Argument Recap: Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co. on 11/28

The following argument recap is by Fred Smith of the Stanford Supreme Court Litigation Clinic. His preview of this case can be found here.

On Tuesday, November 28, the Supreme Court heard argument in Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co. The case centers upon the proper standard courts should apply when a plaintiff alleges that a defendant has engaged in a predatory buying (“predatory bidding”) scheme in violation of Section 2 of the Sherman Antitrust Act. Predatory bidding cases involve plaintiffs who allege that a defendant paid too much for raw materials (“inputs”), thereby driving the costs of these inputs up so high that competitors cannot obtain the product at a fair price.

Andrew Pincus of Mayer, Brown, Rowe & Maw argued for the petitioner. He opened by urging the Court to adopt the standard that is used to adjudicate predatory selling schemes. That standard is found in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp. Under Brooke Group, petitioner urged, a plaintiff should have to show that the defendant (1) bought inputs at prices too high to cover its expenses; and (2) had a dangerous probability of eventually recouping its losses.

During petitioner’s argument, Justice Stevens asked seventeen of the thirty-one questions dispensed by the bench. His questions contained two chief themes. First, he inquired about the difference between an “anticompetitive act” and a violation of Section 2. In particular, Justice Stevens noted that the challenged portion of the jury instructions addresses what constitutes an “anticompetitive act.” He asked petitioner whether showing an anticompetitive act, by itself, necessarily amounts to a violation of Section 2. Petitioner answered that an anticompetitive act, by itself, is not a per se violation; there must be a showing of monopoly power as well. But petitioner noted that it was not disputing the existence of monopoly power.

The second theme from Justice Stevens’s questions focused on the intent of defendants. If a defendant made an agreement intending to create a monopoly, would this help establish a violation of Section 2? Petitioner answered that it would not, because it is hard to distinguish aggressive competitive intent from monopolistic intent. Courts are not equipped to make such a distinction. Justice Kennedy responded, “Why is it so hard if you take Justice Stevens’s premise that there’s an agreement [to eliminate competitors] and we take that as a given, as a given premise?” Petitioner explained that in actual cases, there is evidence rather than “given premises.” And we should not ask courts to perform tasks with this evidence that they are not institutionally capable of performing.

Justice Ginsburg asked a question that seemed to go to the administrability of the petitioner’s rule. She asked how one determines whether the prices one pays for inputs is excessive, especially when the inputs came from different sources. Petitioner answered that you look at the inputs, regardless of the source, and “you add all of those up and compare them to revenues.”

Both Chief Justice Roberts and Justice Scalia queried petitioner about the degree to which “predatory bidding” and “predatory selling” are analogous. This analogy is crucial because the petitioner is asking the court to adopt the Brooke Group standard, which is used in the predatory selling context. Chief Justice Roberts explained that in “predatory selling” schemes, defendants sell products for very low prices, which provides a (perhaps temporary) windfall to consumers. And consumers are a class the Sherman Act is designed to protect. The Chief Justice questioned whether that same consumer windfall occurs in predatory bidding cases. Petitioner responded by noting that when defendants pay suppliers high prices, these suppliers get a windfall. It cited Mandeville Farms for the proposition that suppliers are also protected by the Sherman Act. This prompted a series of friendly questions from Justice Scalia, who noted that consumers can benefit if the most efficient producers increase the number of goods on the market that the customer favors. Scalia also added that efficient production could also lead to lower prices for consumers. Petitioner agreed with these propositions.

Assistant to the Solicitor General Kannon Shanmugam then argued on behalf of the United States as an amicus curaie in support of petitioner. Shanmugam told the Court that aggressive bidding generally represents procompetitive behavior, which should be encouraged. The United States maintained that the Ninth Circuit standard would instead chill procompetitive behavior by producing antitrust liability even for procompetitive behavior (“false positives”).

