September 15, 1994

Predatory Pricing: Can a Georgia Business Recover Today?

Laurie Webb Daniel

A predatory pricing plaintiff claims that it has suffered losses as the result of below-cost pricing by a competitor.  The theory is that the defendant or defendants deliberately priced products below cost in an effort to unfairly eliminate competition with the goal of raising prices after achieving a dominant market position.

Georgia businesses trying to compete with low-pricing rivals received encouragement from the Eleventh Circuit’s decision in McGahee v. Northern Propane Gas Company, 858 F. 2d 1487 (11th Cir. 1988), cert. denied, 490 U.S. 1084 (1989).  In McGahee, the Eleventh Circuit strayed from the rulings of several other circuits by imposing a much tougher costing standard on defendants and by inviting proof of subjective intent in these cases.  Recently, however, the enthusiasm of many predatory pricing plaintiffs was dampened by the Supreme Court’s opinion in Brooke Group v. Brown and Williamson Tobacco Corp., 509 U.S. _____, 113 S.Ct. 2578, 125 L.Ed. 2d 168 (1993).  Brooke Group limited the viability of many predatory pricing claims by requiring objective proof of a reasonable prospect that the defendant could recoup the losses from its own below-cost sales through subsequent excessive profits after having eliminated its competitors.  It is not enough that the plaintiff was put out of business by below-cost pricing.  The Georgia Supreme Court also recently limited the use of the predatory pricing theory under state law in U.S. Anchor Mfg. Inc. v. Rule Industries, Inc., 264 Ga. 295 (1994).  As a result of these recent decisions, now it may be actually harder to recover for predatory pricing in this area than in some other parts of the country.

Before Brooke Group, A Plaintiff In The Eleventh Circuit Could Prove Predatory Pricing With Subjective Evidence Of Costs And Intent.

While recognizing that predatory pricing involves below-cost pricing, the Supreme Court has never identified the “appropriate measure of cost” for determining predatory pricing liability.  Brooke Group, 113 S. Ct. at 2587 n.1.  Because of the lack of Supreme Court authority on this issue, the circuit courts have developed a number of different cost standards.  In the process many of these courts, including the Eleventh Circuit, have cited the work of Professors Phillip Areeda and Donald F. Turner, Predatory Pricing And Related Practices Under Section 2 of the Sherman Act, 88 Harv. L. Rev. 697 (1975).

In their article, Areeda and Turner proposed an objective cost-based test for determining whether a predatory pricing claim has merit.  Under this approach, a price at or above the defendant’s average variable cost is conclusively deemed lawful and a price below the defendant’s average variable cost is conclusively deemed unlawful.  The Areeda and Turner test uses average variable cost, which is an accounting concept, as a surrogate for the economic concept of marginal cost.

In International Air Industries v. American Excelsior Co., 517 F.2d 714, (5th Cir. 1975), cert. denied 424 U.S. 943 (1976), the “old” Fifth Circuit adopted the Areeda and Turner test with only a slight modification.  When the Eleventh Circuit was formed in 1981, it decided to observe as binding the decisions of the former Fifth Circuit. Bonner v. City of Pritchard, 661 F.2d 1206 (11th Cir. 1981).  Subsequently, however, the Eleventh Circuit held that International Air Industries was not binding in the context of a motion for summary judgment.  Stating that the Areeda and Turner test is like the Venus de Milo because “it is much admired and often discussed, but rarely embraced,”  the Eleventh Circuit adopted its own predatory pricing test in McGahee v. Northern Propane Gas Co., 858 F.2d 1487 (11th Cir. 1988).

McGahee raised the cost level for presumptively legitimate pricing from average variable cost to average total cost and held that subjective evidence of predatory intent should be analyzed when an antitrust defendant moves for judgment as a matter of law. Id. at 1496.  Under the Eleventh Circuit test, average total cost is the sum of average variable cost and average fixed cost with a “necessary minimum profit” included as an element of total economic cost. Id. n.22, 1503.  The amount of “necessary minimum profit” that should be included as a cost item “is an issue of fact requiring expert testimony particular to the market involved.”  Id. at 1503 n. 35.  McGahee also indicated that a typical sales memorandum expressing a desire to take advantage of the inefficiencies of a rival in order to increase market share constitutes evidence of predatory intent which could defeat a motion for summary judgment if the defendant’s prices were below average total cost. Id. at 1504.  After McGahee, therefore, a plaintiff in the Eleventh Circuit could prove predatory pricing with subjective expert testimony regarding total economic cost combined with evidence of an aggressive sales memorandum which is typically found in the files of businesses participating in competitive industries.

Although proof of “predatory pricing” has never guaranteed a treble damage award because there are additional prerequisites to recovery for violations of the Sherman and Robinson Patman Acts, before Brooke Group a plaintiff in the Eleventh Circuit had a greater chance of recovering than similarly situated plaintiffs in some of the other circuits.

