Dustin Sharpes, Reintroducing Intent Into Predatory Pricing Law

• Publication year: 2012

REINTRODUCING INTENT INTO PREDATORY PRICING LAW

ABSTRACT

Predatory pricing occupies a strange position in the antitrust laws. Normally, low prices are one of the major goals of antitrust law because they reflect competition and are generally beneficial to consumers. However, in some situations, the antitrust laws condemn prices that are too low as predatory: a company may be able to set prices arbitrarily low to gain monopoly power by excluding rivals or forcing them to acquiesce to its price leadership, and the company may then charge monopoly prices to the detriment of consumers. Separating normal, competitive low prices from predatory low prices is a difficult task, which, if not managed correctly, may completely frustrate the purpose of the antitrust laws.

Prior to the Supreme Court’s decision in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., courts used wide-ranging standards to distinguish between competitive low prices and anticompetitive predatory prices. The Court’s decision foreclosed some more holistic standards by mandating two prerequisites for any predatory pricing claim: (1) below-cost pricing and (2) feasibility of recoupment. Despite the fact that Brooke Group did not foreclose other elements or considerations, courts have tended to treat its prerequisites as dispositive. This Comment argues that such an interpretation has resulted in an overly inclusive rule that is likely to become increasingly problematic given recent scholarship advocating expansion of the scope of the current doctrine. Current law is missing a key element that should be required for any predatory pricing claim: predatory intent. This Comment argues that adding an intent element to the current doctrine would be perfectly consistent with Brooke Group and, more broadly, with policies underlying antitrust law. Properly implemented, an intent requirement would add clarity to existing law by producing a theoretically complete definition of predatory pricing and would provide an important limiting principle on the scope of the law.

INTRODUCTION 905

1. BACKGROUND: THE ROLE AND STATUS OF PREDATORY PRICING

   LAW 907

   1. The Role of Predatory Pricing in the Antitrust Laws 908

   2. Statutory Coverage 910

   3. Brooke Group and the Current Status of the Law 911

2. CURRENT PROBLEMS WITH PREDATORY PRICING AND RECENT PROPOSALS 914

3. THE ROLE OF INTENT BEFORE AND AFTER BROOKE GROUP 919

   1. Intent Before Brooke Group 920

   2. Intent After Brooke Group 928

4. ADDING AN INTENT REQUIREMENT 931

   1. Meaning of Predatory Intent 932

      1. Basic Meaning 932

      2. Evidentiary Issues 934

   2. Why Intent? 936

      1. Statutory Requirements 936

      2. Intent as a Limiting Principle 940

CONCLUSION 942

INTRODUCTION

Small Town is home to four grocery stores and five gasoline filling stations.1 Local Grocery, a regional subsidiary of National Grocery, operates two of the grocery stores. Each of its two stores operates a gas station. Gas Filling Services, a regional gasoline wholesaler, operates two of the town’s gas stations. Ray’s Filling Station operates the remaining gas station. Ray’s is a

privately owned, local business that has been in operation for thirty-five years.

Several years ago, Local Grocery began a promotion it called the “Grocery Discount Program.” Under the program, customers could earn discounts at its gas stations based on the amount they spent at its grocery stores. For the first few months of the program, customers who purchased $25–$49.99 in groceries earned $0.04 per gallon off the posted price of gas, and customers who purchased $50 or more earned an $0.08-per-gallon discount. After the first few months, Local Grocery changed the terms so that a purchase of $35 or more earned a $0.15-per-gallon discount. Ten months later it deepened the discounts again: a purchase of $50 or more earned a $0.20-per-gallon discount. The program was wildly popular among Local Grocery’s customers.

However, the program was not popular with Gas Filling Services and Ray’s Filling Station. They could not keep pace with Local Grocery’s low gas prices, and they lost a significant amount of money as a result. After thirty-six years of operation, Ray’s Filling Station was forced to shut down. Gas Filling Services and Ray’s Filling Station take issue not only with the effect of Local Grocery’s discount program on their profit margins but also with its legality. They file an antitrust lawsuit against Local Grocery, alleging that it attempted to monopolize the local gas filling business through a scheme of predatory pricing. If Gas Filling Services and Ray’s Filling Station prevail, they are

entitled to treble damages.2

Small Town’s story illustrates the central difficulty in predatory pricing law. Normally, antitrust laws are aimed at encouraging low prices because they

1 This fact pattern is based on Parish Oil Co. v. Dillon Cos., 523 F.3d 1244 (10th Cir. 2008). Note that this case was brought under Colorado’s Unfair Practices Act, COLO. REV. STAT. §§ 6-2-101 to -117 (2011), rather than under federal antitrust laws. Parish Oil Co., 523 F.3d at 1247. This Comment deals only with federal antitrust laws. The issues, however, are essentially the same.

