United States: Fall 2006 Supreme Court Preview: Antitrust

For the upcoming fall term, the Supreme Court has agreed to hear two significant antitrust cases, Bell Atlantic v. Twombley, Case No. 05-1126 (2006), and Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., Case No. 05-381 (2006). There is also a chance that the Court may grant certiorari in another important antitrust case in the coming months — Leegin Creative Leather Products, Inc. v. PSKS, Inc., Case No. 06A179 (2006).

In Bell Atlantic v. Twombley, the Court will decide whether allegations of parallel competitive conduct by defendants, coupled with a simple assertion that such conduct is the result of a conspiracy, states a claim under Section 1 of the Sherman Act. In the decision below, the Second Circuit held that it does, despite the fact that it is settled law that parallel conduct alone does not entitle the plaintiff to relief.

The Second Circuit’s holding conflicts with decisions of the First, Sixth, and Tenth Circuits, which require plaintiffs pleading a claim under Section 1 to allege facts that, if true, would support a claim of conspiracy. According to the law of the other circuits, in the absence of direct evidence of a conspiracy, a plaintiff seeking damages for a violation of Section 1 based on parallel conduct must present evidence that tends to exclude the possibility that the alleged conspirators acted independently. Such additional facts — commonly known as "plus factors" — usually involve a showing that the defendants’ behavior would not be rational if they were not acting collusively. Under the "plus factor" standard, a plaintiff is not required at the pleading stage to describe every aspect of the asserted conspiracy, but it must allege some facts suggesting conspiracy before it can proceed to the discovery process. The Bell Atlantic defendants, as well as many amici, contend that the Second Circuit’s lowered pleading standard will invite frivolous litigation and impose significant burdens on the courts and private businesses.

Oral argument in Bell Atlantic v. Twombley has been scheduled for Monday, November 27th.

The Department of Justice and the Federal Trade Commission submitted a brief in the case in support of the defendants, arguing that in order to state a claim under the Federal Rules of Civil Procedure, "a complaint must allege, at a minimum, a sufficient factual predicate to provide meaningful notice to the defendant and to demonstrate a reasonable basis for inferring that the alleged conduct may be wrongful." Agencies Brief at 6. The Agencies explain that the extent of the factual predicate that is necessary to give a defendant "fair notice" depends on the complexity of the case, and that a district court should retain the power to require specificity in pleading before permitting a potentially massive controversy to proceed. In the context of a complex antitrust suit, the Agencies assert that the principle of meaningful notice requires more than mere allegations of parallel conduct and conclusory allegations of an agreement or conspiracy. According to the Agencies, specificity in pleading is especially important in Section 1 cases premised on parallel conduct because an agreement is the critical element distinguishing otherwise legal conduct from a violation of the antitrust laws. The DOJ/FTC brief concludes that the proper standard for evaluating an antitrust complaint is one that "requires sufficient factual allegations to demonstrate at least a reasonably grounded expectation that discovery will reveal evidence of an illegal agreement." Agencies Brief at 23.

This case is significant because if the Second Circuit’s decision is upheld, then allegations of (otherwise legal) parallel conduct coupled with conclusory statements about an agreement would be sufficient to entitle a plaintiff to proceed to discovery. Business groups have argued in amicus briefs supporting the defendants that if the Second Circuit’s decision is affirmed, there is a significant "risk that massive class action lawsuits will be filed solely to pressure defendants to settle rather than endure enormous discovery costs, even though the claims have no merit." Amicus Brief of the Chamber of Commerce of the U.S.A. at 7. These groups fear that unless the Court reverses, class-action plaintiffs will be emboldened to make conclusory allegations that are barely sufficient to survive a motion to dismiss, and then seek "blackmail settlements" from defendants, even if the plaintiffs have no real expectation of success on the merits of their claim.

Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co. concerns conduct known as "predatory bidding" — deliberately bidding up the price of inputs in order to prevent competitors from procuring sufficient supplies to manufacture finished products. The question presented by the case is whether the legal standard for predatory pricing claims under Section 2 of the Sherman Act also applies to "predatory bidding" claims. The standard for predatory pricing was set by the Supreme Court in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993), where the Court held that a plaintiff alleging predatory pricing must prove that the defendant (1) suffered a short term loss by virtue of its pricing, and (2) had a dangerous probability of recouping its loss through supracompetitive pricing in the long term once competition was eliminated.

The Ninth Circuit concluded that predatory bidding cases were distinguishable from predatory pricing cases because, unlike predatory pricing, predatory bidding does not result in lower prices to the end consumer. Therefore, the Ninth Circuit held that the two-part Brooke Group test was inapplicable to predatory bidding claims and instead created its own test. Under the Ninth Circuit’s rule, a defendant engages in anticompetitive predatory bidding if it pays "a higher price than necessary" in order to prevent a plaintiff from obtaining necessary inputs "at a fair price." The Ninth Circuit test has been criticized for its lack of objective standards and the increased likelihood that beneficial, aggressive, legal competition may be confused with anticompetitive conduct.

