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The 2006 Supreme Court term yielded four antitrust opinions, a recent record, with two cases, in particular, significantly changing antitrust law. In Leegin Creative Leather Products, Inc. v. PSKS, Inc., the court abandoned the per se prohibition against resale price maintenance, and in Bell Atlantic Corp. v. Twombly, the court created a new pleading standard for complaints alleging conspiracy under the Sherman Act. In addition, the court held in Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., Inc. that predatory buying claims must be analyzed under the same framework as predatory pricing claims. Finally, in Credit Suisse Securities (USA) LLC v. Billing, the court ruled that securities law preempts antitrust law with regard to claims of anticompetitive activity in the initial public offerings of securities.
In all four cases, the Supreme Court reversed the appeals court, which had ruled in favor of the plaintiffs, and entered judgment for the defendants. These decisions appear to signal the Roberts Court's noteworthy and continuing shift away from black-and-white doctrinal rules and toward a broader economic analysis for establishing liability in antitrust cases.
Leegin Creative Leather Products, Inc. v. PSKS, Inc.
In Leegin, the Supreme Court finally overruled the 1911 case of Dr. Miles Medical Co. v. John D. Park & Sons Co., which held vertical price restraint agreements to be per se illegal. After Leegin, vertical price restraints must be analyzed under the rule of reason, which weighs all circumstances in determining the legality of a restraint.
Petitioner Leegin Creative Leather Products manufactures and distributes leather products. Respondent PSKS operates a women's apparel store that used to sell Leegin's products. In 1997, however, Leegin announced a policy refusing to sell to distributors that sold below Leegin's suggested prices. Five years later, when PSKS refused to stop discounting, Leegin stopped selling to PSKS.
PSKS sued Leegin, alleging an illegal agreement to fix the resale price of products. In its defense, Leegin had planned to introduce expert testimony on the pro-competitive effects of its pricing policy, but the district court excluded the testimony under the per se rule of Dr. Miles. The jury found an illegal agreement and awarded PSKS nearly $4 million in damages, after trebling. Leegin appealed to the Fifth Circuit, arguing that its vertical price-fixing agreements should be analyzed under the rule of reason instead of being deemed per se illegal. The Fifth Circuit found that it was bound by Dr. Miles.
The Supreme Court reversed, and expressly overruled Dr. Miles. In its decision, the court first explained that the basic level of analysis under Section 1 of the Sherman Act is the rule of reason, which balances the economic benefits and burdens associated with a restraint of trade. Per se rules are only proper, the opinion said, when courts have had considerable experience with a particular restraint and can predict that the restraint would always or almost always be invalidated under the rule of reason. Economic evidence suggests that vertical price restraints do not always diminish interbrand competition and decrease output, the court held, thus invalidating the rationale of Dr. Miles. The court justified its overruling of such a longstanding precedent by pointing to the extent it has strained to distinguish or limit Dr. Miles in a number of subsequent cases, including longstanding precedents such as Colgate, GTE Sylvania and Monsanto.
The Supreme Court also discussed the pro-competitive justifications for vertical price restraints. The court has long stated that promoting interbrand competition is a primary concern of the antitrust laws. Minimum resale price maintenance can stimulate interbrand competition by encouraging distributors to invest in services or promotional efforts that allow the manufacturer to compete more effectively against its rivals. Resale price maintenance can also help eliminate the "free rider" problem of a seller that is able to discount its prices because it does not provide services and other promotional efforts, but nonetheless enjoys the goodwill and increased demand created by other sellers that invest in services and promotional efforts.
Although the Supreme Court recognized that vertical price restraints can also have malign effects on competition, the court said the risks of such effects cannot be stated with enough confidence to justify a per se ban on the practice. The Supreme Court nonetheless urged lower courts to be diligent in ferreting out anticompetitive resale price maintenance. The court recognized, and the dissent noted, that its opinion nullified nearly a century's worth of advice from antitrust practitioners to clients on how to regulate the distribution of goods sold through distributors. The majority pointed to the common law nature of the Sherman Act, arguing that lower courts will gain experience with these types of restraints in future decisions, eliminating anticompetitive restraints from the marketplace and providing guidance to attorneys and businesses on a case-by-case basis.
Leegin will necessitate a rewriting of antitrust treatises and an evaluation of the marketing strategies of virtually all companies that sell products through distributors. At the federal level, Leegin provides manufacturers with new flexibility in regulating the resale prices of their products. However, it is important to recognize that because of the nearly 100-year ban on vertical price restraints, no case law exists to aid in assessing the legality of such restraints under the rule of reason. In addition, the reactions of the 50 state legislatures to the decision are uncertain. Thus, care must still be exercised in implementing resale price maintenance programs, particularly by manufacturers with sizeable market shares, or when the impetus for the program stems from distributors, not the manufacturer acting unilaterally.
