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Predatory Pricing and State Below-cost Sales Statutes in the United States: An Analysis

by
Terry Calvani

Partner, Pillsbury Madison & Sutro (Washington, D.C. & San Francisco, CA); formerly Commissioner, United States Federal Trade Commission.

The following is an analysis of the United States treatment of predatory pricing including state below-cost sales laws. The United States Federal Trade Commission was an active participant in formulating predatory pricing policy during my term of office as Commissioner. I have drawn on this experience where appropriate.

EXECUTIVE SUMMARY

Predatory pricing is generally defined as sales below cost by a dominant firm over a long enough period of time for the purpose of driving a competitor from the market; the predator firm then raises prices to supracompetitive levels to recoup its losses and render the practice profitable.⁽¹⁾

The United States has a rich history of both statutory and case law that treats issues of price predation. Early federal judicial treatment was both aggressive and economically unsophisticated. As a result the law of predatory pricing suppressed competition to the injury of consumers who paid supra- competitive prices. Federal law on predatory pricing has become more rational and pro-consumer. Today there is a consensus led by the U.S. Supreme Court that instances of predatory pricing are very rare and that courts ought not intervene absent proof of sales below an economically informed measure of costs and evidence of probable recoupment.⁽²⁾ The U.S. federal approach to the subject is quite similar to that of the Canadian Competition Bureau as reflected in its Predatory Pricing Enforcement Guidelines.⁽³⁾

Many, although by no means all, of the states have laws that purport to treat predatory pricing. Some states have predatory pricing laws of general application. Other state laws focus on specific markets, e.g., retail sale of gasoline. Some have both. Construction and enforcement of state law is also diverse. Some states, like their federal counterparts, require proof of sales below an economically informed measure of costs and proof of probable recoupment. Others have adopted a more “populist” view reminiscent of the federal treatment in an earlier age and focus on injury to competitors rather than injury to competition. In yet other states, there has been little activity.

Studies of gasoline markets demonstrate that consumers pay higher prices in markets with gasoline below costs sales laws. More interestingly, however, these studies also show that independent dealers are not better off as a result of the laws. Thus consumers pay higher prices, but independent dealers obtain no greater returns. Perhaps for these reasons, efforts to secure similar legislation at the federal level in the U.S. have failed.

U.S. antitrust law is dynamic. Federal antitrust law has matured and today seeks to protect competition and not competitors. The new learning has not fully embraced state law as yet, but there is evidence that state legislatures and judiciaries are becoming more sophisticated.

PREDATORY PRICING LAWS GENERALLY

1. The U.S. Federal Experience—

United States federal law⁽⁴⁾ (like the federal law of Canada⁽⁵⁾) proscribes predatory pricing.⁽⁶⁾ In general, "predatory pricing" occurs "where a dominant firm charges low prices over a long enough period of time so as to drive a competitor from the market or deter others from entering and then raises prices to recoup its losses.⁽⁷⁾ Although predatory pricing was once thought commonplace, claims of predation have produced few recent federal cases in the United States.⁽⁸⁾ Today there is a consensus, led by the United States Supreme Court, that claims of predatory pricing ought to be approached with a very healthy skepticism.⁽⁹⁾ Careful consideration of the subject explains why this is so.

Low prices are the object of competition policy and a boon to consumers.⁽¹⁰⁾It is only when low prices pose a serious problem that they become legitimate objects of concern. That is to say when they drive competitors from the market and subsequently enable the predator to raise and maintain anticompetitive prices to the injury of the consuming public.⁽¹¹⁾ Separating the low competitive prices from real predation is the task—and a difficult one at that. As one distinguished jurist recently wrote:

Consumers, for whose benefit the antitrust laws are designed, welcome low prices but not monopoly prices. Contentions that firms practice predatory pricing—the sequence low-price-now-high-price- later—accordingly create difficult problems for courts. If a rival files suit during the “low price” period, how can a court tell whether the price is low because the defendant is an efficient producer driving down costs (or just driving price down to cost) as opposed to a predator? A price “too low” for an inefficient rival may be just right from consumers’ perspective, showing only that the defendant’s costs of production are lower than those of the plaintiff—for which it should receive a reward in the market rather than a penalty in the courthouse. So the plaintiff’s observation that it is losing business to a rival that has slashed prices is consistent with both aggressive competition and predatory pricing. How to tell them apart?⁽¹²⁾

The two look very much alike. The inherent difficulty of separating predatory from tough competition cautions modesty by antitrust policy makers lest they unwittingly intervene to the detriment of consumers whose interest they seek to protect.

The legal history of predatory pricing in the U.S. sheds some light on this problem. This history can be conveniently treated in three periods. During the first period following enactment of the Sherman Act⁽¹³⁾ through the 1960’s, claims of predatory pricing were taken quite seriously.⁽¹⁴⁾ Indeed, the allegedly predatory tactics employed by John D. Rockefeller and the “Standard Oil Trust” are part of American folklore.⁽¹⁵⁾ The Standard Oil Case⁽¹⁶⁾ became the paradigm. It was widely believed that “Robber Barons” were successfully able to drive competitors from the marketplace by temporarily selling below cost. Once achieved, these firms would raise prices above a competitive level and use those monopoly profits to finance predation elsewhere until they had taken over the entire marketplace.⁽¹⁷⁾

This view reached its zenith in the U.S. Supreme Court’s decision in Utah Pie Co. v. Continental Baking Co.⁽¹⁸⁾ There plaintiff, the leading vendor of frozen pies in its market, brought suit against three national bakeries alleging that they had increased their market share by predatory pricing. Finding that the national bakeries sought to increase their market share above their combined 28% the Court concluded that they charged less for their pies in the plaintiff’s market than they did elsewhere. Indeed, during the forty-four month “price war”, the defendants saw the plaintiff’s market share decrease to 45%. The Supreme Court reinstated the jury verdict for the plaintiff notwithstanding evidence that the plaintiff’s sales volume had increased during the relevant period and that it had continued to make a profit. While the Court did not address the specific definition of “below cost” sales, it suggested that average total cost was the appropriate standard. Suffice it to say that predatory pricing cases of the era were characterized by the relative large size of the alleged predator, geographic price discrimination, sales below average total costs, and predatory intent.⁽¹⁹⁾

The Utah Pie decision stood antitrust principles on their head. Before the “price war” plaintiff enjoyed a “quasi-monopolistic 66.5% of the market.⁽²⁰⁾ It remained profitable throughout the period; indeed, its sales volume increased. As the dissenting Justices observed: “(I)f we assume that the price discrimination proven against the respondents had any effect on competition, that effect must have been beneficent. (T)he Court has fallen into the error of reading the (statute) as protecting competitors, instead of competition. ⁽²¹⁾ Utah Pie and its progeny mark the high point in U.S. antitrust attention to predatory pricing and “below cost” sales.⁽²²⁾

The second period was inaugurated with the publication of a truly seminal article on predatory pricing by two eminent antitrust scholars in 1975. While the legal treatment of price predation had been criticized by many,⁽²³⁾ Predatory Pricing and Related Practices Under Section 2 of the Sherman Act by Harvard Law School Professors Donald F. Turner⁽²⁴⁾ and Philip Areeda⁽²⁵⁾ radically changed the U.S. approach to the subject.⁽²⁶⁾ Their important article offered a cost-based rule for determining whether or not a pricing strategy is predatory.

