 18 RAND J. ECON. 165 (1987)................. 12

Steven C. Salop, Exclusionary Conduct, Effect on

Consumers, and the Flawed Profit-Sacrifice

Standard, 73 ANTITRUST L.J. 311 (2006).................000. 24

Transcript of Hearing, Federal Trade Commission

and Department of Justice Hearings on Section 2

of the Sherman Act: Single-Firm Conduct As

Related to Competition (June 20, 2006) at 10, ar

http://ftc.gov/os/sectiontwohearings/docs/

60620FTC.pdf (testimony of Deborah P.

Majoras, Chairman, Federal Trade Commission).......... 26

Transcript of Hearing on Predatory Pricing, Federal

Trade Commission and Department of Justice

Hearings on Section 2 of the Sherman Act:

Single-Firm Conduct As Related to Competition

(June 22, 2006), at http://ftc.gov/os/

sectiontwohearings/docs/60622FTC.pdf ........... 19, 20, 25

Gregory J. Werden, /dentifying Exclusionary

Conduct Under Section 2: The No Economic

Sense’ Test, 73 ANTITRUST L.J. 413 (2006)................. 8,9

Oliver E. Williamson, Predatory Pricing: A Strategic

and Welfare Analysis,

TALC aT ena AERTS 16

Richard O. Zerbe, Jr. & Donald S. Cooper, An

Empirical and Theoretical Comparison of

Alternative Predation Rules, 6\ TEx. L. REV.

nist dladissencsinasicionshpiniglibinecibionindenpesctinesintianepinrth 13

Miscellaneous—Continued: Page

Richard O. Zerbe, Jr. & Michael T. Mumford, Does

Predatory Pricing Exist? Economic Theory and

the Court After Brooke Group, 41 ANTITRUST

Be I cd cinicresctihinmndetedeineisahaitipiiaiiatiabinisibabeniies 13

SiN. oN

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IN THE

Supreme Court of the Anited States

No. 05-381

WEYERHAEUSER COMPANY,

Petitioner,

Vv.

RoOss-SIMMONS HARDWOOD LUMBER COMPANY, INC..

Respondent.

ON WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

BRIEF FOR THE AMERICAN ANTITRUST INSTITUTE AS

AMICUS CURIAE IN SUPPORT OF RESPONDENT

STATEMENT OF INTEREST

Amicus curiae the American Antitrust Institute (“AAI”)

is an independent, not-for-profit organization whose mission

is to increase the role of competition and sustain the vitality

of the antitrust laws.' This case concerns the application of

' The consent of all parties to the filing of this brief has been lodged

with the Clerk. Pursuant to Rule 37.6, amicus curiae state that no

counsel for a party authored this brief in whole or in part, and that no

persons other than amicus or its counsel have made a monetary

contribution to the preparation or submission of this brief.

This filing has been authorized and approved by the directors of AAI

(director Albert A. Foer, Esq. is recused from this case). The Advisory

Board of AAI consists of more than 85 prominent lawyers, law

monopolization and attempted monopolization principles

under Section 2 of the Sherman Act to a dominant buyer's

exclusionary buying conduct. AAI presents this amicus brief

in the interests of promoting sound development of Section 2

jurisprudence in this buying context. AAI thereby seeks to

ensure that the Sherman Act remains effective in preventing

anticompetitive uses of “monopsony” power in markets for

the purchase of goods and services generally throughout the

economy.

STATEMENT

|. Petitioner, a sawmill operator, manipulated prices

and supply in the Pacific Northwest alder sawlog market to

eliminate competition from other sawmills. A jury found

petitioner liable for both monopolization and attempted

monopolization of the input market for these sawmills in

violation of Section 2 of the Sherman Act, 15 U.S.C. § 2.

Substantial competent evidence proved that petitioner acted

with specific intent to eliminate rival sawmills. Petitioner

had the power — and was aware of its power — to influence

prices in the alder sawlog market. Using its market power in

that market, petitioner bid up sawlog- prices and created an

artificial shortage of sawlog supplies for the sole purpose of

driving rivals out of business.

2. The jury’s verdict against petitioner for attempted

monopolization required the jury to have found a dangerous

probability that petitioner would become the monopoly

purchaser (i.e., monopsonist) of Pacific Northwest alder

sawlogs. This dangerous probability of successful

monopolization was supported by substantial competent

direct evidence. This included substantial evidence of

barriers to entry sufficient to enable the resulting monopsony

professors, economists and business leaders (listed on the AAI web site:

www.antitrustinstitute.org). The members of the Advisory Board serve

in a consultative capacity and their individual views may differ from the

positions taken by AAI.

condition to continue for a substantial period of time. A

fortiori, petitioner had a dangerous probability of recouping.

the expenses it incurred in prosecuting its buy-side

anticompetitive scheme.

3. Petitioner’s scheme threatened competition in the

upstream (input) market by enabling petitioner in the long

run to depress prices for alder sawlogs. Doing so allowed

petitioner to appropriate the producers’ surplus created when

sawmills bid competitively for sawlogs. The monopolization

offense in this case rests on harm to competition in the

sawlog market, consistent with the theory of predatory

bidding and buying in which the offencer “hopes to exploit

its monopsony power by purchasing the relevant input at

lower prices.” Brief for the United States as Amicus Curiae

Supporting Petitioner at 14 (emphasis omitted). The harm to

competition in this case occurred in the upstream supply

market for sawlogs, not in the downstream hardwood lumber

market.

4. Petitioner did not bid prices up or increase its

purchases as part of a normal competitive output expansion,

as a hedge against future price increases, or to ensure against

supply interruptions or lapses in quality. Cf Brief for the

United States as Amicus Curiae Supporting Petitioner at 17.

Indeed, the jury was required to rule out such theoretical

procompetitive explanations for petitioner's market conduct

before it could find against petitioner. More specifically, the

jury was instructed to determine (a) whether petitioner

purchased more logs than necessary and paid more than

necessary “in order to prevent” plaintiffs from meeting their

input needs; and (b) whether petitioner’s conduct “lacks a

valid business purpose.” Pet. App. 7a n.8, 14a n.30. Given

these instructions, the jury plainly rejected petitioner’s

contention that it bid up prices or increased its purchases for

procompetitive reasons.

