The U.S. Supreme Court recently voted 9-0 to vacate a lower court ruling that found Weyerhaeuser Co. liable for forcing a competitor out of the alder lumber market in the Pacific Northwest.
Ross-Simmons Hardwood Lumber Co., which went out of business in 2001, alleged that Weyerhaeuser used predatory bidding to gain an unfair share of the market. It contended that Weyerhaeuser bid two to three times more for alder logs than they were worth.
A federal court jury in Portland, Ore. ruled in favor of Ross-Simmons and awarded the company $26 million; the award was tripled under federal antitrust rules.
Weyerhaeuser appealed the decision to the 9th Circuit Court of Appeals last year, but the jury decision was upheld.
In overturning the case, the Supreme Court based its test of predatory bidding on a previous lawsuit against Brown and Williamson Tobacco Corp.
At the heart of the appeal was the lower court judge’s instructions to the jury that they could award damages if Weyerhaeuser bought “more logs than needed” and prevented Ross-Simmons from buying logs at a “fair price.” The appeals court upheld the instructions.
However, the Supreme Court ruled that the appeals court should have applied a legal standard similar to the one in the Brown and Williamson predatory pricing case in 1993. A plaintiff must prove that predatory prices are below cost and that the accused company has a “dangerous probability of recouping its investment in below-cost pricing.”
Predatory bidding is slightly different. Through predatory bidding a company can establish a monopsony – a market in which there is only one buyer. In this case, Ross-Simmons alleged that Weyerhaeuser established a monopsony as a result of over-bidding for alder logs. Once competition exits the market, the remaining company then reduces its bids in an attempt to turn a profit.
The Supreme Court decided that predatory pricing and predatory bidding are “analytically similar” because they both grant one company singular market power to the possible detriment of competition and consumers.
The Supreme Court ruled that “only higher bidding that leads to below-cost pricing in the relevant output market (finished-product sales) will suffice as a basis for liability for predatory bidding.”
Lawyers for Ross-Simmons conceded that they could not establish that Weyerhaeuser profited from below-cost pricing, thus failing to prove the second part of the test as mandated by the Supreme Court.
However, they were revising their legal strategy to establish that Weyerhaeuser over-purchased and lost money in response to over-bidding alder logs, which would satisfy the legal requirement established in the Brown and Williamson case. “We are going to go back and re-try the case in the District Court,” said Haglund, “and we believe that we will win again.”
Sandy D. McDade, Weyerhaeuser senior vice president and general counsel, said the high court ruling “fully supports our position all along that our conduct was lawful and consistent with the guidelines for competitive conduct as set by the Supreme Court.”
“There are myriad legitimate reasons — ranging from benign to affirmatively pro-competitive — why a buyer might bid up input prices,” Justice Clarence Thomas wrote in the Supreme Court’s opinion. “A firm might bid up inputs as a result of miscalculation of its input needs or as a response to increased consumer demand for its outputs. A more efficient firm might bid up input prices to acquire more inputs as a part of a pro-competitive strategy to gain market share in the output market.” A company may also over-bid in order to establish a hedge that would protect against future rises in cost or shortages, he added.
Others disagreed.
“Unfortunately, the court failed in the view of American Antitrust Institute (AAI) to appreciate that there can be harm to competition without the loss, and the harm was in fact the over-bidding scheme by Weyerhaeuser really did drive out other sawmills,” remarked Jonathan Rubin, a senior fellow with AAI.
Weyerhaeuser “rode a wave of hostility toward anti-trust law,” he said.
Weyerhaeuser received substantial support from big-name companies, including Dow Chemical Co., Verizon Communications Inc., Coca-Cola Co. and Microsoft Corp.
“Weyerhaeuser had the benefit of seven different briefs from over 25 different large companies or big business organizations that supported their position in the Supreme Court,” noted Mark Haglund, attorney for Ross-Simmons.
The Supreme Court justified its ruling as a means of protecting consumers as much as the aggressive bidding strategies of larger companies.
“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 re-coup its losses,” Thomas wrote.
Rubin thinks that raising input prices may eventually be as devastating to
consumers as predatory pricing. “Raising prices, getting them to go up as an input, unlike lowering prices as an output, doesn’t have that same pro-competitive feel to it,” he said. “When input prices go up, it generally means
that markets are getting tighter, meaning that consumers are going to have to
pay more.”
Evidence presented at the trial also suggested that Weyerhaeuser “misused” raw materials by letting logs rot at sawmills.
“We have operated ethically and bought logs that we needed for our use,” said Weyerhaeuser media spokesperson Bruce Amundson. Weyerhaeuser’s bidding practices allowed the company to purchase higher quality logs, he said.
“We have been a leader in that we mill logs and provide uniform product specifications,” said Amundson. “Our customers know that when they get orders filled by us that they will meet the specifications that they have in mind.”
Weyerhaeuser contended that Ross-Simmons went out of business primarily due to mismanagement, but representatives “do not comment on the operations of other businesses,” said Amundson.
Another lumber company, Washington Alder, also filed suit against Weyerhaeuser, similarly accusing the forest products giant of predatory bidding. Washington Alder was awarded $16 million by a federal court jury, but the case has been stayed in the 9th Circuit Court of Appeals pending a final verdict in the Ross-Simmons case.