Justices asked the United States many of the same questions they asked petitioner. Stevens again asked for clarification about the different elements of Section 2. The United States then outlined three requirements: monopoly power, monopolistic intent and anticompetitive behavior. The United States explained that anticompetitive conduct is one of three elements required to establish a violation. The other two are monopoly power and intent. Justice Roberts then asked whether clear evidence of monopolistic intent can establish an anticompetitive act. The United States answered no, prompting a friendly question from Justice Scalia supporting this view. Justice Scalia offered that sometimes a company could desire a monopoly, but go about it in a ludicrously ineffective way. Or as he put it, “I assume you could have a company that has a dynamite evidence of seeking to monopolize and the means that they choose is just idiotic. For example, they say, ‘we’re going to try to get a monopoly by buying these logs at a lower price as, at as low a price as possible.’” The United States agreed that the possibility of “incompetent monopolists” shows the importance of having both an intent element and an independent conduct element.

Michael Haglund of Portland’s Haglund, Kelley, Horngren, Jones & Wilde next argued for respondent, urging the Court to adopt the standard outlined by the Ninth Circuit below. Under that standard, a defendant must show it paid more for inputs than “necessary,” such that competitors cannot purchase inputs at a fair price. Respondent rejected the Brooke Group standard in this context, reminding the court that over the past 25 years, market realities have trumped per se rules.

Justice Breyer then asked a question for the first time during the argument, searching for a rule that accounted for such market realities. “Here we have bad effects, bad possibilities,” Justice Breyer stated. “On the other hand, higher prices are good for the woodsmen. So we need rules to separate the sheep from the goats.” In other words, since companies may sometimes buy more inputs than they need for procompetitive reasons, we need a rule that separates them from businesses that stockpile inputs for anticompetitive reasons. Breyer suggested that the court should look to whether this stockpiling resulted in losses, which could serve as evidence that a company is one of the goats rather than sheep. Respondent rejected this approach, explaining that in an inelastic market such as the log business, it is counterproductive to provide a safe harbor for a company that pays more (and buys more) than it needs. He also countered that the safe harbor approach was unworkable.

Other particularly interesting questions came from Justices Alito and Ginsburg. Alito expressed concern that a jury could ever be asked to determine whether a price is “fair” or “necessary” without more guidance. This prompted a concession from the respondent that “We don’t contend that the instruction was perfect here.” Respondent maintained that on the whole the instructions were proper. He explained that the jury was sophisticated and included people who were well-steeped in accounting and science. Justice Ginsburg asked whether respondent could win under the Brooke Group standard. Haglund carefully declined to concede that it could not win under that standard. He articulated evidence showing that perhaps the company could satisfy that standard. Justice Scalia offered, “[That’s] ultimately a jury question, I assume. “

Respondent also attempted to argue that the question whether Brooke Group applies was not properly before the court, because it had not been raised in earlier stages of the case. No justice seemed to take this bait. Justice Scalia essentially told respondent that since the petitioner challenged the jury instruction at every stage, it did not matter whether the petitioner always cited Brooke Group. The Court has to adopt some standard if it addresses the merits of this case, and if it does, Brooke Group has to be in play as a possibility. Respondent opted not to refute this point.

After watching oral argument and reading the briefs, I predict that the court will reverse the Ninth Circuit. Even Justice Stevens, who wrote a dissenting opinion in Brooke Group, seemed more interested in searching for a new, creative ground to resolve this case than he did in defending the Ninth Circuit standard. Respondent, too, acknowledged flaws in the jury instruction that the Ninth Circuit blessed. Moreover, Justice Scalia’s questions sometimes virtually tracked the petitioner’s brief on central points. This is not to say that the court will necessarily embrace the Brooke Group standard (though I believe that is the most likely outcome). Whether the Brooke Group standard prevails may depend on the ability of Justice Stevens or perhaps Breyer to assemble a convincing new standard that commands a majority of the court. Their questions both revealed strong interest in the intent of defendants—and if a new standard emerges, it may contain (implicitly or explicitly) such an element that looks to whether there are purposefully monopolistic agreements. Justices Kennedy and Roberts showed interest in the intent question as well.

As for the Court’s disposition of the case, it seems almost certain that if the Court reverses, it will remand for a retrial rather than simply reversing and vacating the decision. Justice Scalia, petitioner’s apparent strongest proponent, explicitly stated that it is “a jury question” whether the facts support a finding that the defendant violated Section 2 under the Brooke Group standard. No justice made any remarks that revealed transparent opposition to this position.