Areeda & Turner observed that predatory pricing is not common.⁽²⁷⁾ Nonetheless, they concluded that predatory pricing is still a subject for legitimate concern to antitrust policy makers as long as great care is taken not to deter vigorous competition.

That predatory pricing seems highly unlikely does not necessarily mean that there should be no antitrust rules against it. But it does suggest that extreme care be taken in formulating such rules, lest the threat of litigation…materially deter legitimate, competitive pricing.⁽²⁸⁾

Areeda and Turner develop their rule from an analysis of the short-run, static model of the firm used in all introductory price theory texts. Asserting the textbook theorem that marginal cost pricing leads to a proper allocation of resources in the short run and claiming that the only explanation for below- marginal cost pricing is exclusionary behavior, Areeda and Turner suggest:

a. Any price at or above “reasonably anticipated” short-run marginal costs is nonpredatory.

b. A price below “reasonably anticipated” short-run marginal cost is predatory unless at or above average total cost….

c. Since data on marginal costs are difficult to obtain, average variable costs, which are much easier to ascertain, should be used by the courts as a surrogate for marginal costs in the above formulation, unless average variable costs fall significantly below marginal cost in the relevant range of output.⁽²⁹⁾

Without embarking on an exegesis of the legal and economic literature, suffice it to say that almost every Court of Appeals in the United States has embraced some form of the Areeda-Turner test.⁽³⁰⁾The mode of analysis used by the Canadian Competition Bureau is consistent.⁽³¹⁾ The problem with the Areeda-Turner cost- based test is that it is not easy to apply in reality.⁽³²⁾

While it is difficult to fix with precision the start of the third and latest period, the 1989 decision of the Court of Appeals in A.A. Poultry Farms, Inc. v. Rose Acre Farms, Inc.⁽³³⁾ is an appropriate place to begin. The case involved a pricing battle between egg producers. The plaintiff’s expert economist had testified at trial that the defendant’s prices were below its average total costs and less than its average variable costs for a period of time. Moreover, the cost data were accompanied by executive comments evidencing predatory intent. Some of the more colorful ones included: “We are going to run you out of…business. Your days are numbered.⁽³⁴⁾ Recognizing that application of a price/cost standard is “difficult business,⁽³⁵⁾ the court stated that one should first consider the likelihood that the predator would be able to recoup its predation costs.

Predatory prices are an investment in a future monopoly, a sacrifice of today’s profits for tomorrow’s. The investment must be recouped. If a monopoly price later is impossible, then the sequence is unprofitable and we may infer that the low price now is not predatory. More importantly, if there can be no “later” in which recoupment could occur, then the consumer is an unambiguous beneficiary even if the current price is less than the cost of production. Price less than cost today, followed by the competitive price tomorrow, bestows a gift on consumers. Because antitrust laws are designed for the benefit of consumers, not competitors…, a gift of this kind is not actionable.⁽³⁶⁾

Because determination of likelihood of recoupment is easier than undertaking the price/cost characterization and comparison,⁽³⁷⁾ the court held that trial courts ought to undertake the recoupment analysis first. If recoupment is implausible, then one need not undertake the laborious price/cost exercise.

Market structure offers a way to cut the inquiry off at the pass, to avoid the imponderable questions that have made antitrust cases among the most drawnout and expensive types of litigation. Only if market structure makes recoupment feasible need a court inquire into the relation between prices and cost.⁽³⁸⁾

Recoupment is a necessary, but insufficient, element of the plaintiff’s case. The court went on to state that intent ought play no role in assessing whether conduct is predatory.⁽³⁹⁾

This approach was embraced by the U.S. Supreme Court in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp.⁽⁴⁰⁾ The case involved allegations of predatory pricing by Brown & Williamson against a smaller rival in an effort to discipline the pricing of generic cigarettes.⁽⁴¹⁾ The case is important for several reasons. First, the Court noted that predatory pricing was generally implausible.⁽⁴²⁾ Justice Kennedy, writing for the Court, noted earlier authority that concluded “predatory pricing schemes are rarely tried” citing Matsushita Electric Industrial Co. v. Zenith Radio Corp.⁽⁴³⁾ In Matsushita, the Court had stated:

(T)he success of such schemes in inherently uncertain: the short-run loss is definite, but the long-run gain depends on successfully neutralizing the competition. Moreover, it is not enough simply to achieve monopoly power, as monopoly pricing may breed quick entry by new competitors eager to share in the excess profits. The success of any predatory scheme depends on maintaining monopoly power for long enough both to recoup the predator’s losses and to harvest some additional gain. Absent some assurance that the hoped-for monopoly will materialize, and that it can be sustained for a significant period of time, “(t)he predator must make a substantial investment with no assurance that it will pay off." … For this reason, there is a consensus among commentators that predatory pricing schemes are rarely tried, and even more rarely successful.⁽⁴⁴⁾

Second, the Court stated that only truly below costs sales ought be treated as predatory. In that connection, the Court observed:

(T)he exclusionary effect of prices above a relevant measure of cost either reflects the lower cost structure of the alleged predator, and so represents competition on the merits, or is beyond the practical ability of a judicial tribunal to control without courting intolerable risks of chilling legitimate price-cutting. “To hold that the antitrust laws protect competitors from the loss of profits due to such price competition would, in effect, render illegal any decision by a firm to cut prices in order to increase market share. The antitrust laws require no such perverse result.⁽⁴⁵⁾

The Court did not further discuss which price/cost standard was appropriate because both parties had stipulated that average variable cost, as a surrogate for marginal cost, was the standard to be applied.

Third, the Court held that plaintiff must prove the likelihood that the alleged predator will be able to later recoup the losses associated with its predatory pricing. The Court reasoned that the unsuccessful predator (the firm that prices predatorily but is unsuccessful thereafter raising prices above a competitive level) does not present an antitrust issue.⁽⁴⁶⁾ While that firm may have made life miserable for firms within the market, consumers reap the benefit. Mr. Justice Kennedy wrote: “That below-cost pricing may impose painful losses on its target is of no moment to the antitrust laws if competition is not injured: It is axiomatic that the antitrust laws were passed for “the protection of competition, not competitors.⁽⁴⁷⁾

While predatory pricing remains actionable under U.S. federal law, the current caselaw is quite skeptical of the theory generally. On the one hand, there is the view that it is rarely tried and even more rarely successful. On the other, there is also the view that the costs of inappropriate intervention are particularly high since consumers are denied the benefits of tough competition. Current law embraces the cost/price tests suggested by Professors Areeda and Turner, which are not easy to satisfy. Moreover, the recoupment requirement imposed by the Court in Brooke Group requires plaintiff to demonstrate that there is a likelihood of recoupment before going forward. The universe of actionable cases in U.S. federal courts may not be a null set, but it is not large. Consumers are the beneficiaries of this change in the law.