5. The significant reduction in the number of Pacific

Northwest alder sawmills during the relevant period has not

been attributed to anything other than petitioner's anti-

competitive conduct. Rather, the jury found that petitioner’s

rivals succumbed to the anticompetitive effects of

petitioner’s price and supply manipulation scheme.

6. As the court of appeals observed, the supply of alder

sawlogs was relatively price inelastic. Pet. App. lla. The

response of the quantity supplied to an increase in price,

therefore, would be less than proportional. The more

inelastic the supply conditions, moreover, the less likely

petitioner’s overbidding and over-purchasing scheme would

“create{ ] incentives for sellers to increase the quantity, or

improve the quality, of that input.” Brief for the United

States as Amicus Curiae Supporting Petitioner at 17. Such a

procompetitive dynamic is unlikely in the alder sawlog

market in any event, since the “nature of the input supply at

issue here does not readily allow for market expansion.” Pet.

App. lla. Given these circumstances, there is no reasonable

basis for concern that affirmance of the judgment below will

somehow bias antitrust law against — or create “false

positives” condemning — procompetitive conduct under other

conditions in other markets.

SUMMARY OF ARGUMENT

The court of appeals correctly applied to petitioner’s

conduct in the alder sawlog market this Court’s definition of

“anticompetitive or predatory acts” as “those that tend to

exclude or restrict competition “on some basis other than

efficiency.”” Aspen Skiing Co. v. Aspen Highlands Skiing

Corp., 472 U.S. 585, 605 (1985) (quoting ROBERT H. Bork,

THE ANTITRUST PARADOX 138 (1978)). The court of appeals

also correctly determined that (a) the trial court’s jury

instructions considered as a whole were consistent with the

Aspen definition and (b) the evidence itn the record amply

supported the jury’s finding that petitioner's conduct was

unlawful in accordance with that test. This Court can,

therefore, comfortably affirm the decision below.

Petitioner and supporting amici argue for reversal

because the court of appeals did not apply the Brooke Group

test for “predatory pricing” as it has evolved for sellers’

pricing conduct, under which a plaintiff must prove that a

seller’s prices were below an appropriate measure of cost

and created a dangerous probability of recoupment through

subsequent supracompetitive pricing. Brooke Group Lid. v.

Brown & Williamson Tobacco Corp., 509 U.S. 209, 222,

223-24 (1993). The Brooke Group test, however, has come

under serious question even as applied to selling-side

conduct; it rests on an outdated economic understanding of

the rationality and likelihood of predatory pricing schemes.

It is in any event not suitable for buying-side conduct in a

case of this kind where petitioner artificially increased input ~

prices. A cost-based standard is all the more inappropriate

here because this case involves closely connected

combinations of price and non-price conduct.

Finally, there is insufficient judicial experience with and

empirical analysis of overbidding, overbuying and related

buying-side conduct to warrant adoption of the Brooke

Group test for this area at this time. Brooke Group rests on

the premise that an exceptionally strict standard for

predatory pricing on the selling side is necessary to avoid

excessive false positives, which are presumed to be a greater

danger than excessive false negatives in that pricing context.

Whatever may be the continued validity of that intuition on

the selling side, not enough is known about the incentives,

competitive dynamics and ultimate effects of dominant

buyers’ pricing and related strategies to be confident that the

same bias against overdeterrence at the expense of

underdeterrence is prudent for buying practices in input

markets generally.

ARGUMENT

A. The Ninth Circuit’s Decision Is Consistent With This

Court’s Long-Established Section 2 Standards.

1. The court of appeals correctly applied Aspen

Skiing Co.

The decision below is soundly premised on this Court’s

established Aspen test: “Anticompetitive or predatory acts

are those that tend to exclude or restrict competition ‘on

some basis other than efficiency.’ Pet. App. 17a (quoting

Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S.

585, 605 (1985)). There is no need to search for a “new”

Section 2 standard suitable for use in this case. The Court

can affirm the court of appeals’ decision under its well-

established jurisprudence.

In Aspen, this Court affirmed a Section 2 judgment

because the evidence supported “an inference that Ski Co.

was not motivated by efficiency concerns and that it was

willing to sacrifice short-run benefits . . . in exchange for a

perceived long-run impact on its smaller rival.” /d. at 610-

11. The Court asked whether the defendant “impaired

competition in an unnecessarily restrictive way,” thereby

implementing the Areeda/Turner~ definition of

“exclusionary” as encompassing “behavior that not only (1)

tends to impair the opportunities of rivals, but also (2) either

does not further competition on the merits or does so in an

unnecessarily restrictive way.” /d. at 605 n.32 (quoting III

PHILLIP E. AREEDA & DONALD F. TURNER, ANTITRUST LAW

78 (1978)).

In the present case, the jury instructions underlying the

verdict and upheld by the court of appeals were consistent

with the Aspen test. The jury was instructed to “consider

whether the conduct lacks a valid business purpose” or

“unnecessarily impedes the efforts of other firms to compete

for raw materials”; whether “the anticipated benefits of the

conduct flow. primarily from its tendency to hinder or

eliminate competition”; and, more particularly, whether

petitioner “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 needed at a fair price.”

Pet. App. 14a n.30.

Petitioner and all of its supporting amici complain that

the jury instructions were too “subjective,” focusing in

particular (and out of context) on the inquiry into whether

petitioner purchased more than it “needed” and paid more

than “necessary” in order to prevent plaintiffs from obtaining

their needs at a “fair” price. Considered as a whole, the

instructions adequately informed the jury of its need to focus

upon the motive or intent of petitioner’s buying strategies.

The propriety of that focus is clear from this Court’s own

most recent Section 2 decision. Thus, in Verizon Commc'ns

Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398

(2004), the Court explained why the conduct at issue in

Aspen was properly found to be unlawful while that at issue

in the case then before it could not similarly be found

unlawful because of motive/intent differences between the

two cases: the evidence in Aspen “suggested a willingness to

forsake short-term profits to achieve an anticompetitive end”

and “revealed a distinctly anticompetitive bent” while, in

contrast, Verizon’s conduct “sheds no light upon the

motivation of its refusal to deal — upon wh ther its regulatory

lapses were prompted not by competitive zeal but by

anticompetitive malice.” /d. at 409.

The court of appeals here was justified in determining

that there was substantial evidence to support the jury’s

verdict. The evidence quoted in the opinion below from

petitioner's own officials and documents strongly supports a

finding by the jury that the defendant’s buying practices

lacked a valid business purpose and that its executives had

formed the requisite specific intent to monopolize by

anticipating the benefits from the elimination of competition.

