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This document summarizes key issues regarding exclusionary business conduct under antitrust laws. It discusses the cost standards for predatory pricing claims, including debates around the Areeda-Turner test. It also analyzes recent cases on bundled discounts, loyalty pricing, and the implications of the Third Circuit's decision in ZF Meritor v. Eaton, which declined to apply a price-cost test to certain exclusive dealing arrangements. The document concludes that while the consensus view favors a price-cost test, there remains room for aggressive predatory pricing claims under Section 2, and the Supreme Court will likely extend the Brooke Group test to all price-related unilateral conduct claims.
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Manishin stafford slides (pp show)
- 1. Glenn B. Manishin Troutman Sanders LLP http://law.manishin.com Strafford Publications Exclusionary Business Conduct Under the Antitrust Laws December 18, 2012
- 2. Predation, Areeda-Turner and Matsushita Cost standards, Linkline and “recoupment” Two wrongs do not make right Discounting, rebates and loyalty pricing A ZF Meritor revolution? Why pricing still matters Conclusions
- 3. Pricing and “costing” are gateway issues for unilateral Section 2 predation claims Prices must be below some relevant measure of costs (Brooke Group) Correct economic standard has beguiled courts since seminal Harv. L. Rev. “AVC” (incremental) proposal Supreme Court has bypassed opportunities to clarify standard and resolve circuit splits Under Matsushita, predation is “rarely tried, and even more rarely successful” Inherent policy tension between price cutting and putative monopolization liability
- 4. Pre-Matsushita, 9th Circuit prominently rejected AVC screen (Inglis) Brooke settled elements — below-cost prices and likelihood of recoupment — but refused to specify cost standard Recoupment requires added Section 2 showing that exclusionary conduct will be profitable After Brooke, 90%+ predation cases resolved for Ds under Rule 56 Linkline jettisoned “end run” of price squeeze theory for dual-distribution defendants No viable price squeeze claim when there is no duty to deal at wholesale level and price to retailers is > cost
- 5. “Trinko holds that a defendant with no antitrust duty to deal with its rivals has no duty to deal under the terms and conditions preferred by those rivals. Brooke Group holds that low prices are only actionable under the Sherman Act when the prices are below cost and there is a dangerous probability that the predator will be able to recoup the profits it loses from the low prices. “In this case, plaintiffs have not stated a duty-to-deal claim under Trinko and have not stated a predatory pricing claim under Brooke Group. They have nonetheless tried to join a wholesale claim that cannot succeed with a retail claim that cannot succeed, and alchemize them into a new form of antitrust liability never before recognized by this Court. We decline the invitation to recognize such claims. Two wrong claims do not make one that is right.”
- 6. DOJ Section 2 Report Compare SmithKline (2008) = even though (1978) with Ortho bundled discounts Diagnostic typically result in lower (1996), LePage’s Inc. consumer prices, they (2003) and PeaceHealth “may nonetheless harm (2008) competition in some Widely criticized for circumstances” providing inadequate guidance to market “Discount attribution rule” of PeaceHealth applied in 2011 DOJ settlement
- 7. Third Circuit 2-1 decision (2012) affirmed jury verdict that D’s market-share discounts were unlawful “de facto partial exclusive” dealing although prices always > cost Meritor declined to apply price-cost test to exclusive dealing unless “price is the clearly predominant mechanism of exclusion” Overruled LaPage’s for market-share or volume rebates offered by suppliers within a single-product market Recognizes “safe harbor for above-cost discounting” w/r/t predatory pricing involving a single product under Brooke Vigorous and vituperative dissent suggests other circuits will examine closely Supreme Court’s two decade unwillingness to take up purely unilateral predation case portends continued viability of Section 2 (non-price) claims not alleging below-cost pricing
- 8. Modern consensus economic view that predatory pricing can be successful business strategy, but courts rely on earlier theory Meritor shows that pricing can be separated from non- price exclusion without “monopoly broth” objection Lower courts remain conscious that AVC is short- run, static test, thus continue to temporize on cost standard Current literature suggests emerging trend recognizing “efficient” price predation which may allow price-based Section 2 claims through the cracks
- 9. Legal advocacy favors price-cost test due to SJ potential and economically conservative bench Despite Linkline and Brooke, still room for aggressive and thoughtful P claims Given politicization of Section 2 enforcement, government complaint to settle price-cost applicability quite unlikely Over the long term, apparent that Supreme Court will apply Brooke to all price-related unilateral conduct claims due to perceived risk of false positives Another 35+ years before resolution?