Unlike state law, U.S. federal law does not contain any significant modern predatory pricing provision that focuses on a specific market or channel of distribution. Efforts to secure special treatment have generally failed. Nonetheless the experience with retail sale of gasoline merits mention. In 1981, the U.S. Department of Energy completed a congressionally-mandated study of the retail gasoline market.⁽⁴⁸⁾ The study failed to find indications of predatory pricing and for a short time dampened any congressional enthusiasm for legislation. Throughout the 1980’s, however, there were efforts to enact legislation that would require divorcement of retail operations by large integrated petroleum companies. The Small Business Motor Fuel Marketer Preservation Act of 1983 is a good example.⁽⁴⁹⁾ As its title would suggest, the legislation was promoted by organizations of independent gasoline retailers. This and similar legislation never secured sufficient support in Congress.⁽⁵⁰⁾

2. The U.S. State Experience—

Generally-- Many states have laws that address predatory pricing and related issues.⁽⁵¹⁾ In a federal system as diverse as the United States, it is difficult to generalize with precision. Some statutes have been construed more or less consistently with the modern federal precedents described above.⁽⁵²⁾ Others have been interpreted in the more populist tradition now rejected by the federal courts.⁽⁵³⁾ Discussing these latter statutes, one commentator has observed:

(W)hile the (Supreme) Court has justifiably increased the difficulty which plaintiffs face in succeeding on a predation claim under federal law, many states continue to encourage the use of lawsuits to thwart the competitive procompetitive conduct by making it easy to prove a violation of predatory pricing under a “sales below cost” statute.

Ostensibly designed with goals identical to their federal counterparts—to promote competition—these state statutes prohibiting “sales below costs” are usually poorly disguises attempts to protect small, local businesses from competition by larger, more national firms. Such statutes, therefore, promote inefficiency at the expense of the consumer.⁽⁵⁴⁾

Nonetheless, the U.S. experience with price predation cannot be discussed fully without also focusing on state law.

Foreign commentators sometimes note that the U.S. has a well-developed state regime of predatory pricing legislation. This probably overstates the reality. Some state statutes are enforced, others are not.⁽⁵⁵⁾ While one would expect to find higher prices in those jurisdictions with enforcement programs, the implicit threat of prosecution may impact pricing behavior—particularly in those jurisdictions with criminal sanctions.⁽⁵⁶⁾ Thus the statutes may affect pricing behavior without regard to the enforcement record.⁽⁵⁷⁾

Some state laws are general;⁽⁵⁸⁾ others focus on particular industries like petroleum retailing.⁽⁵⁹⁾

TABLE A: STATE SALES-BELOW-COST LAWS

General SBC Law⁽⁶⁰⁾	Gasoline-Specific SBC Law⁽⁶¹⁾
Arkansas	Alabama
California	Colorado
Colorado	Florida
Hawaii	Massachusetts
Idaho	Missouri
Kentucky	New Jersey
Louisiana	North Carolina
Maine	Tennessee
Maryland	Utah
Massachusetts
Minnesota
Montana
Nebraska
North Carolina
North Dakota
Oklahoma
Rhode Island
South Carolina
Tennessee
Utah
Washington
West Virginia
Wisconsin
Wyoming

The prohibition against “below-cost sales” of frozen desserts in my home state of Tennessee is one of the more curious.⁽⁶²⁾

The efforts to secure state legislation regulating sales within the retail gasoline market, noted above, are a good example of these laws.⁽⁶³⁾ Generally speaking this legislation has been sponsored by independent dealers organizations.⁽⁶⁴⁾ As discussed above, state courts have construed these statutes in different ways. Nonetheless, courts increasingly focus on injury to competition rather than injury to competitors.

The American Law Reports annotation, Validity, Construction, and Application of State Statutory Provision Prohibiting Sales of Commodities Below Cost, summarizing the case law, was published in 1985.⁽⁶⁵⁾ The current supplement discusses the state case law from 1985 through 1998.⁽⁶⁶⁾ Of the eleven below-cost sales cases analyzed in the supplement,⁽⁶⁷⁾ a very clear majority were decided in favor of defendants. While this alone does not suggest much, a reading of those recent decisions reflects that state courts are increasingly concerned about injury to competition rather than injury to competitors.⁽⁶⁸⁾ Accordingly this suggests that the state courts are following—albeit more slowly—the lead of the federal courts in this area.

The effect of state petroleum “below cost sales” statutes has been the object of study. Consistent with economic theory, these laws appear to produce higher retail gasoline margins.⁽⁶⁹⁾ One very recent study of U.S. state statutes by Anderson and Johnson merits attention.⁽⁷⁰⁾ They unambiguously conclude: “SBC laws directed specifically at the retail gasoline market have resulted in higher margins.⁽⁷¹⁾ These economists found that “(t)he difference between margins at locations where a gasoline-specific (sales below cost) law is present and where there are no SBC laws to be over 2 cents per gallon.⁽⁷²⁾ Professors Anderson and Johnson conclude “(d)ata on the minimum observed margin indicate that (these laws) restrict competition by limiting downward pressure on retail margins.⁽⁷³⁾

This latest study by Anderson and Johnson is consistent with the conclusion of prior studies. For example, one study by Savvides-Gellerson of the effects of state “below-cost” selling laws in three southeastern states found significantly higher gasoline prices following the then-recent enacted legislation.⁽⁷⁴⁾

Statistical comparisons of price changes prior to and after the enforcement of the laws indicates that retail prices in the states with sales “below-cost” laws increased relative to both the U.S. average price and the average price of gasoline sold in neighboring states without sales “below- cost” laws.⁽⁷⁵⁾

The increased costs (in 1987 dollars) were large.

The below-cost selling law was estimated to have reduced consumers’ income in Alabama by $37 million, in Georgia by $43 million, and in Florida by $57 million as a result of the increase in motor gasoline prices, during the first twelve months following the implementation of the law.⁽⁷⁶⁾

Importantly, Savvides-Gellerson reports that the correlation was statistically significant: “the statistical test supports the conclusion that the “below-cost” selling laws are associated with a statistically significant increase in retail gasoline prices.⁽⁷⁷⁾ Accordingly, the study concludes:

the higher retail prices associated with enactment of below-cost sales laws may be attributed to reduced competition. Hence, the policy implication…is that below-cost legislation is both anticompetitive and anti- consumer.⁽⁷⁸⁾

Previous studies appear to confirm these results.⁽⁷⁹⁾

Interestingly, higher margins may not mean higher profits for the dealers that the legislation was sought to protect. Anderson and Johnson conclude: higher “margins…in states with gasoline-specific SBC laws does not…imply that economic profits of gasoline retailers in those states are higher.⁽⁸⁰⁾ Entry conditions and the like may insure that retailers garner no additional profits.⁽⁸¹⁾ If true, such laws have a deleterious effect on consumers while failing to provide protection to those for whose benefit the legislation was enacted.

More recently, Professor Johnson examined whether gasoline-specific SBC laws have significantly altered the number and structure of gasoline outlets in states with such legislation.⁽⁸²⁾ This study focuses specifically on whether these laws protect independent dealers. Consistent with the earlier work, Johnson concludes that they do not. The decline in the number of independent dealers appears to be the same without regard to whether the state has a SBC law.⁽⁸³⁾ Johnson proffers two explanations. First, entry into the retail gasoline business is relatively unencumbered and high profit margins can be expected to attract entry. The rise of the gasoline retailer/convenience store also suggests that controlling the margin on one of many goods sold by the retailer does not prevent vigorous competition on other margins.