After the Supreme Court’s Decision in Brooke Group, All Predatory Pricing Plaintiffs Must Present Objective Market Evidence Of The Defendant’s Ability To Recoup Losses Through Sustained Supracompetitive Pricing.

Declining to resolve the conflict among the circuits regarding the appropriate cost test for predatory pricing claims, the Supreme Court in Brooke Group shifted the focus of predatory pricing analysis from the fact of below-cost pricing to the impact of below cost pricing in the market.  The court did this by requiring that predatory pricing plaintiffs prove that the defendant had a reasonable prospect or dangerous probability of recouping its investment in below-cost prices through subsequent supracompetitive pricing in the relevant market.

The second prerequisite to holding a competitor

liable under the antitrust laws for charging low

prices is a demonstration that the competitor

had a reasonable prospect, or, under § 2 of

the Sherman Act, a dangerous probability, of

recouping its investment in below-cost prices.

113 S. Ct. at 2588.

Significantly, the court did not distinguish between predatory pricing claims brought under a Section 2 conspiracy to monopolize theory which would not ordinarily require proof of a dangerous probability of success and those brought under a Section 2 attempt to monopolize theory which have traditionally required proof of a dangerous probability of success.  Instead, the court found that the recoupment element was essential to all predatory pricing claims due to the peculiar nature of the underlying theory.  “`For the investment to be rational, the [predator] must have a reasonable expectation of recovering,in the form of later monopoly profits, more than the losses suffered.’“ Id.

By requiring more than proof of below-cost sales, Brooke Group restored objectivity to the evaluation of predatory pricing claims in the Eleventh Circuit.  To establish recoupment, plaintiffs must now prove that defendants have sufficient market power to sustain higher than competitive prices after eliminating competition for “long enough to earn in excess profits what they earlier gave up in below-cost prices.”  Id. at 2589.  Such proof necessarily involves an analysis of the relevant market and market shares of the parties and other competitors.  The Supreme Court made it clear that “if market circumstances or deficiencies in proof would bar a reasonable jury from finding that the scheme alleged would likely result in sustained supra competitive pricing,” summary disposition is appropriate. Id.

Brooke Group emphasized that the recoupment requirement is not an artificial barrier to recovery but is an element which is essential to preserve the goals of the antitrust laws due to the unusual nature of predatory pricing claims.  Without recoupment, below-cost pricing produces lower market prices to the benefit of the consumer.  Because “the mechanism by which a firm engages in predatory pricing - lowering prices - is the same mechanism by which a firm stimulates competition,” a predatory pricing standard without a recoupment element would chill the very conduct that antitrust laws are designed to protect.  Id.  “That below-cost pricing may impose painful loses on its target is of no moment to the antitrust laws if competition is not injured. . . .” Id. at 2588.

After Brooke Group, therefore, a plaintiff in the Eleventh Circuit cannot prove predatory pricing simply with evidence of below-cost pricing and malicious intent.  The plaintiff must objectively show the defendant’s ability to subsequently recoup its losses through sustained supracompetitive pricing.           


The Boomerang Effect: Because the Eleventh Circuit’s Cost Standard Increases The Defendant’s Losses, It May Be Harder To Prove The Recoupment Element In The Eleventh Circuit.

Because Brooke Group did not determine the appropriate cost standard, the average total cost test announced in McGahee remains the standard in the Eleventh Circuit for deciding whether challenged prices are below-cost in the first place.  Ironically, however, this cost test which used to favor plaintiffs now may impede proof of predatory pricing because it may result in higher losses attributable to the defendant.  Quite simply, the larger the losses, the less feasible the recoupment and the harder to prove a predatory pricing claim.

For example, suppose a defendant with sales nationwide is selling its products below its average variable cost.  A plaintiff alleging predatory pricing in the Fifth Circuit would only need to prove the ability to recoup the amount between the sales price and the average variable cost whereas a plaintiff in the Eleventh Circuit would need to prove recoupment of the difference between the sales price and the average total cost.  The recoupment amount would be substantially greater and thus a more onerous burden for the Eleventh Circuit plaintiff.

The Georgia Supreme Court Recently Restricted The Viability Of Predatory Pricing Claims Under State Law.

Predatory pricing plaintiffs sometimes assert claims under state law as an alternative to federal antitrust counts.  See U.S. Anchor Mfg. Inc. v. Rule Industries Inc., 7 F.3d 986 (11th Cir. 1993), conformed to answer to certified question, 27 F.3d 521 (11th Cir.), cert. denied, _____ U.S. _____, 114 S. Ct. 2710, 129 L.Ed.2d. 837 (1994); H.J. Inc. v. International Tel. & Tel. Corp., 867 F. 2d 1531, 1548 (8th Cir. 1989); Indiana Grocery, Inc. v. SuperValu Stores, Inc., 864 F.2d 1409, 1420 (7th Cir. 1989).  Although tort law does not provide treble damages, it has been an attractive alternative because it permits the recovery of punitive damages for intentional predatory conduct.  State law theories of recovery for predatory pricing have included conspiracy in restraint of trade and tortious interference with business relations.  The Georgia Supreme Court, however, recently restricted the viability of predatory pricing claims under Georgia law in U.S. Anchor Mfg. Inc. v. Rule Industries, 264 Ga 295, 443 S.E. 2d 833 (1994).