Pet. App. 19a-20a. The jury could reasonably conclude that

buying more than necessary and paying more than necessary

for sawlogs for the purpose of impeding competitors’ access

to this input amounted to “attempting to exclude rivals on

some basis other than efficiency.” Aspen, 472 U.S. at 605

(quoting ROBERT H. BORK, THE ANTITRUST PARADOX 138

(1978)).

Both the jury instructions in this case and the Ninth

Circuit’s analysis of the evidence in the record supporting

the verdict are consistent with those well-established Aspen

principles.

2. The decision below is consistent with other well-

recognized indicia of anticompetitive conduct.

The jury’s verdict and the Ninth Circuit's decision are

also consistent with two closely related Section 2 indicia of

anticompetitiveness: the “sacrifice test,” under which con-

duct is deemed anticompetitive if it would be “unprofitable

for the defendant hut for the exclusion of rivals and resulting

supracompetitive recoupment” and the “no economic sense

test,” under which conduct can be deemed exclusionary or

predatory if “it would make no economic sense for the

defendant but for the tendency to eliminate or lessen

competition.”

The sacrifice test contributed to this Court’s analysis of

Section 2 claims in both Aspen, 472 U.S. at 610-11}; and

Trinko, 540 U.S. at 409; and it has played a leading role in

* A. Douglas Melamed, Exclusive Dealing Agreements and Other

Exclusionary Conduct — Are There Unifying Principles?, 73 ANTITRUST

L.J. 375, 389 (2006).

* Gregory J. Werden, Identifying Exclusionary Conduct Under

Section 2: The ‘No Economic Sense’ Test, 73 ANTITRUST L.J. 413, 413

(2006).

Section 2 decisions from four circuits.‘ The no economic

sense test has been advocated by both the Antitrust Division

of the Department of Justice and the Solicitor General in

recent years.”

Petitioner’s purchase of “more logs than it needed” and

paying “a higher price for logs than necessary” are, as the

jury found, practices that satisfy both the sacrifice test and

the no economic sense test. Indeed, how could buying more

than needed or paying more than necessary ever be sensible,

efficient or otherwise legitimate profit-maximizing conduct?

Again, as the court of appeals recognized, evidence from

petitioner’s own officials and documents precluded any

finding of a valid business purpose for this overbuying and

overpaying. Pet. App. 19a-20a. Accordingly, the only

supportable conclusion is that these practices were profitable

and rational only because of their expected elimination of

competition, thereby enabling eventual supracompetitive

recoupment.

The court of appeals did not require respondent to meet

the first prong of the Brooke Group test, as petitioner urged,

by proving that petitioner suffered a loss in the short term as

* See, e.g, Concord Boat Corp v. Brunswick Corp., 207 F.3d 1039.

1062 (8th Cir. 2000); Stearns Airport Equip. Co v FMC Corp., 170 F.3d

518, 522, 524 (Sth Cir. 1999); M&M Medical Supplies & Serv., Inc. v

Pleasant Valley Hosp., Inc., 981 F.2d 160, 167-68 (4th Cir. 1992),

Neumann v. Reinforced Earth Co., 786 F.2d 424, 427 (D.C. Cir. 1986).

* See Werden, supra, at 413-14 n.4-7 (citing briefs filed by the

United States in four recent Section 2 cases: Brief for the United States

and the Federal Trade Commission as Amici Curiae at 15, Verizon

Comme 'ns Inc. v. Law Offices of Curtis V. Trinko, LLP, $40 US. 398

(2004) (No. 02-682); Brief for the United States at 28 (public redacted

version), United States v. Dentsply Int'l Inc., 399 F.3d 181 (3d Cir. 2005)

(No. 03-4097); Brief for the United States at 2, 30 (public redacted

version), United States v. AMR Corp., 335 F.3d 1109 (10th Cir. 2003)

(No. 01-3202), Brief of the Appellees United States and States Plaintiffs

at 48, United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001)

(Nos. 00-5212, 00-5213)).

determined by the relationship between petitioner’s costs

(including the prices paid for inputs) and the amount of

revenue that petitioner received (or expected to receive) for

its finished product. It is sufficient for petitioner to have

devoted resources to carrying out its scheme in the sawlog

market. As explained below, it was not necessary for

petitioner's expenses to have been of such a magnitude to

represent a loss on products sold in the downstream (output)

market for hardwood lumber. This is because the

monopolized market was the upstream sawlog market and

the harm to competition occurred in that market.

With respect to the second prong of the Brooke Group

standard, it was unnecessary in this case to require the jury to

find a dangerous probability of “recoupment” of its expenses

in its anticompetitive scheme. The very nature of becoming

an upstream monopolist by illegitimate means in a market

surrounded by high entry barriers implies ability to recoup

the expense incurred to achieve the monopoly power and

more. It would thus have been redundant to require the jury

to make a specific finding that the defendant had a dangerous

probability of recouping its loss in the long term because a

dangerous probability of recoupment follows in this case

from the attempted monopolization verdict itself.

B. There Is No Economic Or Legal Justification For

Extending Brooke Group To Bidding Practices On

The Buying Side.

The Brooke Group test has come under question as

inadequate, even as applied to predatory pricing claims on

the selling side. Growing doubts about the validity of its

underlying premises militate against its extension to new

applications such as practices on the buying side of the kind

here at issue.

1. Brooke Group is based on an outdated economic

understanding of the rationality and likelihood of

sell-side price predation.

The Supreme Court has most recently addressed

predatory pricing claims in three decisions: Matsushita Elec.

Indus. Co., Lid. v. Zenith Radio Corp., 475 U.S. 574, 589

(1986), Cargill, Inc. v. Monfort of Colorado, Inc., 479 U.S.

104 (1986), and Brooke Group Lid. v. Brown & Williamson

Tobacco Corp., 509 U.S. 209 (1993). In all three cases, the

Court characterized predatory pricing as “speculative” and

“inherently uncertain,” emphasizing its “general implausi-

bility” and the “obstacles to [its] successful execution.” In

Matsushita, the Court concluded that “there is a consensus

among commentators that predatory pncing schemes are

rarely tried, and even more rarely successful.” Matsushita,

475 U.S. at 589.

The presumed “consensus” in that regard rested upon

empirical analyses of predatory pricing conduct published in

1958 and 1971 by John McGee and Roland Koller,® whose

studies of cases from the first half of the twentieth century

led to their conclusion that predatory pricing was irrational

and unlikely to occur.’ Those studies remained persuasive to

the Court seven years later when, in Brooke Group, the

Court announced the current liability standard for predatory

pricing under Section 2 of the Sherman Act.