2 See 15 U.S.C. § 15(a) (2006).

reflect competitive markets and benefit consumers.3 However, predatory pricing doctrine recognizes that, in some situations, low prices are harmful to competition and to consumers. Companies may artificially lower prices to achieve monopoly power and thereafter charge supracompetitive prices to the detriment of the public.4 The problem arises in attempting to separate

competitive low prices from anticompetitive low prices that are likely to lead to a monopoly. From the information available, the Small Town scenario seems consistent with each.5

But how do we go about separating competitive low prices, which are the very goal of the antitrust laws, from anticompetitive predatory prices, which the antitrust laws forbid? It would seem logical to begin with a clear definition of what constitutes predatory pricing and then to develop rules for determining when prices fit that definition. However, this is not how the law has developed. Courts and commentators have instead worked backwards, developing various tools for identifying when low prices have anticompetitive effects without first

agreeing on any one definition of a predatory pricing scheme.6 As a result,

courts have used fairly wide-ranging standards for assessing predatory pricing claims.7 The Supreme Court’s decision in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp. foreclosed some of these standards by making clear that a predatory pricing claim must satisfy two prerequisites: (1) prices were

below some measure of cost (though it declined to specify the appropriate measure), and (2) it was feasible that the alleged predator could recoup the initial losses it sustained by pricing below cost.8 The second prerequisite is important because, if it is not met, a predatory scheme would not be profitable. Because of the flexibility of the Brooke Group prerequisites, the decision

1. See generally HERBERT HOVENKAMP, FEDERAL ANTITRUST POLICY: THE LAW OF COMPETITION AND

   ITS PRACTICE 3–7 (3d ed. 2005) (explaining why, as a matter of basic economic theory, competitive markets are a chief goal of antitrust law).

2. See 3A PHILLIP E. AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW ¶ 723a, at 22 (3d ed. 2008).

3. The fact that Local Grocery’s discount program ran Ray’s Filling Station out of business is not particularly relevant. The antitrust laws are aimed at protecting “competition, not competitors.” Brooke Grp.

   Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 224 (1993) (quoting Brown Shoe Co. v. United States, 370 U.S. 294, 320 (1962) (emphasis omitted)). In other words, harming competitors through low prices is perfectly compatible with normal competition.

4. See infra Part I.C.

5. See generally MARGARET C. LING ET AL., AM. BAR ASS’N, PREDATORY PRICING LAW: A CIRCUIT-BY-

   CIRCUIT SURVEY 20–70 (Barbara O. Bruckman ed., 1995) (explaining the standards utilized by each of the federal circuits).

6. Brooke Grp., 509 U.S. at 222–24.

   really only foreclosed more holistic standards9 and did not mandate that its two prerequisites were to be the only elements of a predatory pricing claim. However, since Brooke Group, the overwhelming tendency of courts has been to hold that these prerequisites are necessary and sufficient to establish the existence of predatory pricing.10

   
   

   This Comment argues that this interpretation is misguided. This Comment argues that courts should add a third requirement—predatory intent—and that doing so would be perfectly consistent with Brooke Group. The Comment proceeds in four parts. Part I provides a background on the role of predatory pricing in the antitrust laws and describes the current status of the law. Part II identifies problems with the current law and predatory pricing doctrine generally. It also briefly discusses several other proposals for reforming the law and considers how these proposals may contribute to the problem in the future. Part III identifies intent as the element lacking in current analyses and discusses the role of intent in the law before and after Brooke Group. Finally, Part IV argues that intent should be explicitly required as an element of any predatory pricing claim. This final part clarifies the concept of intent and argues that requiring this element would be more faithful to antitrust law and policy, and would provide an important limiting principle on the scope of the law.

   
   

   1. BACKGROUND: THE ROLE AND STATUS OF PREDATORY PRICING LAW

      
      

      Since their inception, the antitrust laws have condemned the practice of predatory pricing.11 While predatory pricing’s illegality has long been a part of the American legal tradition, there has been, and remains, much confusion about the legal and practical limits of the formal predatory pricing doctrine.12 Then-Professor Easterbrook once suggested that “we have so many theories [of

      
      

7. See, e.g., McGahee v. N. Propane Gas Co., 858 F.2d 1487, 1502 (11th Cir. 1988) (explaining a standard...