Also see: http://picker.uchicago.edu/Papers/Manhattan200.pdf
The federal antitrust laws have long been an attractive and fertile source for commercial
plaintiffs, in part, lured by the treble damage and attorneys’ fees provision of the Clayton Act.
Recently, however, federal antitrust plaintiffs have been confronted by a much less expansive
appellate view of the Sherman Act. Although the federal Racketeer Influenced and Corrupt
Organization Act and its treble damage and attorneys’ fees provision has absorbed some of the
antitrust overflow, creative plaintiffs have investigated other avenues for their actions.
A predatory pricing case, traditionally brought under §2 of the Sherman Act, is one type of a
federal antitrust claim that recently has been recast as a state tort action. Predatory pricing can
serve as a predicate for a charge of actual or attempted monopolization under §2 of the Sherman
Act. The Phrase predatory pricing was defined and examined by the Supreme Court in
Cargill,
Inc. v. Monfort of Colorado, Inc.
1 as follows:
Predatory pricing may be defined as pricing below an appropriate measure of cost for the
purpose of eliminating competitors in the short run and reducing competition in the long run. It is
a practice that harms both competitors and competition. In contrast to price cutting aimed simply
at increasing market share, predatory pricing has as its aim the elimination of competition.
Predatory pricing is thus a practice “inimical to the purposes of [the antitrust] laws,” and one
capable of inflicting antitrust injury.
Since a federal antitrust plaintiff will encounter substantial hurdles before a predatory pricing
claim is submitted to the jury,
2 plaintiffs have recently looked to state tort law as a safe harbor
for their predatory pricing claims.
I.The State Tort Law Movement Has Already Begun in Other Federal Antitrust Areas.
The federal Sherman Act, and particularly §1 of that Act, has been a fertile ground for dealer
termination lawsuits over the last fifteen years. Typically, a terminated dealer will claim that its
supplier agreed or conspired with a competing dealer to eliminate the plaintiff from the
supplier’s dealer network. In some instances, the terminated dealer would complain that its fate
was prompted by its price-cutting or discounting tactics in hopes of testing the supplier’s conduct
under a per se test of illegality, rather than the more strenuous rule-of-reason test usually
reserved for non-price, vertical restraints under §1 of the Act. After some initial plaintiff
successes in this area, the Supreme Court in
Monsanto Co. v. Spray-Rite Service Corp.,3 and
Business Electronics Corp. v. Sharp Electronics Corp.
,4 raised the degree of proof necessary to
sustain a dealer termination, §1 conspiracy claim under the Act. Consequently, terminated dealer
victories in federal court under the Act have been few and far between.
5 While many states have
enacted their own “baby” Sherman antitrust acts, the state courts typically construe their antitrust
statutes in tandem with the federal Sherman Act cases within their federal circuit.
Some type of recovery is better than none at all, however, and thus resourceful dealers have
reexamined their rights and remedies under state franchise, tort, and contract law.
6 A wrongful
dealer termination may evoke a breach either of an express or implied contract or an implied
term or condition, such as the implied covenant of good faith and fair dealing. In addition, a
manufacturer’s solicitation of a terminated dealer’s customer base also may elicit a charge of
tortious interference with contract or prospective economic advantage. Of course, punitive
damages and attorneys’ fees would normally be quite difficult to recover under any of these
common law theories of recovery. Many state franchise laws, however, do provide for the
recovery of attorneys’ fees for the successful plaintiff. Like the Sherman Act, a tort law claim
allows for joint and several liability thereby allowing the plaintiff to proceed selectively against
non-judgment proof defendants. In addition, one positive by-product of a state tort claim may be
a less congested trial docket and fewer opportunities to delay discovery.
II.The Confusion in Sherman Act §2 Predatory Pricing Cases.
In order to support a charge of actual or attempted monopolization under §2 of the Sherman Act,
the defendant must engage in some willful activity designed to achieve or maintain a monopoly
position in a relevant product and geographic market or submarket. Oftentimes, a firm will
consciously reduce its prices in order to match or meet a competitor’s prices. Generally, this
conduct is not actionable under the federal antitrust law’s price discrimination statue, the
Robinson-Patman Act.