These conclusions are consistent with that of an earlier study by M. J. Houston.⁽⁸⁴⁾ That study assessed the efficacy of minimum markup legislation in preserving small business. If the laws were effective, states with such legislation should have more robust smaller enterprises. The study failed to find that states with the legislation had more robust smaller businesses. Houston concluded that the laws were “insignificant in their influence on small retail success.” From a public policy perspective, the result is a loss for the consumer and no gain for the independent dealer.

Consumers may appreciate this conclusion. Montana enacted its motor- fuel SBC law in 1991.⁽⁸⁵⁾ That statute provides that a retailer may not sell gasoline at less than its delivered cost plus the cost of doing business. The statute generated consumer hostility especially when motorists compared their prices with those in neighboring Wyoming. When the legislature failed to take action, citizens mobilized and secured sufficient signatures to place the issue on the November 1998 general election ballot. The referendum measure passed and the Montana statute was repealed.

The finding that state below cost legislation increases gasoline prices is generally consistent with other studies of the U.S. gasoline market finding competitive conditions that do not warrant interference. Illustrative is the very recent conclusion of Professor Philip E. Sorensen:

There is no reason for any state legislature in the U.S. to interfere with the existing market in gasoline distribution. The experience of the U.S. in the years since 1981 shows that the gasoline industry is competitive at both the wholesale and the retail levels. Real gasoline prices are at their lowest levels since the 1920’s. Products and services continue to improve in quality and timesaving convenience. At the same time, rates of profits earned by refiners are low—the antithesis of what would be expected under conditions of price coordination or market power.⁽⁸⁶⁾

Following the sharp increase in the price of retail gasoline during the early months of 1996, President Clinton ordered the Department of Energy to investigate. Consistent with prior studies of the industry,⁽⁸⁷⁾ the resulting study found that market forces (rather than anticompetitive behavior) determined pricing conditions.⁽⁸⁸⁾

FTC Participation--The United States Federal Trade Commission (“FTC”) is a federal law enforcement agency responsible for enforcement of the antitrust and consumer protection laws.⁽⁸⁹⁾ It is quite similar to the Canadian Competition Bureau.⁽⁹⁰⁾ During my tenure as Commissioner (1983-90) and as Acting Chairman (1985-86), the Commission was often asked by legislators to comment on the competitive effects of such proposed “below-cost” legislation. We generally responded and routinely opposed efforts to enact such legislation. We did so because we believed that the legislation was unnecessary and--more importantly--because we concluded that the bills, if enacted, would increase the retail price of gasoline to U.S. consumers.⁽⁹¹⁾ The Anderson-Johnson study confirms the Commission’s wisdom in opposing these measures.

In our review of proposed legislation we were concerned about proposals that went beyond the proscription of predatory (“below cost”) pricing. Some proposals included both a measure of profit for traders and the allocation of costs to integrated companies.⁽⁹²⁾ Sometimes these terms were not defined with precision. We believed that these proposals might proscribe not only predatory, but also vigorously competitive pricing.

We were concerned that integrated companies might err “on the safe side” by pricing their own sales to the retail market higher than would otherwise be permitted. (This would be particularly true where legislation contains imprecise terms or criminal sanctions.)⁽⁹³⁾ We were also concerned that litigation would be quite protracted as litigants and the courts attempt to give meaning to these otherwise imprecise terms.

It should be noted that these proposals were part of a larger set of proposed legislation that focused on the retail sale of gasoline. Other related proposals included laws that would forbid self-service gasoline stations,⁽⁹⁴⁾ that mandated minimum retail gasoline price “markups”, ⁽⁹⁵⁾ and that required integrated petroleum companies to divest themselves of their retail operations.⁽⁹⁶⁾ While different, all are variations on the same theme. Integrated companies price predatorily, and independents need protection from this competition.

CONCLUSION

The U.S. experience with predatory pricing has matured over time. Federal practice is today consistent with a consumer protection rationale for antitrust. Focus is on the maintenance of the competitive process rather than the protection of competitors. State practice is more varied. Some jurisdictions have general proscriptions against predatory pricing, others have special “below cost” laws that focus on particular channels of distribution, and still others have combinations of both. State enforcement of these laws is also varied. Moreover, judicial construction of the laws is not uniform. Some state courts have required some demonstration of injury to competition; others have not. It has taken the U.S. federal courts many years and much litigation to achieve the present level of sophistication. It will probably take some additional time and case law before state law reaches the same point.

The economic literature concludes that state retail gasoline below cost sales legislation has increased costs to consumers. Interestingly, such legislation appears not to have provided independent dealers either higher profits or greater stability. Thus the laws appear to come at a cost to consumers without any attendant benefit to the channel of distribution the legislation sought to protect.

March 1, 1999

Footnotes

⁽¹⁾ See generally, Director of Investigation and Research, Predatory Pricing Enforcement Guidelines (1992) (hereinafter “Predatory Pricing”).

⁽²⁾First, the courts began to appreciate that er As discussed more fully later, three developments were important during this evolution. roneous enforcement deters vigorous price competition and increase prices. Given that erroneous intervention increases costs to consumers, the courts became more cautious. Second, the case law embraced a more meaningful and economically based definition of “below cost.” Lastly, the courts concluded that there is no significant prospect of injury to competition unless the alleged predator is subsequently able to recoup the costs of its predation. Accordingly, proof of likely recoupment has become a necessary element of plaintiff’s case.

⁽³⁾See, Predatory Pricing, supra note 1.

⁽⁴⁾ Predatory pricing is treated under two different antitrust laws. Predatory pricing is often alleged as a means of attempted monopolization proscribed under Section 2 of the Sherman Act, 15 U.S.C. § 2. It is also the theory employed in primary-line (seller-level) cases brought pursuant to the Robinson Patman Act, 15 U.S.C. § 13 et seq. While the former is self- explanatory, the latter requires more commentary. The Robinson Patman Act proscribes certain price discrimination. One type involves an allegation that a seller is pricing its products “below cost” in one area while pricing “above costs” in another. The Robinson Patman Act was enacted in an effort to stem the growth of chain stores in the United States. For a discussion of the history of the law, see Calvani & Breidenbach, An Introduction to the Robinson Patman Act and Its Enforcement by the Government, 59 Antitrust L.J. 765 (1991).

⁽⁵⁾ Competition Act § 50.

⁽⁶⁾ See generally, Calvani & Lynch, Predatory Pricing Under the Robinson-Patman and Sherman Acts: An Introduction, 51 Antitrust L.J. 375 (1982) (hereinafter “Calvani/Lynch”); Calvani & Lynch, Predatory Pricing After Matsushita, 7Antitrust 22 (June 1986); ABA, Antitrust Section, Monograph No. 22, Predatory Pricing (1996).

⁽⁷⁾Predatory Pricing, supra note 1, at 1.

⁽⁸⁾The same can be said in Canada. In Predatory Pricing Enforcement Guidelines, the Bureau noted that claims of predatory pricing had produced very few cases. Id.

⁽⁹⁾ See note 36, infra, and accompanying text.