Oral argument in Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co. has been scheduled for Tuesday, November 28th.

As in Bell Atlantic, the Federal Trade Commission and the Department of Justice submitted a brief arguing for the reversal of the Court of Appeals. The Agencies contend that because a claim of predatory bidding by a buyer is closely analogous to a claim of predatory pricing by a seller, the Brooke Group standard should be applied to a claim of predatory bidding as well. The Ninth Circuit’s error, the Agencies assert, was losing sight of the antitrust laws’ purpose of protecting the competitive process — that downstream consumers are unlikely to suffer any detrimental effects from the bidder’s behavior so long as the bidder does not acquire significant market power in the downstream market as a result of its predatory bidding. "Aggressive bidding for an input by a buyer is usually procompetitive because it sends important signals to the market, and harm to competition occurs only if the bidder is able to recoup any losses." Agencies’ Brief at 8. The Agencies argue that application of the Ninth Circuit’s subjective fairness standard instead of the Brooke Group standard could lead to an increase in "false positives" that would deter or chill otherwise procompetitive conduct.

A number of companies have submitted amicus briefs in this case, all supporting the petitioner Weyerhaeuser. From their perspective, the Ninth Circuit’s test is so open-ended and unmanageable that it will deter efficient purchasing decisions in the marketplace. The groups emphasize that many legitimate business reasons exist for outbidding rival firms in order to secure necessary inputs, especially if there is a limited supply of the inputs. A firm may attempt to outbid its rival for inputs because there increased demand for the bidding firm’s products, or in order to hedge against potential input price increases in the future, or to compete with another manufacturer. These business justifications should be encouraged, not punished, by the Sherman Act. If the Ninth Circuit’s decision is upheld, efficient market behavior may be disrupted by requiring a more efficient firm to change its pricing and purchasing decisions to permit a less efficient rival to continue in business. The Ninth Circuit’s test will tend to punish economically beneficial behavior and encourage inefficiency, and will likely deter innovation and expansion by efficient firms.

The Court has the opportunity to grant certiorari in another antitrust case in the coming months that presents an important question of antitrust law. Leegin Creative Leather Products, Inc. v. PSKS, Inc. presents the Court with the opportunity to reconsider its long-standing per se rule against vertical minimum resale price maintenance. In the case, PSKS, a retailer of Brighton brand products manufactured by Leegin, claimed that Leegin violated Section 1 of the Sherman Act by entering into illegal agreements with retailers to fix the price of Brighton products. The jury found for the plaintiff, and the Fifth Circuit upheld the verdict based on the per se rule against vertical resale price maintenance. The rule of per se illegality was announced in 1911 in Dr. Miles Medical Co. v. John D. Park & Sons, Co., 220 U.S. 373. Economists and antitrust theorists alike have argued that the per se rule of Dr. Miles is inconsistent with modern antitrust analysis. In recent years, the Court has overturned other precedents that applied the per se rule to vertical restraints. In Continental TV v. GTE Sylvania (1977), the Court reversed the per se rule against vertical non-price restraints, such as territorial restrictions on dealers, and in State Oil v. Khan (1997), the Court overturned the per se rule against maximum resale prices. The Court’s reasoning in GTE Sylvania and Khan is based on the economic learning that vertical maximum-price and non-price restraints tend to have pro-competitive effects in inter-brand competition (which directly benefits consumers), and therefore the restraints should be judged under the "rule of reason" rather than being condemned outright under the per se rule. Most antitrust experts believe that the same rationale should be applied to vertical minimum resale price restraints.

On August 15, Leegin submitted an application to Justice Scalia to stay the Fifth Circuit’s decision pending the filing of a petition for certiorari. Justice Scalia referred the application to the entire court, and on August 28, the Court granted Leegin’s application for a stay. Leegin’s petition was filed on October 4, 2006.

One other much-watched antitrust case might have been on the Court’s antitrust docket this term, but due to a procedural error, the case will not be considered because the petition in the case was filed out of time. The case of Northwest Airlines v. Spirit Airlines presented the issue of what quantity and quality of evidence is necessary to show below-cost "predatory" pricing behavior. In the case, Spirit Airlines, a discount air carrier, alleged that Northwest Airlines, the dominant carrier in the Detroit market, cut its fares between Detroit and Boston and Detroit and Philadelphia significantly to undercut Spirit. Spirit also alleged that in addition to cutting its prices, Northwest expanded its service on the two routes, with the purpose and result of driving Spirit out of the market. Spirit lost its predatory pricing claim on summary judgment in the District Court because the court found that Spirit failed to show that Northwest priced below its costs. The Sixth Circuit reversed, finding that based on Spirit’s evidence, a reasonable trier of fact could have concluded that Northwest engaged in predatory pricing, and remanded the case for further proceedings.

Many antitrust experts believed that this case might merit a grant of certiorari. Northwest filed a petition for certiorari on July 17, 2006. However, the petition was denied as being untimely. Northwest filed a motion to file out of time on July 21, 2006, but that motion was denied on October 2, 2006.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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