In U.S. Anchor, the plaintiff brought a predatory pricing action in federal court under the Sherman Act.  The complaint also alleged that the defendants’ below-cost pricing violated Article III Section VI Paragraph 5 of the Georgia Constitution and O.C.G.A. § 13-8-2(a)(2) which invalidate contracts in restraint of trade.  After a seven week jury trial, the defendants successfully obtained a directed verdict on the state law claims on the ground that these provisions do not provide a cause of action for damages.  On the other hand, the plaintiff obtained a sizeable jury verdict in its favor on the federal claims.  On appeal, the Eleventh Circuit reversed.  After ordering judgment as a matter of law in the defendants’ favor on the federal claims, the court remanded the state law claims for consideration in the context of Georgia common law.  7 F.3d at 1002-1004.

In support of its remand, the Eleventh Circuit cited Blackmon v. Gulf Life Ins. Co., 179 Ga. 343, 175 S.E. 798 (1934) as authority for the conspiracy theory.  Blackmon addressed the question of whether a conspiracy to sell funeral services at below-cost prices would support a petition for relief by a rival.  In holding that the petition withstood the challenge of a general demurrer, the opinion emphasized that the cause of action was premised on the threat of monopoly with resulting supracompetitive prices, not on the destruction of a particular plaintiff.  Blackmon, 179 Ga. at 350-51.  The opinion also stressed that it was addressing the question on demurrer and that proof of the allegations were essential to the continued survival of the lawsuit. IdBlackmon, therefore, actually sets a standard which is very similar to that embraced by the United States Supreme Court in Brooke Group.  In order to succeed, the plaintiff must have evidence that as a result of the pricing scheme, “competition would be destroyed and the defendants enabled to arbitrarily fix their own prices.”  Id.  Below-cost pricing without evidence of a resulting monopoly is not enough.

In U.S. Anchor, the Eleventh Circuit also raised the question: “Does the tort of intentional interference with business relations encompass predatory pricing below some measure of the defendant’s cost?”  7 F.3d at 1006.  Because no Georgia authority had addressed predatory pricing by a single defendant acting unilaterally, the Eleventh Circuit then certified this question to the Georgia Supreme Court to assist the district court on remand.  Id. at 1005-1006.

Noting that Georgia common law favors unrestricted pricing activities, the Georgia Supreme court held that “below-cost pricing by a single defendant is not improper in the absence of some other unlawful element and, thus, is not encompassed by the tort of intentional interference with business relations.” 264 Ga. at 299.  In support of its ruling, the Georgia Supreme Court cited Strickland v. Ports Petroleum Co., 256 Ga. 669, 353 S.E. 2d 17 (1987) and Parks v. Atlanta News Agency Inc., 115 Ga. App. 842, 156 S.E. 2d 137 (1976).  Strickland struck down a state statute forbidding below-cost sales on the ground that it infringed on the constitutional right “for a seller and purchaser to agree upon a price.”  256 Ga. at 670.  Parks described the general policy in Georgia that absent some other unlawful element, “a defendant seeking to increase his own business may cut rates or prices, allow discounts or rebates, enter into secret negotiations behind the plaintiff’s back, refuse to deal with him . . . “ 115 Ga. App. at 845.

While the Georgia Supreme Court limited the analysis of the certified question to predatory pricing claims asserted against a single defendant, it is well established that Georgia law does not recognize a cause of action for conspiracy where the underlying conduct is not illegal if done by a single firm. E.g. Cook v. Robinson, 216 Ga. 328, 329, 116 S.E.2d 742 (1960).  Because below-cost pricing by a single defendant generally is not improper under Georgia law, Georgia law does not recognize a cause of action for a conspiracy to price below cost.  Rather, a cause of action based on below-cost pricing under Georgia law must encompass some other unlawful element such as the monopoly scheme alleged in Blackmon, supra.  Because the considerations described in Blackmon are so similar to the requirements of federal law after Brooke Group, it is doubtful that predatory pricing plaintiffs will fare any better under Georgia law than under federal law, particularly in light of the recent decision from the Georgia Supreme Court limiting predatory pricing liability.

CONCLUSION

Because of the recent predatory pricing decisions of the Supreme Courts of the United States and the State of Georgia, a Georgia business feeling the effects of low pricing by rivals has limited chances of recovering under a predatory pricing theory even if it can prove below-cost pricing and predatory intent.

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