7 A firm, however, with substantial market power or the ability to achieve
a sizeable market share that reduces its prices below some measure of its costs might run afoul of
the antimonopoly proscriptions of §2 of the Sherman Act.
The debate in the federal system over the proper cost standard of predation has been long and
furious. Professors Areeda and Turner have advanced the most generally accepted
average
variable cost measure
. Areeda and Turner have argued that a firm’s prices, if below its average
variable cost per unit, are subject to a rebuttable presumption of illegality; conversely, if a firm’s
prices are above its average variable cost, the prices are presumptively legal. Courts have often
interchanged a marginal cost measure for the average variable cost standard.
The Eleventh Circuit in
McGahee v. Northern Propane Gas Co.,8 however, recently summarized
the Areeda-Turner average variable cost test as follows: The test is “much like the Venus De
Milo: it is much admired and often discussed, but rarely embraced.”
9The court in McGahee
instead adopted an
average total cost standard (inclusive of some reasonable profit margin) and
suggested that the plaintiff had presented sufficient evidence to demonstrate the requisite intent
to monopolize as a result of defendants’ pricing practices. The
McGahee court recognized,
however, that pricing below average total cost only creates an inference of specific intent to
monopolize. Other “objective or subjective” evidence must be established. According to
McGahee
, if a defendant’s price falls below average variable or marginal cost, a rebuttable
presumption of predatory intent would be created.
10
Another slightly different means to prove that a defendant wrongfully sought to achieve a
monopoly position is found in the Fifth Circuit’s decision in
International Air v. American
Excelsior Co
.11 In International Air, the Fifth Circuit adopted an economically objective
alternative test in addition to the average variable cost measure advocated by Areeda and Turner.
The test set forth in International Air focuses on whether the defendant charged a price below its
short-run profit maximizing price and if barriers to entry are great enough to allow the firm to
reap the fruits of predation before new entry is possible. This prong of the International Air test,
thus, hinges on a plaintiffs ability to prove that long term profit maximization could not be
thwarted by new entry.
Thus, the proper definition of “cost” may hinge on the circuit in which the antitrust claim arose.
The path, however, to establishing that a firm’s prices are below average variable cost is filled
with pitfalls. Assuming that a defendant’s cost records are maintained in the ordinary course of
business and discoverable, those costs must be allocated between fixed and variable costs.
12
While the defendants self-characterization of its costs as variable or fixed is instructive, it may
not be binding on the jury.
13 Typically, an expert will be retained to analyze the defendant’s cost
accounting and opine on whether the defendant priced its product below average variable cost.
In
Bartholomew City Beverage v. Barco Beverage,14 a beer wholesaler sued a competitor under a
common law tort theory of unfair competition for below cost pricing. The court held that
“although price cutting generally is considered a fair and welcomed part of vibrant competition,
if prices are cut for the primary puting business then the price cutting is considered unfair
competition.”
15 Under the Indiana tort theory, plaintiff apparently need not prove that defendant
sold some specific measure of cost,
16 but only that the competitor intended to reduce prices of
the primary purpose of injuring a competing business. While the federal Sherman Act is
concerned with whether
competition generally was harmed, the Indiana tort theory evaluates
only whether a
competitor’s business was damaged. The Clayton Act antitrust injury requirement
also is dispensed with under this common-law theory.
The Supreme Court recently granted certiorari in a predatory pricing case brought under §2 of
the Sherman Act as well as Vermont tort law in
Kelco Disposal, Inc. v. Browning-Ferris Indus.,
Inc
.17 In Kelco Disposal, plaintiff charged that defendant attempted to monopolize the waste
collection market in Vermont through below average variable cost pricing under §2 of the
Sherman Act. Alternatively, plaintiff claimed that defendant’s conduct constituted tortious
interference with contract and demanded punitive damages. The jury found for plaintiff on both
theories. While it awarded a $51,146 pre-trebling antitrust verdict, the jury assessed an identical
$51,146 amount of compensatory damages and six million dollars in punitive damages in tort.