The McGee/Koller conclusions, however, have been

undermined by more recent scholarship on dominant firms’

* See Matsushita, 475 U.S. at 590 (citing Roland Koller, The Myth of

Predatory Pricing: An Empirical Study, 4 ANTITRUST L. & ECON. REV

105 (1971) and John S. McGee, Predatory Price Cutting: the Standard

Oil (NJ.) Case, | J.L. & ECON. 137 (1958)).

’“The Court’s skepticism about the rationality of predatory pricing

was justified by the now dated economic authorities on which the Court

relied.” Patrick Bolton et al., Predatory Pricing Strategic Theory and

Legal Policy, 88 Gro. LJ. 2239, 2263 (2000)

incentives to engage in predatory pricing strategies of

various kinds. “It is now the consensus view in modern

economics that predatory pricing can be a successful and

fully rational business strategy.” Patrick Bolton et al.,

Predatory Pricing: Strategic Theory and Legal Policy, 88

GEO. L.J. 2239, 2241 (2000). The judiciary’s skepticism of

predatory pricing “assumes that predation is extremely rare,

but sound empirical and experimental studies, as well as

modern economic theory, do not justify this assumption.”

Id. at 2249. Most fundamentally, it ignores “sophisticated

modern economic theories founded on more realistic

assumptions of imperfect and asymmetric information,

where much is unknown and where one party may have

more knowledge than the other.” /d. See also David Easley

et al., Preying for Time, 33 J. INDUS. ECON. 445, 446 (1985)

(“When the problem is seen as one of incomplete

information, the standard reasons for saying predation is rare

are not compelling.”); Garth Saloner, Predation, Mergers,

and Incomplete Information, 18 RAND J. ECON. 165, 183

(1987) (concluding that “when one abandons the assumption

of complete information, there are numerous ways in which

rational predatory pricing can arise’’).

Current economic understanding of predatory pricing no

longer accepts the “static, non-strategic view’ of predatory

pricing on which Matsushita and Brooke Group are based.

See, e.g, Bolton, supra, at 2241-50; Janusz A. Ordover &

Garth Saloner, Predation, Monopolization, and Antitrust, in

! HANDBOOK INDUS. ORG. 537, 581-90 (Richard

Schmalensee & Robert D. Willig eds., 1989); Alvin K.

Klevorick, The Current State of the Law and Economics of

Predatory Pricing, 83 AM. ECON. REV. 162, 166 (1993). See

* Federal courts have also recognized new economic understandings

of the rationality of predatory pricing behavior: “{Rjecent scholarship

has challenged the notion that predatory pricing schemes are implausible

and irrational.” United States v AMR Corp., 335 F.3d 1109, 1114 (10th

Cir. 2003)

alse Richard Craswell & Mark R. Fratrik, Predatory Pricing

Theory Applied: The Case of Supermarkets v. Warehouse~

Stores, 36 CASE W. RES. L. REV. 1, 3-8 (1985).

To the contrary, recent economic scholarship reveals that

predatory pricing is rational, it does occur, and it is profitable

and consistent with profit-maximizing behavior. See, e.g.,

Richard O. Zerbe, Jr. & Michael T. Mumford, Does

Predatory Pricing Exist? Economic Theory and the Court

Afier Brooke Group, 41 ANTITRUST BULL. 949, 956-68

(1996) (collecting economic literature and concluding that

the “empirical evidence regarding predation does not suggest

it is either rare or unsuccessful”); Malcolm R. Burns, New

Evidence of Price-cutting, 10 MANAGERIAL & DECISION

ECON. 327, 327 (1989) (“Predatory pricing is a rational

strategy in game-theoretic models of oligopoly, based on

informational asymmetries, that consider signaling, signal-

jamming and reputation effects.”); Richard O. Zerbe, Jr. &

Donald S. Cooper, An Empirical and Theoretical

Comparison of Alternative Predation Rules, 61 TEX. L. REV.

655, 674-77, 699-708 (1982); Paul Milgrom & John Roberts,

Predation, Reputation, and Entry Deterrence, 27 J. ECON.

THEORY 280, 281 (presenting an economic model in which

predation is a “rational, profit-maximizing strategy”).

2. The Brooke Group test evolved from cases

involving allegations of coordinated predation

among multiple firms operating in oligopolistic

markets.

Neither Matsushita nor Brooke Group involved claims

that a single dominant firm engaged in predatory pricing.

Rather, both cases concerned allegations of “coordinated”

predation among several rivals in an oligopolistic market.

While skepticism about the plausibility of predation in that

context appeared well-founded, that does not justify

skepticism about predation incentives of a single dominant

firm in all market environments.

In Matsushita, two American television manufacturers

sued a group of Japanese manufacturers, alleging that the

defendants unlawfully conspired to charge below market

prices for televisions in the United States to eliminate

competition. Matsushita, 475 U.S. at 590. The Court stated

that “[s!uch a conspiracy is incalculably more difficult to

execute than an analogous plan undertaken by a single

predator” because “[t]he conspirators must allocate the losses

to be sustained during the conspiracy’s operation, and must

also allocate any gains to be realized from its success.” /d.

In this instance, the Court explained, because “success is

speculative and depends on a willingness to endure losses,”

firms have a “strong incentive to cheat” and “|t]he necessary

allocation is therefore difficult to accomplish.” /d.

The Court’s skepticism toward coordinated predation

resonated again in Brooke Group. There, a generic cigarette

manufacturer sued another cigarette manufacturer, alleging

that the defendant pressured the plaintiff to raise its prices to

more profitable levels “through a process of tacit collusion

with the other cigarette companies.” Brooke Group, 509

U.S. at 227. The Court rejected the plaintiff's theory as

unavailing because “tacit cooperation among oligopolists

must be considered the least likely means of recouping

predatory losses.” /d. at 228. See also Bolton, supra, at

2258 (“{T]he Court’s view of the predatory pricing claim

was colored by its doubts that predation by tacit coordination

could realistically occur.”).