⁽¹⁰⁾ “Low prices benefit consumers regardless of how those prices are set .…” Atlantic Richfield Co. v. USA Petroleum Co., 495 U.S. 328, 340 (1990).

⁽¹¹⁾ As two of the leading scholars in this field have written:

(P)redation…cannot exist unless there is a temporary sacrifice of net revenues in the expectation of greater future gains.…Thus, predatory pricing would make little economic sense to a potential predator unless he had (1) greater financial staying power than his rivals, and (2) a very substantial prospect that the losses he incurs in the predatory campaign will be exceeded by the profits to be earned after his rivals have been destroyed.

Donald F. Turner & Philip Areeda, Predatory Pricing and Related Practices Under Section 2 of the Sherman Act, 88 Harv. L. Rev. 697 (1975) (hereinafter "Areeda/Turner").

⁽¹²⁾A. A. Poultry Farms, Inc. v. Rose Acre Farms, Inc., 881 F.2d 1396, 1400 (7th Cir.1989; Easterbrook, J.).

⁽¹³⁾15 U.S.C. §§ 1-7.

⁽¹⁴⁾ Prior to the passage of the Sherman Act in 1890, common law judges attached little significance to predatory pricing. The freedom to trade, it was reasoned, would defeat the efforts of any company to dominate a market through predatory schemes. Calvani/Lynch 376.

⁽¹⁵⁾See., e.g., Ida Tarbell, History of the Standard Oil Company (1904).

⁽¹⁶⁾Standard Oil Co. of New Jersey v. United States, 221 U.S. 1 (1911).

⁽¹⁷⁾ It should be noted that later scholars have questioned whether Rockefeller and the Standard Oil Company ever actually engaged in predatory pricing. See, e.g., McKee, Predatory Price Cutting: The Standard Oil (N.J.) Case, 1 J.L. & Econ. 137 (1958).

⁽¹⁸⁾386 U.S. 685 (1967).

⁽¹⁹⁾Calvani/Lynch 378; see also Brodley & Hay, Predatory Pricing: Competing Economic Theories and the Evolution of Legal Standards, 66 Cornell L.Rev. 738 (1981).

⁽²⁰⁾386 U.S. at 705.

⁽²¹⁾ Stewart & Harlan, JJ., dissenting.

⁽²²⁾The decision was widely criticized by the commentators. See, e.g., Bowman, Restraint of Trade by the Supreme Court: The Utah Pie Case, 77 Yale L.J. 70 (1967).

⁽²³⁾See, e.g., McKee, supra note 17; Elzinga, Predatory Pricing: The Case of the Gunpowder

Trust , 13 J.L. & Econ. 223 (1970); see also, Koller, The Myth of Predatory Pricing: An Empirical Study, 4 Antitrust L. & Econ. Rev. 105 (Summer 1971).

⁽²⁴⁾Donald F. Turner was both a lawyer and an economist by training. He served as Assistant Attorney General for Antitrust under President Lyndon Johnson. Turner was Bussey Professor of Law at Harvard Law School until his retirement in 1979.

⁽²⁵⁾ Phillip Areeda was Langdell Professor of Law at Harvard Law School and served as Counsel to President Gerald Ford. At the time of his death in 1997, he was regarded as the foremost antitrust scholar in the United States.

⁽²⁶⁾ 88 Harv. L. Rev. 697 (1975), supra note 11, cited as "Areeda/Turner."

⁽²⁷⁾See also, R. Bork, The Antitrust Paradox 433 (1993).

⁽²⁸⁾Areeda/Turner ¶ 711. Empirical research suggests that it is difficult to segregate cases of predation from tough competition. Professor Koller reviewed some ninety-five cases decided between the passage of the Sherman Act in 1890 and 1971. Of the twenty-six with sufficient records to study, Koller found only seven where the evidence supported a finding to actual predation. See Koller, supra note 23, at 112.

⁽²⁹⁾Calvani/Lynch 380-81, quoting Areeda/Turner ¶¶ 711(d), 715 (d). For a discussion of the various critiques, see Calvani/Lynch 381-94. See also, Economic Analysis & Antitrust Law 231-45, 279-82 (T. Calvani & J. Siegfried eds., 2d ed. 1988).

⁽³⁰⁾ABA Section of Antitrust Law, Antitrust Law Developments 256-62 (4th ed. 1997); Hurwitz & Kovacic, Judicial Analysis of Predation: The Emerging Trends, 35 Vand. L.Rev. 63 (1982); ABA Monograph, supra note 6 at 8.

⁽³¹⁾ Predatory Pricing, supra note 1, Preface § 2.22.

⁽³²⁾The determination of which costs are variable is a function of the jury. ABA Section of Antitrust Law, Antitrust Law Developments, supra note 30 at 255. This means that pretrial discovery and the trial itself are often taken up with laborious and difficult issues of cost characterization and expert testimony on those points.

⁽³³⁾881 F.2d 1396 (7th Cir., Easterbrook, J.).

⁽³⁴⁾881 F.2d at 1398.

⁽³⁵⁾881 F.2d at 1400.

⁽³⁶⁾881 F.2d at 1401. (Citations omitted.)

⁽³⁷⁾It is much easier to determine from the structure of the market that recoupment is improbable than it is to find the cost a particular producer experiences in the short, middle, or long run (whichever proves pertinent).” Id.

⁽³⁸⁾Id.

⁽³⁹⁾The court’s discussion of intent is most interesting:

Reference to intent could not help the court determine whether recoupment is possible, and unless recoupment lies in store even the most vicious intent is harmless to the competitive system.

Several other compelling reasons support the conclusion that intent plays no useful role in this kind of litigation. Firms “intend” to do all the business they can, to crush their rivals if they can.…Rivalry is harsh, and consumers gain the most when firms slash costs to the bone and pare price down to cost, all in pursuit of more business.…. Entrepreneurs who work hardest to cut their prices will do the most damage to their rivals….If courts use the vigorous, nasty pursuit of sales as evidence of a forbidden “intent”, they run the risk of penalizing the motive forces of competition. (Citations omitted.)

Almost all evidence bearing on “intent” tends to show both greed-driven desire to succeed and glee at a rival’s predicament.….Firms need not like their competitors; they need not cheer them on to success; a desire to extinguish one’s rivals is entirely consistent with, often is the motive behind, competition.

881 F.2d at 1401-02.

⁽⁴⁰⁾509 U.S. 209 (1993).

⁽⁴¹⁾More specifically, the market in question was held by six principal firms, there was little price competition and profits were high. Plaintiff was the first major cigarette manufacturer to promote a much less expensive “generic” product. This market expanded as smokers switched to generic products. Defendant, the third largest manufacturer with a 12% market share, introduced a competing generic cigarette, which it priced at a lower wholesale price than that charged by plaintiff. A price war ensued during which plaintiff alleged that defendant sold product at a loss. Plaintiff’s theory was that the defendant sought to force plaintiff to increase its prices in order to minimize the price gap between the generic and branded products in an effort to maintain the profitability of the branded line. The jury returned a verdict for the plaintiff, which was set aside by the Court of Appeals.