On appeal, defendant charged that the punitive, trebling nature of the Sherman Act precluded a
finding of punitive damages under a corollary tort theory. The Second Circuit rejected that
argument and affirmed the punitive damage verdict, in part, on the grounds that the amount
represented less than 1% of the defendant’s net worth.
In
H.J., Inc. v. Int’l Telephone & Telegraph Co.,18 the Eighth Circuit recently reviewed a
predatory pricing scenario under the Sherman Act as well as four different common law theories:
breach of implied contract, conversion, fraud and tortious interference with prospective business
advantage.
19 In H.J., the jury awarded a $600,000 pre-trebled verdict because the plaintiff, a
distributor of agricultural equipment, was unlawfully terminated.
The court of appeals in
H.J. reversed a jury finding that defendant was a monopolist in a
submersible liquid measure pump market or submarket. The Eighth Circuit, however, affirmed a
finding of attempted monopolization against the agricultural equipment manufacturer under §2.
The appellate court held that sufficient evidence had been presented to the jury to support a
finding that defendant priced its product below average variable cost. The court concluded that
plaintiff had presented sufficient evidence of defendant’s specific intent to monopolize and its
dangerous probability of achieving a monopoly position to support an attempt to monopolize
verdict. The court, however, modified the pre-trebled damage award from $672,000 to $106,000.
The court then considered the state law claims because the jury awarded punitive damages in
excess of $773,000 on fraud, conversion and tortious interference with existing or prospective
business advantage claims. Plaintiff had charged that its establishment of its own network of
subdistributors was a property right then had been improperly converted by defendant. The
Eighth Circuit reversed and stated that plaintiff had no property right under Minnesota law to
convert.
Plaintiff also argued that defendant’s below cost sales of its mixed hoist systems post termination
without any legitimate business justifications amounted to a tortious interference with existing or
prospective economic advantage. The Eighth Circuit affirmed this jury finding by concluding
that defendant’s attempt to monopolize constituted a wrongful and unprivileged interference.
III.State Below-cost and Antitrust Statutes
Many states have enacted civil and/or criminal below cost statutes to support their antitrust
statutes.
20 While typically the statutes do not precisely define a below cost sale, some, in fact,
have been declared unconstitutional on due process or equal protection principles.
21
Two state courts have recently analyzed the inherent conflict between a state below cost antitrust
statute and §2 of the Sherman Act. In
Caller-Times Publishing Co. v. Triad Communications,
Inc.
,22 a Texas appellate court held that the Texas Free Enterprise Act was violated when a
newspaper sold half-price advertising to a competitor’s customers even though the sales were not
below the defendant’s average variable costs. The Texas state court held that the Texas statute
prohibited predatory pricing and that sales below cost were not necessary to support a violation.
In California, an appellate court reached a similar result in
Turnbull & Turnbull v. ARA
Transportation, Inc.
,23 when it held that the federal Sherman Act did not preempt state statutory
efforts (
e.g. California Unfair Practices Act Bus. & Prof Code Secs. 17000 et. seq.) to control
unfair pricing practices.
Clearly, state antitrust, unfair competition and below-cost sales statutes are viable alternatives to
a federal predatory pricing Sherman Act claim.
IV.Conclusion
A potential plaintiff who is contemplating a federal antitrust predatory pricing action under §2 of
the Sherman Act should stop and consider before filing the traditional knee-jerk federal antitrust
claim. While treble damages and attorneys’ fees are not recoverable in a state common law
action, the prospect of punitive damages, a more lenient standard of proof, and a less congested
state court docket are strong factors in favor of converting a federal Sherman Act §2 predatory
pricing claim into a state tort law action. The absence of the jurisdictional components of §4 of
Clayton Act (
e.g. antitrust injury, standing) alone may militate in favor of filing a state law claim
as opposed to a Sherman Act lawsuit. Since the plaintiff is also excused from establishing an
effect on
competition generally under a state tort law theory, the advantages of a common law
theory of recovery may become even more compelling.
* * * * * *
1 479 U.S. 104, 117-18 (1986),
quoting, Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S.
477, 488 (1977).
2 For an example of a Sherman Act §2 predatory pricing claim that was substantiated, see
U.S.