The Court has thus not heretofore considered and ruled

on the entirely different circumstance of unilateral price

predation by a single dominant firm.” This makes it all the

° Cargill, Inc. v. Monfort of Colorado, Inc., 479 U.S. 104 (1986), did

not involve allegations of unilateral price predation under Section 2 of

the Sherman Act; rather, it examined whether a competitor suffered the

requisite antitrust injury to have standing to enjoin a proposed merger

under Section 16 of the Clayton Act, 15 U.S.C. § 26. One of the

plaintiff's theories of antitrust injury was that, after the merger was

ees eee oe nO goo a eee eee

more prudent for the Court to consider the new economic

learning about predation incentives discussed hereinabove

before deciding whether the Brooke Group test should apply

to any single-firm predation, but particularly to buy-side

purchasing.

3. The intolerable risks of chilling legitimate price-

cutting present in Brooke Group are not present in

this case where the defendant increased the price

of raw materials paid by sawmills.

Because of the need to ensure that antitrust rules do not

discourage or punish conduct consisting of directly lowering

prices to consumers, this Court in Brooke Group adopted an

exceptionally strict test for predatory pricing. There, the

Court explained that the “mechanism by which a firm

engages in predatory pricing — lowering prices - is the same

mechanism by which a firm stimulates competition.” Brooke

Group, 509 U.S. at 226. In that light, a strict test was

deemed necessary to avoid discouraging procompetitive

price-cutting.

Unlike those kinds of predatory pricing cases, the present

case involves predatory bidding in which petitioner

artificially increased the prices it paid for inputs used in its

operation. Liability for increasing prices in the manner

found by the jury in this case does not create disincentives to

procompetitive pricing on the selling side. While there may

be limited instances in which overbidding can benefit

competition, it can do so only quite indirectly. See, eg,

John B. Kirkwood, Buyer Power and Exclusionary Conduct:

Should Brooke Group Set the Standards for Buyer-Induced

consummated, the merged firm would engage in predatory pricing and

thereby drive plairtiff out of the market. This Court rejected that

argument, concluding that the plaintiff lacked standing to enjoin the

proposed transaction under the Clayton Act because it “never raised nor

proved any claim of predatory pricing.” Cargi//, 479 U.S. at 119.

Price Discrimination and Predatory Bidding?, 72

ANTITRUST L.J. 625, 655 (2005) (“[I]t seems indisputable

that any negative impact of a predatory bidding case on

downstream price competition is less direct and less certain

than the impact of a predatory pricing case, which is a direct

assault on a seller’s decision to lower prices to its

customers.’’).

In short, any negative consequence for consumers of

deterring desirable bidding practices on the buying side is far

more remote and uncertain than that entailed in punishing

firms for directly lowering their downstream prices. Because

of this difference, Brooke Group should not be extended to

predatory bidding claims. As the court of appeals in this

case observed, “[The] benefit to consumers and stimulation

of competition do not necessarily result from predatory

bidding the way they do from predatory pricing.” Pet. App.

9a.

4. A cost-based test for buy-side predation is in-

appropriate.

Cost-based tests for anticompetitive conduct may on the

surface appear “objective” but contain substantial elements

of subjectivity and are exceptionally difficult to administer.

See, e.g, Oliver E. Williamson, Predatory Pricing: A

Strategic and Welfare Analysis, 87 YALE L.J 284, 305 (1977)

(presenting arguments why cost-based standards for

predatory pricing are insufficient and problematic); Joseph F.

Brodley & George A. Hay, Predatory Pricing: Competing

Economic Theories and the Evolution of Legal Standards, 66

CORNELL L. REV. 738, 756-57, 765-69 (1981); Peter C.

Carstensen, Predatory Pricing in the Courts: Reflection on

Two Decisions, 61 Notre Dame L. Rev. 928, 945-46

(1986). Extending Brooke Group’s cost-based test to

overbidding in the purchase of inputs in upstream markets

would be all the more problematic for two additional

reasons.

First, there is no satisfactory way to measure cost when a

dominant buyer cross-subsidizes the amount it overpays for

one input with a second input that could have been

purchased at a reduced price. In this scenario, the available

cost information may not reveal that a firm has overbid or

overpaid for the input at issue because the buyer is able to

account for the overpayment on one input through cross-

subsidization from one input to another. There is no good

means to account for that possibility or its effects in the

application of a cost-based test in this upstream context.

Second, it is also quite unclear how a cost-based test for

overbidding would allocate fixed costs. For example, would

fixed costs include the average cost to purchase current

inventory, or would the cost measure only be concerned with

the incremental price of each additional sawlog? This

difficulty in determining how a cost standard would account

for fixed costs militates against the extension of Brooke

Croup’s cost-based test to buy-side conduct such as

overbidding.

C. Cost-Based Tests Are Particularly Inappropriate For

Claims Involving Closely Connected Combinations Of

Price And Non-Price Conduct On Either The Selling

Or Buying Side, As With The Combination Of

Overbidding And Overbuying Along With Other

Non-Price Conduct In The Present Case.

Petitioner and its amici urge the adoption of a safe harbor

that would allow any buyer to escape liability for “predatory

buying” of an essential input if it is able to demonstrate that

the buying conduct did not result in selling its goods

incorporating that input below the pertinent measure of the

cost of those goods. This incorrectly assumes that the sole

measure of wrongdoing under the Sherman Act is the price a

company charges an end-use consumer. Under both the

Sherman and Clayton Acts, courts have regularly recognized

that harm to competition is not so restricted. See, e.g., FTC

v. HJ. Heinz Co., 246 F.3d 708, 719 (D.C. Cir. 2001); see

also Cont'l Ore Co. v. Union Carbide & Carbon Corp., 370

U.S. 690, 699-700 (1962).

For the reasons explained above, there should be no such

safe harbor for petitioner here. This is especially so since the

conduct at issue involved closely connected combinations of

price and non-price conduct.'” Predatory “pricing” in the

form of “overpaying” for sawlogs was only one among

several related practices supporting the jury verdict and

district court judgment that the court of appeals affirmed in

this case.

The record below establishes all of these facts:

e Petitioner owns seven hardwood sawmills in the

Pacific Northwest. J.A. 158a.

e It both drove up sawlog prices and restricted

access to sawlogs. Pet. App. 3a.

e Itoverbought. /d. at 3a-4a.

e It “tracked competitors’ profit margins and

estimated the potential effects of targeted

increases in sawlog costs on the ability of low-

margin competitors to survive.” /d. at 20a.

e It entered “restrictive or exclusive agreements

with sawlog suppliers.” /d. at 4a.

e It made “misrepresentations to state officials in

order to obtain sawlogs from state forests.” Jd.

e During the relevant period, the “supply of alder

sawlogs remained relatively stable or declined.”