Bell Atlantic Corp. v. Twombly
In Twombly, the Supreme Court reviewed the standards for pleading conspiracy in an oligopolistic setting—the market for local telephone and Internet services. The Supreme Court granted certiorari in Twombly to review a Second Circuit decision, which held that a plaintiff asserting a claim under Section 1 of the Sherman Act can survive a motion to dismiss by pleading only parallel conduct among the defendants. In Twombly, the plaintiffs brought a class action suit on behalf of purchasers of local telephone or high-speed Internet service in the United States. Plaintiffs' complaint alleged—wholly on information and belief—that defendants, four of the "Baby Bell" telephone and Internet companies, (a) conspired to prevent competitive entry into each of their local markets and (b) agreed not to compete with each other and to allocate customers and markets.
The trial court dismissed plaintiffs' complaint because it alleged only that the defendants engaged in parallel conduct that was consistent with each of their individual economic interests. Because plaintiffs failed to plead any "plus factors"—facts that tend to exclude independent action as an explanation for defendants' parallel conduct—the district court found that these factual allegations, even if true, failed to establish a cause of action. The Second Circuit reversed, finding the pleading standard imposed by the district court to be inconsistent with Federal Rules of Civil Procedure 8 and 12. In the absence of direct evidence of conspiracy, a plaintiff must show "plus factors" to prevail on a Section 1 claim at summary judgment and trial, the Second Circuit said, but a plaintiff need not allege "plus factors" to avoid dismissal at the pleading stage.
The Supreme Court reversed the Second Circuit in Twombly, holding that a complaint which alleges a Section 1 claim based only on parallel conduct and a bare assertion of conspiracy will not survive a motion to dismiss. However, the Supreme Court did not stop there, and proceeded to articulate a new "plausibility" standard for pleading Section 1 claims. To survive a motion to dismiss under this standard, a Section 1 complaint must state "plausible grounds to infer an agreement" or, as the court explained, a complaint must contain "enough fact[s] to raise a reasonable expectation that discovery will reveal evidence of [an] illegal agreement." In articulating its new standard of "plausibility," the court expressly rejected the 50-year-old formulation in Conley v. Gibson that a complaint may only be dismissed if a plaintiff "can prove no set of facts in support of his claim."
In its opinion, the Supreme Court clearly articulated its concerns about the skyrocketing cost of antitrust litigation, particularly discovery. The court said judges are unable to place meaningful controls on such discovery, and the financial costs of sweeping discovery "will push cost-conscious defendants to settle even anemic cases."
Twombly harmonizes the pleading standard in Section 1 cases with the proof standard required to survive summary judgment. The more onerous pleading standard announced in Twombly will likely increase the number of antitrust cases resolved on motions to dismiss, and could soon come to modify the application of Rule 12 in all cases in federal court. In addition, the dicta from Twombly discussing the negative repercussions of large-scale discovery will undoubtedly be cited in many future motions for protective orders.
Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., Inc.
In Weyerhaeuser, the Supreme Court unanimously held that the same restrictive standards which govern proof of a claim of monopolization under Section 2 of the Sherman Act based on predatory pricing also apply to a claim of predatory bidding or predatory buying.
Weyerhaeuser, a large lumber manufacturer, held approximately 65 percent of the Pacific Northwest market for alder logs. In 2001, Ross-Simmons, a longtime competitor of Weyerhaeuser, went out of business after the market price for raw alder logs increased and the price for finished lumber declined.
Ross-Simmons sued Weyerhaeuser under Section 2 of the Sherman Act, alleging that Weyerhaeuser had artificially inflated log prices to injure its rivals. At trial, Ross-Simmons produced evidence that Weyerhaeuser could control log prices and strategically suffered declining profits because of the high prices it was paying for logs. Weyerhaeuser's internal projections forecast lowering the price it paid for logs after it gained market share as a result of reduced competition.
In its instructions to the jury, the district court said Ross-Simmons needed to prove that Weyerhaeuser "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." The jury found for Ross-Simmons, and awarded the company nearly $79 million, after trebling. On appeal, Weyerhaeuser argued that the standards of Brooke Group Ltd. v. Brown & Williamson Tobacco Corp. should apply to predatory bidding cases. In Brooke Group, a predatory selling case, the Supreme Court held that a plaintiff must show (a) that the defendant's selling price did not cover its costs and (b) that the defendant had a dangerous probability of recouping its losses following a successful campaign of predation. The Ninth Circuit declined to apply Brooke Group and upheld the verdict.