Editor's Notes
- Phillip Areeda & Donald F. Turner, Predatory Pricing and Related Practices Under Section 2 of the Sherman Act, 88 HARV. L. REV. 697 (1975)Impact of Matsushita extends far beyond specific S.J. and collusion issues presentedConcern with false positives and high cost of incorrect intervention led to parallel dicta demoting impact of economically implausible inferences“With a perfect test for predation, we would not need to worry whether predation is rare or about the cost of confusing competition with predation. When predation occurs, it would be punished. Absent such a test, however, the legal standard should rationally take account both of the relative frequency of anticompetitive price reductions (compared with those that are just good, clean competition) as well as the cost of falsely labeling a competitive price cut as predatory.”Michael Salinger (FTC Bureau of Econ,.), The Legacy of Matsushita: Has this Thing Called Economics Gotten Way out of Hand? (2006)
- Inglis v. ITT Continental Baking Co., 668 F2d 1014 (9th Cir. 1981) Brooke Group v. Brown & Williamson Tobacco, 509 U.S. 209 (1993)Pacific Bell Telephone Co. v. linkLine Communications, Inc., 555 U.S. 438 (2009)Courts declined to adopt a per se rule, and instead augmented the Areeda-Turner formulation with other factors, which included cost-based presumptions,intent and market structure. While there were variations between judicial circuits, most commonly courts held that a price below average variable cost was presumptively unlawful, while a price above average total cost was conclusively lawful. A price falling between these two cost benchmarks was presumptively lawful, but the presumption could be rebutted by evidence of intent and market structure.The Brooke decision established a new framework for predatory pricing analysis. While elements of the new analysis were anticipated in two earlier Supreme Court decisions, Brooke melded them into a more fully articulated judicial policy. The Court’s exacting requirements of proof appear to be driven partly by the assumption that predatory pricing rarely occurs and partly by its skepticism toward predation by tacit coordination among rival firms, despite proof that Brown & Williamson held price < AVC fo4r 18 mos. after entry of “generic” manufacturer.The Court applied an exacting standard of proof to the specific evidence offered in the case. The facts in Brooke were unusual in that the alleged predator was not a single dominant firm, but a relatively small cigarette manufacturer holding only 12 percent of the total market, although the market itself was highly concentrated. Predation could occur only through the joint action of the leading firms engaged in oligopolistic price coordination. As no explicit agreement was alleged, the joint action necessarily rested on tacit coordination—a predatory theory the Court thought highly problematic, especially in the factual context of the case.Brooke held that summary disposition is appropriate where the market structure is unconcentrated, entry barriers are low or the defendant lacks excess capacity. See 509 U.S. at 209. To this list some lower courts have added a requirement that rivals should not be able to expand output. See Rebel Oil Co., Inc., v. Atlantic Richfield Co., 51 F.3d 1421, 1434 (9th Cir. 1995), cert denied, 516 U.S. 987 (1995) (existing rivals lack capacity to increase output in short run)
- SmithKline Corp. v. Eli Lilly & Co., 427 F. Supp. 1089 (E.D. Pa. 1976), aff’d, 575 F.2d1056 (3d Cir. 1978)Ortho Diagnostic Systems, Inc. v. Abbott Laboratories, Inc. , 920 F. Supp. 455, 458 (S.D.N.Y. 1996).“Whether a firm that enjoys a monopoly on one or more of a group of complementary products, but which faces competition on others, can price all of its products above average variable cost and yet still drive an equally efficient competitor out of the market.”In each of these cases, the court analyzed the discount based on the relationship between defendant’s prices and its costs to produce the goods that made up the bundle. The 2003 LePage’s decision represents a departure from this practice. In LePage’s, a manufacturer of private-label transparent tape charged that 3M maintained a monopoly in the market for transparent tape through a bundled-rebate (volume targets) program for large retail chains. The court did not require LePage’s to prove that either it or a hypothetical equally efficient competitor could not meet the discount without pricing below cost. Rather, the jury instructions, which the Third Circuit upheld, provided that conduct is illegal under section 2 when it “‘has made it very difficult or impossible for competitors to engage in fair competition.’”DOJ Settles Significant Section 2 Bundled Discount CaseOn February 25, the DOJ announced a settlement with United Regional Health Care System, a Wichita Falls, Texas hospital, of allegations that United Regional effectively prevents insurers from contracting with its competitors by offering price discounts to commercial insurers who make United Regional their sole in-network provider. Press Release, DOJ Antitrust Div., Justice Department Reaches Settlement with Texas Hospital Prohibiting Anticompetitive Contracts with Health Insurers (Feb. 25, 2011); Complaint, United States of America v. United Regional Health Care Sys., No. 7:11-cv-00030 (Feb. 25, 2011. The DOJ asserted that for the Wichita Falls MSA United Regional has a 90% share of the market for inpatient hospital services sold to commercial insurers, and a greater than 65% share of the market for outpatient surgical services sold to commercial insurers. By 2010, insurers with exclusionary contracts allegedly accounted for 35-40% of all payments United Regional received from commercial insurers. The case is significant because it is the Antitrust Division’s first case since 1999 charging a monopolist with engaging in anticompetitive unilateral conduct. Further, in May 2009, the Antitrust Division withdrew a 2008 Sherman Act § 2 report issued during the previous administration, announcing it would apply a “more rigorous” enforcement standard. In its competitive impact statement, the DOJ states that the appropriate test to apply to determine if the United Health bundled discounts are anticompetitive is a variant of the discount-attribution test adopted by the Ninth Circuit in Cascade Health Solutions v. PeaceHealth, 515 F.3d 883 (9th Cir. 2008) (“PeaceHealth”). PeaceHealth held that the proper test requires “the full amount of the discounts given by the defendant on the bundle [to be] allocated to the competitive product or products.” If the prices are below the defendant’s incremental cost for those products – and hence would tend to exclude a hypothetical equally-efficient supplier of those products – the discounts can be deemed anticompetitive. In United Health, the DOJ asserted that the full discount should be attributed not to the entire volume of the competitive products, as suggested in PeaceHealth, but rather to the “contestable volume,” i.e., the volume that the defendant could actually be at risk of losing without the discounts to exclusivity. The DOJ looked at the share of Blue Cross and Medicare patients who went to hospitals other than United Regional. Blue Cross had not agreed to be subject to exclusivity restrictions. Based on volumes of Blue Cross and Medicare patients, the DOJ estimated that the “contestable” volume of patients was 10% of the patient volume United Regional received from payers that had agreed to exclusivity restrictions, and attributed the discount only to that 10%
- ZF Meritor, LLC v. Eaton Corporation, Nos. 11-3301 & 11-3426, 2012 WL 4483899 (3d Cir. Sept. 28, 2012).The Court found that price was not the predominant mechanism of exclusion. Despite Eaton’s rebate pricing, “Plaintiffs [did] not allege that price itself functioned as the exclusionary tool.” Instead, Plaintiffs alleged that they were foreclosed from a substantial share of the market as a result of Eaton’s use of its monopoly power to force the OEMs to remove Plaintiffs’ products from the sales catalogues and to meet the market share penetration targets of 90% or more for Eaton’s products.
- New view is founded on a more realistic assumption of imperfect and asymmetric information, where much is not known and where one party may have more knowledge than the other. For instance, prey can be deterred from remaining in market until oppty. for later price increase by monopolist signaling declining demand and preventing capital infusions by lowering prices.