⁽⁴²⁾“In Matsushita, we remarked upon the general implausibility of predatory pricing.” 509 U.S. 209, 227, citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 588-590 (1986).

⁽⁴³⁾475 U.S. id. at 589.

⁽⁴⁴⁾Id., quoting Easterbrook, Predatory Strategies and Counterstrategies, 48 U. Chi. L.Rev. 263, 268 (1981).

⁽⁴⁵⁾509 U.S. 209, 223, quoting Cargill, Inc. v. Monfort of Colorado, Inc., 479 U.S. 104, 116 (1986). Justice White, the author of the Court’s decision in Utah Pie, was sitting on his final term of court. Although the Court did not expressly overrule its earlier decision in Utah Pie Co., it did suggest that the decision “was an early judicial inquiry in this area” that has received subsequent attention by the Court. 509 U.S. at 221.

⁽⁴⁶⁾The Court observed:

Recoupment is the ultimate object of an unlawful predatory pricing scheme; it is the means by which a predator profits from predation. Without it, predatory pricing produces lower aggregate prices in the market, and consumer welfare is enhanced. Although unsuccessful predatory-pricing may encourage some inefficient substitution toward the product being sold at less than its cost, unsuccessful predation is in general a boon to consumers.

509 U.S. 209, 224 (1993).

⁽⁴⁷⁾Id., citing Brown Shoe Co. v. United States, 370 U.S. 294, 320 (1962). (Emphasis added.) The Court also addressed the relationship between the Sherman and Robinson Patman Acts. As noted earlier, predatory pricing is relevant to both. The Court took this occasion to again state that “’the Robinson-Patman Act should be construed consistently with broader policies of the antitrust laws.’” 509 U.S. at 220, quoting Great Atlantic & Pacific Tea Co. v. FTC, 440 U.S. 69, 80 n.13 (1979). It continued: “it has become evident that primary-line competitive injury under the Robinson Patman Act is of the same general character as the injury inflicted by predatory pricing under §2 of the Sherman Act.” Id.

⁽⁴⁸⁾See U.S. Department of Energy, The State of Competition in Gasoline Marketing (1981).

⁽⁴⁹⁾S. 40, 98th Cong. (1983).

⁽⁵⁰⁾The antitrust authorities opposed enactment of this legislation as contrary to consumer interest. See, e.g., Testimony of FTC Bureau of Competition Assistant Director Ronald B. Rowe before the Committee on the Judiciary, U.S. Senate on S. 1140 (“Motor Fuel Sales Competition Improvements Act of 1985”), 99th Cong., Oct. 9, 1985. The FTC opined that “there is no credible evidence that the alleged anticompetitive practices the bill purports to correct exist. Present federal laws are sufficient to remedy predatory pricing…. (The bill) would increase the costs of gasoline distribution, eliminate legitimate price competition, and raise prices for motor fuel to consumers.”

Although I do not profess any expertise with reference to Canadian competition law, the U.S. and Canadian federal experience appear quite close. Section 50 of the Competition Law addresses predatory pricing. The Predatory Pricing Enforcement Guidelines promulgated by the Director of Investigation & Research present a mode of analysis quite similar to that currently utilized by the U.S. federal courts. Predatory Pricing, supra note 1, at 1. Reflecting the new learning of microeconomics, these Guidelines observe:

predatory pricing, which is subject to the competition laws of many nations, has become a better understood phenomenon internationally in more recent times, and its treatment from a competition policy viewpoint now benefits from a more cohesive, analytical approach.

Id. As in the U.S., actual price predation has been rare. Id., The Canadian courts, like U.S. judges today, appear careful to distinguish between injury to competitors and injury to competition. See R. v. Consumers Glass Co. (1981), 33 O.R.2d 228 at 247. As in the States, recoupment is an important element of a case. Predatory Pricing, supra note 1, at 5, 7-10. Moreover, Canadian and U.S. laws approach the price/cost issue similarly. Id., at 10-13. While there are differences, the two countries federal approaches to predatory pricing are quite alike.

⁽⁵¹⁾ See generally, W. Lifland, State Antitrust Law § 2.04 (1998). See also, Table A, notes 63-64 and accompanying text, infra. For a general discussion of the history of “below-cost sales” legislation in the United States, see Note, State Legislation Prohibiting Sales Below Cost, 52 Harv. L.Rev. 1142 (1939).

⁽⁵²⁾ See, e.g., Caller-Times Publishing Co. v. Triad Communications, Inc. 1992-1 CCH Trade Cas. ¶ 69, 746 (Tex. Sup. Ct. 1992); Ideal Dairy Farms, Inc. v. Farmland Dairy Farms, Inc., 1995-2 CCH Trade Cas. ¶ 71,074 (N.J. App. 1995); Prestressed Concrete Inc. Bladholm Bros. Culvert Co., 1993-1 Trade Cas. ¶ 70,187 (Minn. App. 1993); Ghem, Inc. v. Mapco Petroleum, Inc., 1993 Trade Cas. ¶¶ 70,161; 70,236 (Tenn. 1993).

⁽⁵³⁾See, e.g., Turnbull & Turnbull v. ARA Transportation, Inc. , 1990-1 Trade Cas. ¶ 69,073 (Cal. App. 1990); McGuire Oil Co. v. Mapco, Inc., 1993-1 CCH Trade Cas. ¶ 70,133 (Ala.1992).

⁽⁵⁴⁾ Jordan, Predatory Pricing after Brooke Group: The Problem of State “Sales Below Cost” Statutes, 44 Emory L.J. 267, 268 (1995). The Robinson Patman Act, 15 U.S.C. § 13-13c, is a good example of such protectionist legislation at the federal level. Originally entitled the “Wholesale Grocers Protection Act,” the bill was enacted to protect certain trade channels that were threatened by mass merchandisers. For an examination of the legislative history, see In re General Motors Corp., 103 F.T.C. 691 (1984). For a general discussion of the history of “below- cost sales” legislation in the United States, see Note, State Legislation Prohibiting Sales Below Cost, 52 Harv. L.Rev.1142 (1939).

⁽⁵⁵⁾ In yet others the courts have either narrowly construed the relevant statute, see, e.g., So-Lo Oil Co. v. Total Petroleum, Inc., 832 P.2d 14 (Okla. 1992), or found it unconstitutional, see Kentucky Milk Marketing and Antimonopoly Comm'n v. Kroger Co, 691 S.W.2d 893 (Ky. 1985).

⁽⁵⁶⁾ “The ultimate losers…are the consumers living in states with these statutes. If the statute is enforced, these consumers will fact higher prices for goods and services since the statute makes vigorous competition illegal.” Jordan, supra note 54, at 307.

⁽⁵⁷⁾ The sporadic enforcement of some state laws is probably a function of politics; most state attorneys general are elected. While there may be political benefit in supporting legislation aimed at obtaining a “fair profit” for a particular merchant constituency, there may be little gain in actually prosecuting cases that result in higher prices to consumers. This may explain lax enforcement in many states.

⁽⁵⁸⁾ One commentator identifies over twenty states that have predatory pricing statutes of general application. Jordan, supra note 54. For a partial inventory of these laws, see Jordan, supra note 54, Appendix (1995). For a general discussion of state below cost legislation, see Annot., Validity, Construction, and Application of State Statutory Provision Prohibiting Sales of Commodities Below Cost—Modern Cases, 41 ALR4th 612 (1985) and (Supp.1998).