The Supreme Court reversed the Ninth Circuit, holding that the Brooke Group standard applies equally in cases of predatory buying and predatory selling. The court reiterated its previously expressed belief that while cutting prices below costs raises antitrust concerns, penalizing "above-cost" price cutting might chill legitimate competitive conduct, and since the costs of an erroneous finding of predatory-pricing liability are quite high, such claims are deserving of a high standard of proof before liability can be imposed. The court then turned to an economic analysis of predatory bidding (or predatory buying). The court concluded that because predatory-pricing and predatory-bidding claims are economically similar, similar legal standards should govern each type of claim.
Ultimately, the Supreme Court imposed a two-part modification of the Brooke Group standard to claims of predatory bidding. First, a plaintiff must prove that the defendant's alleged predatory bidding led to the company selling its products or services at prices below the actual cost of production: That is, the predator's bidding on inputs must have caused the cost of the relevant outputs to rise above the revenues generated in their sale. Second, a predatory-bidding plaintiff also must prove that the defendant has a dangerous probability of recouping the losses incurred in bidding up prices through the exercise of monopsony power. Because Ross-Simmons conceded that it had not satisfied the Brooke Group standard at trial, the Supreme Court vacated the judgment and jury verdict.
The Weyerhaeuser decision did not go beyond aligning the law of predatory selling and predatory buying to address more broadly the standards that govern proof of non-price predatory conduct or other theories involving alleged attempts to raise rivals' costs. Nonetheless, it is difficult to imagine the Roberts Court sustaining a finding of liability for monopolization based on any type of predatory conduct absent a dangerous probability that the defendant could raise prices on a sustained basis and injure consumers after driving one or more rivals from the market.
Credit Suisse Securities (USA) LLC v. Billing
In Credit Suisse, the Supreme Court held that securities law impliedly preempts the application of antitrust laws to certain activities related to initial public offerings (IPOs). Plaintiff investors filed class action complaints against investment banks, including Credit Suisse, alleging that the banks had illegally agreed to sell new issues of high-demand securities only to investors who agreed to pay additional, sometimes disguised, charges, above the IPO price.
The district court granted defendants' motion to dismiss on the ground that federal securities law impliedly preempts the application of antitrust law to the conduct in question. The Second Circuit reversed and reinstated the complaints. The Supreme Court, in turn, reversed the Second Circuit.
The Supreme Court began by explaining that securities laws, which are silent regarding the applicability of antitrust laws, will impliedly preempt antitrust laws when the two sets of laws are "clearly incompatible." Four factors are critical to this preemption analysis: (1) the existence of legal authority to regulate the questioned activity; (2) the relevant regulatory agency's exercise of that authority; (3) a risk of conflicting requirements or standards if the two fields overlap; and (4) the possible conflict is within an area of market activity that securities law seeks to regulate. The court summarily stated that the first, second and fourth factors had been met in Credit Suisse. According to the court, the third factor was also met and the conflict rose to the level of incompatibility ("the securities laws are ‘clearly incompatible' with the application of the antitrust laws in this context"). Indeed, the Supreme Court opined that the Securities and Exchange Commission is in the best position to do the "serious legal line-drawing" that is necessary to delineate permissible from prohibited IPO activity.
In addition, the court emphasized, allowing different non-expert judges and non-expert juries to assess such activity under the antitrust laws would create an unacceptable risk of inconsistent results. The court concluded that "[t]ogether these factors mean there is no practical way to confine antitrust suits so that they challenge only activity of the kind the investors seek to target, activity that is presently unlawful and will likely remain unlawful under the securities law. Rather, these factors suggest that antitrust courts are likely to make unusually serious mistakes in this respect." Such mistakes, the court believed, could jeopardize the orderly functioning of securities markets, particularly as they relate to IPOs.
Conclusion
These four cases from the 2006 term are further examples of the current Supreme Court's preference for economic analysis over doctrinal per se rules. They likewise illustrate the continued high level of scrutiny the court has given to the factual and economic underpinnings of plaintiffs' claims in antitrust cases. Leegin and Twombly will have a substantial impact on Section 1 jurisprudence, by rewriting longstanding rules of substantive antitrust law and pleading requirements. While the direct impact of Weyerhaeuser is fairly limited because of the rarity of predatory buying claims, it reflects the determination of the Roberts Court to harmonize the law applicable to economically similar claims. Credit Suisse may be limited to its facts, or it could signal an increased willingness by the Supreme Court to accept arguments that the antitrust laws are impliedly preempted by other regulatory statutes.