Id. at 11a.

'° Petitioner's amici assert that non-price conduct played no role in

the court of appeals’ affirmance of the district court’s judgment.

Although we do not believe this to be the case, the Ninth Circuit’s

grounds for affirmance would not in any event constrain the scope of this

Court’s review. This is “because the prevailing party may defend a

judgment on any ground which the law and the record permit that would

not expand the relief it has been granted.” United States v. New York Tel

Co., 434 U.S. 159, 166 n.8 (1977) (internal citations omitted).

e A companion case had specifically recognized the

significance of allowing surplus logs to rot. /d. at

9a n.14.

e Alder sawlogs are a natural resource that has a

limited annual supply and is a “highly inelastic”

market that is a byproduct of the “more important

softwood harvest.” /d. at lla & n.20.

e 95 percent of hardwood lumber in the Pacific

Northwest is alder, and the mills at issue are the

only hardwood mills in the western United States.

Id. at 2a.

And the parties stipulated that the alder was “typically, but

not always, harvested within 100 miles of the sawmill in

which [it was] processed into hardwood lumber, chips, and

other products.” J.A. 153a. As well, petitioner embarked on

an aggressive acquisition program that enabled it to control

the market. In their stipulated facts, the parties recounted

petitioner’s acquisitions: one in 1980, three in 1995, and one

in 2000. /d. at 158a.

In short, this is a case involving substantial elements of

non-price buying conduct and a case in which the geographic

and product characteristics of the supply market are

particularly significant.

Even assuming that the Brooke Group test is appropriate

to apply to pricing conduct on the buying side, it cannot

reasonably apply to the combination of buying practices

established on the record of this case.'' Because Brooke

'' Indeed, at the recent hearings on Section 2 policy conducted

jointly by the Federal Trade Commission and the Department of Justice,

much of the discussion during the “buy-side” session focused on how to

characterize the non-price conduct; regardless of the label, the

participants agreed that it was not appropriate to lump such conduct in

with predatory pricing. See Transcript of Hearing on Predatory Pricing,

Federal Trade Commission and Department of Justice Hearings on

Section 2 of the Sherman Act: Single-Firm Conduct As Related to

Competition (June 22, 2006) at 162-67, at

Group focuses on predatory pricing, petitioner and its

supporting amici have glossed over the distinction between

overbidding and overbuying.'* This is a mistake, first,

because overbuying is a distinct form of exclusionary

conduct, independent of pricing and second, because the

other aspects of anticompetitive conduct are not even

arguably captured by a predatory pricing analysis. Thus, for

example, Blair and Harrison highlight the strategy employed

in American Tobacco Co. v. United States, 328 U.S. 781

(1946), in which tobacco companies bid aggressively for

tobacco they did not utilize in their own cigarettes, in order

_ to restrict the supply available to companies that would use

it. See RoGer D. BLaiR & JEFFREY L. HARRISON,

MONOPSONY: ANTITRUST LAW AND ECONOMICS 34 (1993).

On occasion, other companies have employed such

tactics in order to restrict supply. See, e.g., Poller v.

Columbia Broad. Sys. Inc., 368 U.S. 464 (1962) (examining

the purchase of UHF stations that were then abandoned);

Spirit Airlines, Inc. v. Northwest Airlines, Inc., 431 F.3d 917

(6th Cir. 2005) (examining the expansion of gate capacity

and flights that were dropped after Spirit, the low-cost

carrier, exited the market); George C. Frey Ready-Mixed

Concrete, Inc. v. Pine Hill Concrete Mix Corp., 554 F.2d

551 (2d Cir. 1977) (denying summary judgment where

plaintiff alleged that the sources of gravel and grit supplies

were bought up by defendants to deny plaintiff access).

http://ftc.gov/os/sectiontwohearings/docs/ 60622FTC.pdf (testimony of

Prof. John Kirkwood, Seattle University School of Law; Prof. Tim

Brennan, University of Baltimore, Maryland County; Prof. Steven Salop,

Georgetown University Law Center; Frederick Warren-Boulton,

Microeconomic Consulting & Research Associates, Inc.; Janet McDavid,

Hogan & Hartson LLP) (hereinafter Section 2 Hearing Transcript].

'2 One amicus brief went so far as to state that it was treating the

overbidding and overbuying claims as “functionally interchangeable.”

Brief for Law Professors as Amici Curiae in Support of Petitioner at 3

n.2.

As Blair and Harrison have recognized, even though

there are seldom “pure monopsonists,” dominant buyers can

“impose monopsonistic welfare losses.” BLAIR &

HARRISON, supra, at 49. These losses result ultimately in too

few resources being purchased because a dominant firm’s

privately optimal level of purchase is different from the

socially optimal level. See id. at 39. The Brooke Group test

takes no account of this kind of upstream harm; its sole

concern is the rationality of a downstream pricing decision.

The case of Reid Bros. Logging Co. v. Ketchikan Pulp

Co., 699 F.2d 1292 (9th Cir. 1983), was one of a handful of

cases in which price and non-price conduct were separate but

related parts of a systematic attack on competition. In Reid

Bros., in addition to collusive bidding, the court of appeals

found that otherwise undesirable purchases were made in

order to deny competitors access to timber; defendants also

extended credit to loggers, thus giving the defendants the

power to “cut off a logger’s financing, force the logger out of

business, and acquire the company or its assets.” Jd. at 1298.

Another such case was Swift & Co. v. United States, 196

U.S. 375, 391-92 (1905), in which the purchasers of live

stock had engaged in a combination of practices that

included restrictive contracts with railroads and stockyards,

complemented by alternately bidding prices up to induce

shipments to a given location and then manipulating bidding

so that the live stock was purchased at a reduced price.

Another was Spirit Airlines, in which Northwest Airlines

was found to have not only manipulated prices but also to

have increased the number of flights to selected destinations,

even though it had planned to reduce the number of flights

prior to Spirit’s entry into the market. 431 F.3d at 923-24.