⁽⁵⁹⁾ Still others focus on cigarettes, milk or insurance. Jordan, supra note 54, at 305.

⁽⁶⁰⁾The data are taken from Jordon, supra note 54, Appendix. The categorization of statutes is imprecise. Accordingly, there are differences among the various sources. These differences are a function of the dates of the studies, whether the writer took into account judicial construction of the statutes, e.g., finding of unconstitutionality, and judgment. I have not undertaken an independent survey of state laws.

⁽⁶¹⁾The data are taken from Table I of Anderson-Johnson, infra note 69, at 7. I have added North Carolina since more recent work by Johnson includes North Carolina. See Johnson, infra note 82. It should be noted that the authors state that they contacted state authorities to confirm their inventory.

⁽⁶²⁾See Tenn. Code. Ann. § 53-3-201.

⁽⁶³⁾Several states have enacted legislation within this decade. For example, Montana enacted legislation in 1991. See Mont. Rev. Code § 30-14-801. Colorado enacted legislation in 1993. See Col. Rev. Stat. § 6-2-105(1b). Missouri enacted legislation that same year. See Mo. Rev. Code §416.600.

⁽⁶⁴⁾The same can be said of the efforts to secure federal legislation. For example, H.R. 2966, proposed in 1992 was championed by the Society of Independent Marketers of America (“SIGMA”).

⁽⁶⁵⁾ 41 ALR4th 612. The annotation discusses all types of below-cost sales statutes and not just those involving the retail sale of gasoline.

⁽⁶⁶⁾41 ALR4th 76 (Supp. 1998).

⁽⁶⁷⁾See Ghem, Inc. v. Mapco Petroleum, Inc., 850 S.W.2d 447 (Tenn. 1993), 1993-1 Trade Cases (CCH) ¶ 70,161; Hartsock-Flesher Candy Co. v. Wheeling Wholesale Grocery Co., 328 S.E.2d 144 (1984), 1984-2 Trade Cases (CCH) ¶ 66,321; Kentucky Milk Marketing & Antimonopoly Com. v. Korger Co., 691 S.W.2d 893 (Ky. 1985), 1985-1 Trade Cases (CCH) ¶ 66,596; Remote Services, Inc. v. FDR Corp., 764 S.W.2d 80 (Ky. 1989), 1989-1 Trade Cases (CCH) ¶ 68, 394; McGuire Oil Co. v. Mapco Petroleum, Inc., 763 F. Supp. 1103 (S.D. Ala 1991); Money Back Inc. v. Gray, 569 S.2d 325 (Ala. 1990); Star Services & Petroleum Co. v. State, 518 S2d 126 (Ala. App. 1986); Walmart Stores v. American Drugs, 319 Ark. 214 (1995), 891 S.W.2d 30 (1995); Glenn Smith Oil Co. v. Sheets, 704 P.2d 474 (Okla. 1985) ; Vollrath Co. v. Sammi, 9 F.3d 1455 (9th Cir. 1993); G. Fruge Junk Co. v. Oakland, 637 F.Supp. 422 (N.D. Cal. 1986).

⁽⁶⁸⁾ For example, in Ghem, Inc. v. Mapco Petroleum, Inc., id., the Tennessee Supreme Court stated that the petroleum marketing statute required that plaintiff establish both an adverse effect on competition and antitrust injury. Injury to a competitor was insufficient as a matter of law. In Kentucky Milk Marketing, id., the Kentucky Supreme Court held that the statute, while purporting to prohibit sales below cost, was in reality a minimum mark-up law. As such it impermissibly restrained the free enterprise system.

⁽⁶⁹⁾ See Anderson & Johnson, Antitrust and Sales-Below-Cost Laws: The Case of Retail Gasoline, Rev. Ind. Org. 1 (1998) (hereinafter “Anderson-Johnson”). See also, Hogarty, The Consumer Impacts of Mandatory Markup Laws & Related Restrictions (API Feb. 1984).

⁽⁷⁰⁾ Anderson-Johnson, id.

⁽⁷¹⁾ Anderson-Johnson, id.at 2

⁽⁷²⁾ Anderson-Johnson, id.at 8.

⁽⁷³⁾Id.

⁽⁷⁴⁾ E. Savvides-Gellerson, The Effects of State “Below-Cost” Selling Laws on Retail Prices of Motor Gasoline (API Research Study 043 1987).

⁽⁷⁵⁾Id.at 38.

⁽⁷⁶⁾Id. at 39. The average price of gasoline in Alabama rose by 2.08 cents per gallon relative to the regional average, in Georgia by 2.13 cents per gallon and in Florida by 1.39 cents per gallon. Id. at iii-iv. Savvides-Gellerson notes: “The data clearly indicate an increase in the price of gasoline in states with ?below-cost’ selling laws, not experienced in states in the region without such legislation.” Id.

⁽⁷⁷⁾ Id.

⁽⁷⁸⁾ Id.

⁽⁷⁹⁾ See, e.g., Fenili & Lane, Thou Shalt Not Cut Prices! Sales-Below-Cost Laws for Gas Stations, 9 Regulation 31-35 (1985). Several studies, although now somewhat dated, have focused on alleged subsidization by majors of their distribution channels. See, e.g., U.S. Department of Energy, Final Report: The State of Competition in Gasoline Marketing (1981); U.S. Department of Energy, Deregulated Gasoline Marketing: Consequences for Competition, Competitors, and Consumers (1984). Studies commissioned by state government reached consistent conclusions. See, e.g., Final Report to the Washington State Legislature on the Attorney General’s Investigation of Retail Gasoline Marketing (August 12, 1987); Final Report to the Arizona Joint Legislative Study Committee on Petroleum Pricing and Marketing Practices and Producer Retail Divorcement (Dec. 1988). All of these studies failed to find evidence sufficient to support special legislation.

⁽⁸⁰⁾ Anderson-Johnson, supra note 69, at 11.

⁽⁸¹⁾Id.

⁽⁸²⁾ Johnson, The Impact of Sales-Below-Cost Laws on the U.S. Retail Gasoline Market (1999).

⁽⁸³⁾Id. at i. Interestingly, the “results also reveal that prohibitions on refinery operated outlets (divorcement) and bans on self-service have not stemmed the decline in retail outlets ….” Id.

⁽⁸⁴⁾ Houston, Minimum Markup Laws: An Empirical Assessment, 4 J.of Retailing 57 (Winter 1984).

⁽⁸⁵⁾ Johnson, supra note 82, at 4. The rationale for the legislation is expressed in the statute itself: The legislature recognizes that independent and small dealers and distributors of motor-fuel are vital to a healthy, competitive marketplace and are unable to survive financially in competition with subsidized, below cost pricing at the retail level by dealers and distributors who have other sources of income.” Id. The discussion of the Montana experience is taken from Johnson, supra note 82.

⁽⁸⁶⁾ Sorensen, Gasoline Prices in the U.S.--Why Do They Differ Among States & Within Regions (unpublished manuscript, Jan. 1998).

⁽⁸⁷⁾ See, e.g.,studies cited supra note 79.