Philips Corp. v. Windmere Co.
, 861 F.2d 695 (fed. cir. 1988).
3 [1984-1] Trade Cas. (CCH). ¶65.906.
4 __ U.S. __, 108 S. Ct. 1515 (1988).
5 For a rare plaintiff victory under §1, see
Graphic Products Distributors. Inc. v. Itek Corp., 717
F.2d 1560 (11th Cir. 1983).
6
See generally Foote and McCareins, Issues Confronting the Terminated Dealer and Defensive
Recommendations for the Manufacturer Post
Spray-Rite, Distribution at 417 (Nat. Law Journal
Seminar Press 1987).
7
See McCareins, New Dimensions in the Robinson-Putman Act after Vanco Beverage, 1983
Duke L.J.
1308.
8 858 F.2d 1787 (11th Cir. 1988).
9
Id. at 1795.
10
But see Adjusters Replace-a-Car, Inc. v. Agency Rent-A-Car. Inc., 735 F.2d 884 (5th Cir.
1984),
cert. denied, 469 U.S. 1160 (1885) (prices below average variable cost conclusively
establish plaintiffs prima facie case);
Northeastern Telephone Co. v. Am. Tel. & Tel. Co., 651
F.2d 76, 91 n.24 (2d Cir. 1981),
cert. denied, 455 U.S. 943 (1982) (same).
11 517 F.2d 714, 724-25 n.3 (5th Cir. 1975),
cert. denied, 424 U.S. 943 (1976). See also
Adjusters Replace-A-Car, Ins. v. Agency Rent-A-Car, Inc.
, 735 F.2d 884, 890 (5th Cir. 1984),
cert. denied
, 469 U.S. 1160 (1985). The Fifth Circuit alternate test set forth in International Air
has since bd by the Eleventh Circuit in
McGahee v. Northern Propane Gas Co., 858 F.2d 1487
(11th Cir. 1988) and by reference in U.S. Philips Corp. v. Windmere Corp., 861 F.2d 695 (Fed
Cir. 1988).
12 Advertising costs, for example, may be variable costs under the proper circumstances.
See
U.S. Philips Corp. v. Windmere Co.
, 861 F.2d 695 (Fed. Cir. 1988).
13
Kelco Disposal, Inc. Co. v. Browning-Ferris Indus., Inc., 845 F.2d 404, 408 (2nd Cir.), cert.
granted
, No. 88-556, 57 U.S.L.W. 4490 (Dec. 5, 1988) (U.S. S. Ct.). __ U.S. __ (1988).
14 524 N.E. 2d 353 (Ind. App. 1988).
15
Id. at 358, citing, Cargill Inc. v. Monfort of Colorado, Inc., 479 U.S. 104, 117-18 (1986).
16 Plaintiff in
Barco Beverage did introduce some evidence at trial that defendant sold below its
marginal cost.
17 845 F.2d 404 (2d Cir. 1988), cert. granted, No. 88-556, 57 U.S.L.W. 3390 (Dec. 5, 1988)
(U.S. S. Ct.).
18 [1989-1] Trade Cas. (CCH), ¶68,431 (8th Cir.).
19 Plaintiff also argued that defendant’s conduct violated the Connecticut franchise law, but the
Eighth circuit held that it did not apply extraterritorially to a franchise solicitation in Minnesota.
Id
. at 60,373.
20
See, e. g., Seattle Rendering Works, Inc. v. Darling-Delaware Co., [1985-2] Trade Cas.
(CCH), ¶66,772 (Wash. Sup. Ct.) (Washington Unfair Practices Act, Rev. Code Wash. §19.90;
Washington Consumer Protection Act, Rev. Code Wash. §19.86).
21
See, e.g., Remote Service. Inc. v. FDR Corp., No. 88-SC-000147-D (Ky. Jan. 19, 1989 (Ky.
Rev. Stat. §65.03)).
22 [1990-1] Trades Cas. (CCH), ¶69,004 (Tex. App.)
23 268 Cal. Rptr. 856, [1990-1] Trade Cas. (CCH) ¶69,073 (Cal. App.).