In cases of this kind, involving combinations of price and

non-price conduct, “plaintiffs should be given the full benefit

of their proof without tightly compartmentalizing the various

factual components and wiping the slate clean after scrutiny

of each.” Cont'l Ore Co. v. Union Carbide & Carbon Corp.,

370 U.S. 690, 699 (1962). Indeed, this Court recognized in

Continental Ore that even acts that might be legal in

themselves could “lose that character when they become

constituent elements of an unlawful scheme.” /d. at 707.

The “constituent elements of an unlawful scheme”

analysis is particularly important here. As Blair and

Harrison suggest:

There is a bright line test that would be highly

indicative of a predatory buying effort. As noted

earlier, the seller engaged in such an effort must

consider what it will do with the inputs it is required

to buy at the artificially high price. Rather than

produce more of the output, it may find it less costly

to destroy a perishable input or to hoard an input

that is not perishable. This type of behavior,

especially when accompanied by a bidding war for

the input, is hard to interpret as anything other than

an effort to deny the competing buyers access to the

input. Indeed, in a case in which the input is

destroyed, the welfare loss could not be more

obvious.

BLAIR & HARRISON, supra, at 156 (emphasis added). In

other words, when a buyer deliberately pays a price

substantially higher than what would be appropriate and

economically justifiable in a competitive market, society’s

limited assets are wasted and the overal]] economy is made

less efficient — a result that is just the opposite of the policy

embedded in antitrust. Overbidding and overbuying of logs

that ultimately were used for a low-return purpose

(pulpwood) because they were no longer suited for sawlogs

would fit that scenario.

As this Court recognized in Mandeville Island Farms,

Inc. v. Am. Crystal Sugar Co., 334 U.S. 219 (1948),

distortions in a supply market will ultimately affect related

end products and thus consumers. Thus, it was deemed

“inconceivable that the monopoly so created will have no

effects for the lessening of competition in the later interstate

phases of the overall activity or that the effects in those

phases will have no repercussions upon the prior ones,

including the price received by the growers.” /d. at 240.

And, in any event, the Sherman Act “does not confine its

protection to consumers, or to purchasers, or to competitors

or to sellers. Nor does it immunize the outlawed acts

because they are done by any of these. The Act is

comprehensive in its terms and coverage, protecting all who

are made victims of the forbidden practices by whomever

they may be perpetrated.” /d. at 236.

The Sherman Act thus appropriately condemns buyer

predation that injures the competitive process generally in

upstream markets without regard to whether related adverse

effects have yet materialized downstream. Such conduct

creates supply inefficiencies and resource allocation

distortions that produce long-term welfare losses. This is

particularly so when the conduct at issue promotes the

dominant buyer’s predation reputation and thereby raises

input market barriers to entry. This case exemplifies dangers

of this kind from a combination of price and non-price

conduct, thus calling for robust application of Section 2

standards to an evidentiary record that flatly contradicts

petitioner’s proffered “efficiency” justifications.

D. Indicia Of Anticompetitive Conduct Unlawful Under

Section 2 Of The Sherman Act Should Be Sufficiently

Robust To Avoid Not Only Excessive “False

Positives” But Equally Undesirable Excessive “False

Negatives.”

Dominant firm practices with the potential to be

anticompetitive are far too diverse in nature and effects to be

susceptible to one overarching test under Section 2 of the

Sherman Act. As one recent commentator emphasized,

there is no “one size fits all”; the appropriate test for any

case should take into account “the likely consumer harms

and benefits from the conduct, but also the risk of false

positives, false negatives, and legal process costs.” Mark S.

Popofsky, Defining Exclusionary Conduct: Section 2, the

Rule of Reason, and the Unifying Principle Underlying

Antitrust Rules, 73 ANTITRUST L.J. 435, 437 (2006). Section

2 standards that “wrongly curb a monopolist’s incentive to

compete or that improperly enable a monopolist to impede or

vanquish would-be rivals threaten significant and lasting

harm to both competition and consumers.” /d at 436

(emphasis added).

Recent scholarship is in agreement that Section 2

standards for exclusionary conduct should seek to minimize

both the underdeterrence and overdeterrence of anti-

competitive conduct. See, eg, A. Douglas Melamed,

Exclusive Dealing Agreements and Other Exclusionary

Conduct—Are There Unifying Principles?, 73° ANTITRUST

L.J. 375, 383 (2006) (explaining that Section 2 standards

should seek “to minimize the sum of the costs of

enforcement errors and transaction costs overall”); Steven C.

Salop, Exclusionary Conduct, Effect on Consumers, and the

Flawed Profit-Sacrifice Standard, 73 ANTITRUST L.J. 311,

345.54 (2006); Andrew I. Gavil, Exclusionary Distribution

Strategies by Dominant Firms: Striking a Better Balance, 72

ANTITRUST L.J. 3, 68-69, 74-76 (2004).

In short, courts overseeing Section 2 cases should be

sensitive to the need to minimize both false positives and

false negatives. Most recently, this Court in Verizon

Commc'ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540

U.S. 398 (2004), was concerned with false positives

involving a dominant firm’s refusal to deal with a competitor

when the conduct at issue was regulated by a comprehensive

regulatory scheme. There, the Court “weigh{ed] a realistic

assessment of [antitrust]’s costs” against “the slight benefits

of antitrust intervention,” concluding that “[t]he cost of false

positives counsels against an undue expansion of §2

liability” in that context. /d. at 414.

While the Court in 7rinko focused on the risk of false

positives, minimizing false negatives is equally important.

Indeed, a “Section 2 standard that is animated by greater

tolerance of aggressive dominant firm | | strategies that both

exclude and do not benefit consumers will .. . very likely

lead to ‘false negatives’ and under-deterrence, with

uncertain, but very likely substantial adverse consequences

for the nascent competition that is often its target.” Gavil,

supra, at 5. Standards that “are likely to lead to an increased

incidence of false negatives” can “seriously undermine

Section 2’s vitality as a shield that guards the competitive

process.” /d.

As discussed above, the Court in Brooke Group deemed

it necessary to adopt an exceptionally strict test for predatory

pricing because of the considerable risk of chilling

procompetitive conduct that would result in lower prices for

consumers. Here, there is far less risk of that sort. Predatory

bidding involves increasing the price of inputs; a strict test is

not necessary to avoid disincentives to engage in pro-

competitive conduct. Because there is no reason to believe

the risk of false positives is greater than the risk of false

negatives in applying Section 2 to predatory bidding and

related practices on the buying side, the Court should not

extend Brooke Group’s test to this domain.