⁽⁸⁸⁾ U.S. Dept. of Energy, An Analysis of Gasoline Markets (June 1996).

⁽⁸⁹⁾ The Commission is composed of five members who are appointed by the President with the advice and consent of the Senate. The FTC generally shares concurrent antitrust jurisdiction with the Antitrust Division of the U.S. Department of Justice.

⁽⁹⁰⁾ The FTC also has adjudicative powers and would more closely resemble a combined Canadian Competition Bureau and Competition Tribunal.

⁽⁹¹⁾ See, e.g., Letter of FTC Director for Litigation Ronald B. Rowe to Hon. David Knowles (with reference to Calf. Assembly Bill No. 2371), May 5, 1992; Letter from FTC Dallas Regional Office Director Thomas B. Carter to Hon. W.D. Moore Jr. (with reference to Arkansas Petroleum Trade Practices Act), March 22, 1991; Letter of FTC Dallas Regional Office Director Thomas B. Carter to Hon. William R. Ratliff (with reference to Texas Senate Bill 974), May 15, 1989; Letter of FTC Bureau of Competition Director Jeffrey I. Zuckerman to Hon. Gene Thayer (with reference to Montana House Bill 464); Letter of FTC Dallas Regional Office Director Thomas B. Carter to Hon. Francis C. Heitmeier (with reference to Louisiana House Bill 444), June 2, 1989. When it was not possible because of timing for the Commission to take a position, my own office did so. See Letter from Commissioner Terry Calvani to Governor Lamar Alexander, May 3 1984.

⁽⁹²⁾ One commentator has characterized the U.S. experience as follows: “In effect, the consumers must pay a state-imposed tax by which their wealth is transferred to inefficient businesses in the form of a subsidy that keeps prices artificially high.” Jordan, supra note 54, at 307.

⁽⁹³⁾ Our experience in the United States is that vigorously enforced criminal sanctions are an excellent way of insuring antitrust compliance. The prospect of prison focuses the mind. As former Director of Investigation and Research and now Mr. Justice Howard Weston observed: “Placing a criminal ban on a range of price competition…carries with it the risk that business persons may, because of uncertainty…, refrain to some extent from engaging in price competition which would be health and beneficial.” See Predatory Pricing, supra note 1, Preface.

It is true that the United States has a criminal predatory pricing law on its books. The Borah Van Nuys Amendment to the Robinson Patman Act proscribes certain types of predatory pricing behavior. 15 U.S.C. §13a. The U.S. Justice Department has not brought a case under the statute during my professional lifetime. (Interestingly, the U.S. Supreme Court has held that the law is not an “antitrust law” within the meaning of the Clayton Act, 15 U.S.C. §§ 15, 26; accordingly it cannot be the basis for private rights of action seeking either damages or injunctive relief. Nashville Milk Co. v. Carnation Co., 355 U.S. 373, 343 (1958)). There are few areas where there has been such a consensus as to the appropriate level of enforcement (or, more accurately, non-enforcement) as this. The antitrust administrations of Presidents Johnson, Nixon, Ford, Carter, Reagan, Bush and Clinton have been of one mind here.

⁽⁹⁴⁾ See Letter of FTC Bureau of Economics Director David T. Sheffman to Hon. Elizabeth Randall, (with reference to New Jersey State Assembly bills S. 15, S. 2321, S. 813 and A. 1385), April 21, 1988. The Federal Trade Commission staff opposed this legislation and concluded: “the primary beneficiaries of the regulation apparently are incumbent gasoline retailers who are able to keep a proven efficient form of gasoline retailing out of the market. By contrast, New Jersey consumers and visitors are clear losers.” Sheffman letter at 6.

⁽⁹⁵⁾ See Hogarty, The Consumer Impacts of Mandatory Markup Laws & Related Restrictions (API, Feb. 1984). Not surprisingly Hogarty found that the effect of such legislation was to “raise prices to the consumer.” Hogarty letter at 3.

⁽⁹⁶⁾ See Hogarty & Dougher, The Impact of Divorcement on Consumers in Maryland: A Critique of “Gasoline Prices in Maryland Following Divorcement “(API, June 1987). But see, Putnam, Hayes & Barlett, Inc., Gasoline Prices in Maryland Following Divorcement (March 13, 1987). Cf. Barron & Umbeck, A Dubious Bill of Divorcement, Regulation (Jan.-Feb. 1983) at 29.

The F.T.C. vigorously opposed such legislation on both federal and state levels. See note 50, supra, for a description of the former Congressional support for the legislation was never very substantial. More formidable battles were fought on the state levels. The F.T.C. provided numerous comments and testimony in opposition to the proposed legislation. See Letter of F.T.C. Bureau of Competition Director Jeffrey I. Zuckerman to Gov. Joe Frank Harris (with reference to Georgia Senate Bill 177), March 18, 1987. The F.T.C. noted that absence of evidence of predatory behavior or subsidization by integrated companies. It also stated that existing federal law was sufficient to address predatory behavior and that the bill would lead to higher gasoline prices. See also Testimony of F.T.C. Director of Litigation Ronald B. Rowe before the Virginia Senate and House of Delegates Joint Subcommittee Studying Divorcement, Oct. 23, 1990; Letter of F.T.C. Acting Chairman, Hon. Terry Calvani, to Hon. Peter K. Apo (with reference to Hawaii House Bill 1376), Dec. 23, 1985; Letter of F.T.C. Bureau of Competition Director Jeffrey I. Zuckerman to Hon. Randolph J. Townsend (with reference to Nevada Assembly Bill 420), April 22, 1987; Letter of F.T.C. Director for Litigation Ronald B. Rowe to Hon. Daniel E. Bosley (with reference to Massachusetts House Bills 2225 and 2226), April 9, 1990.

Terry Calvani

PILLSBURY MADISON & SUTRO LLP

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Terry Calvani is a partner in the antitrust practice group of Pillsbury Madison & Sutro LLP. Prior to re-joining the firm, he was Commissioner of the US Federal Trade Commission (1983- 1990) and was acting Chairman of the Commission during 1985 and 1986.

Following his graduation from the Cornell Law School, where he was Articles Editor of the Law Review, he practiced with the firm in San Francisco. From 1974-1983, he was Professor of Law at Vanderbilt School of Law teaching courses on antitrust law. Mr. Calvani continues to teach antitrust—most recently at the Harvard Law School (Winter/Spring 1998 and Fall/Winter 1999).

He is the author of a book and numerous articles and has lectured at many seminars on antitrust issues. He has served as chairman of the ABA Antitrust Section's Robinson-Patman Committee, Noerr Doctrine & State Action Committee, Special Committee on Antitrust Penalties and Damages, and on its governing council. He is a member of the American Law Institute, serves on the advisory board of the Antitrust Bulletin, and has been a member of the Administrative Conference of the United States.

Since returning to practice, Mr. Calvani has worked on acquisitions/joint ventures in a very large number of industries and their review by federal and state agencies. He has participated in civil and criminal non-merger investigations in many industries by both federal and state authorities. He has also provided antitrust counseling to a large number of companies and several trade associations.

He maintains his office in Washington and San Francisco and lives in Nashville, Tennessee.

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