FE. There Is Insufficient Judicial Experience With And

Empirical Analysis Of Overbidding, Overbuying And

Related Buying-Side Conduct To Warrant Adoption

Of A Single Predation Test For This Area At This

Time.

There is another reason that this Court should not rush to

adopt a test in this case that may be underinclusive. There

has been very limited experience with or analysis of litigated

cases involving buy-side conduct.'’ Indeed, there have been

"Prof. John B. Kirkwood raised precisely this point at the joint

FTC-DOJ Section 2 Hearing on Predatory Pricing. See Section 2

Hearing Transcript, supra, at 107-08 (testimony of Prof. John Kirkwood,

Seattle University School of Law).

none involving single-firm monopsony conduct under

Section 2 prior to this case. See BLAIR & HARRISON, supra,

at 17. Jacobson and Dorman included a list of the cases they

were able to locate, 39 altogether, in which “antitrust

violations based primarily on the acquisition or abuse of

buyer power have been found.” Jonathan Jacobson & Gary

Dorman, Monopsony Revisited: A Comment on Blair &

Harrison, 37 ANTITRUST BULL. 151, 159-60 (1992)

(hereinafter Jacobson & Dorman, Monopsony Revisited).

Although many cases included Section 2 allegations, all of

them concerned collusive or concerted action (or challenged

mergers under Section 7 of the Clayton Act, 15 U.S.C. § 18).

It thus made sense that, when Blair and Harrison analyzed

non-price buying practices, they did so only for concerted

action cases. See BLAIR & HARRISON, supra, at 76-81.

It is much easier to evaluate — and fashion judicial

remedies to redress — concerted action than unilateral

conduct. See Herbert Hovenkamp, Exclusion and the

Sherman Act, 72 U. Cul. L. Rev. 147, 163-64 (2005).

Indeed, at the introductory session of the recent joint Federal

Trade Commission-Department of Justice hearings on

Section of the Sherman Act, Federal Trade Commission

Chairman Deborah Platt Majoras characterized the issue of

how unilateral conduct should be evaluated as having

“dominated our antitrust debate for several years” and as

“the most heavily discussed and debated area of competition

policy in the international arena.” Transcript of Hearing,

Federal Trade Commission and Department of Justice

Hearings on Section 2 of the Sherman Act: Single-Firm

Conduct As Related to Competition (June 20, 2006) at 10, at

http://ftc.gov/os/sectiontwohearings/docs/60620FTC.pdf

(testimony of Deborah P. Majoras, Chairman, Federal Trade

Commission).

Caution is appropriate in allowing acts that would be “in

restraint of trade” if undertaken by agreement among rivals

to subject a single firm to liability if the firm unilaterally

engages in those acts. But caution is also called for in

ignoring buying-side conduct of the kind at issue here.

These claims have rarely been litigated, and there is no

present basis for adopting sweeping judgments about their

marketplace effects. Where a single firm has become

dominant enough to inflict welfare harms in its buying

practices, there is good reason for heightened vigilance.

Cartels are inherently unstable. Thus, concerted exclu-

sionary conduct can be undermined by defectors. '*

Unilateral exclusionary conduct — if coupled with power-

entrenching market characteristics such as high barriers to

entry — can be more enduring and cannot readily be rectified.

There is accordingly significant risk in adopting an

especially strict test for condemning conduct of that ilk,

particularly when it occurs on the buying side where courts

have little experience in examining its economic

implications. There are many possible strategies apart from

predatory bidding that might be utilized by power buyers for

anticompetitive purposes. A clear danger in prematurely

establishing a single, formulaic test in the context of

predatory bidding is that it might have unfortunate spillover

effects as other strategies emerge, possibly even encouraging

the emergence of such strategies.

There is certainly no need to expand the Brooke Group

test to the buying side to avoid a new flood of indeterminate

litigation of the sort suggested by some of the amici

supporting the appeal in this case. As Jacobson and Dorman

have explained, the exercise of monopsony power requires

three conditions: ‘“(1) the buyer or group of buyers must

represent a substantial portion of total purchases in the

market; (2) the supply curve must be upward-sloping; and

(3) there must be some barriers to entry into the buyers’

'* Blair and Harrison describe the incentive for collusive buyers to

cheat: “Since each member of the cartel will be confronted with the same

temptation, it is not unlikely that the agreement will be undermined

through clandestine defections.” BIAIK & HARRISON, supra, at 46.

market.” Jonathan Jacobson & Gary Dorman, Joint

Purchasing, Monopsony and Antitrust, 36 ANTITRUST BULL.

1, 10 (1991). The authors posit, and the cases bear out, that

only certain industries, such as agriculture, natural resources,

and labor, possess all of these characteristics. See Jacobson

& Dorman, Monopsony Revisited, supra, at 162 n.32."°

Without agreeing that those traditional conditions of

monopsony power must always be present in order to find

Section 2 liability, we note that all of them are present here

(as the court of appeals recognized). The alder sawlog

market also shares another characteristic that, as a practical

matter, permits the rise of monops¢ ny in such industries in

particular: alder sawlogs are limited to a narrow (and thus

more easily dominated) geographic area, particularly given

that most sawlogs are processed within 100 miles of the site

of harvest. J.A. 153a. Alder forests cannot be replicated in,

say, Nevada. As a practical matter, alder’s tendency to stain

makes storage and lengthy transport economically infeasible.

The converse is also true: alder is the predominant hardwood

in the Pacific Northwest, and the only hardwood mills in the

Western United States are located there. Pet. App. 2a. Thus,

control over alder sawlog supply in the Pacific Northwest is

tantamount to control over western hardwood supply.'°

Treating the unusual facts at issue here as a basis for

declaring buying practices generally to be lawful unless a

'S Although Jacobson and Dorman did not mention the movie

industry, the cases they cite are replete with challenges that arise when a

theater is able to dominate a local geographic market for first-run films.

See Jacobson & Dorman, Monopsony Revisited, supra, at 159-60.

' It is true that globalization has altered the analysis applied to most

geographic markets, because manufacturing and even services can be

delivered virtually anywhere. At the same time, there remain resources

that have unique properties narrowing the scope of the relevant supply

market significantly. From the facts found below, alder is one such

resource.

victim of them meets the Brooke Group test would be

dangerous indeed.

CONCLUSION

For the foregoing reasons, the judgment of the court of

appeals should be affirmed.

Respectfully submitted,