UNIT III: DOMINANT FIRM BEHAVIOR

A. The Elements of §2 Claims

UNITED STATES v. ALUMINUM CO. OF AMERICA148 F.2d 416 (2d Cir. 1945)

L. HAND, Circuit Judge. This … action was brought … praying the district court to adjudge that the defendant, Aluminum Company of America [Alcoa], was monopolizing interstate and foreign commerce, particularly in the manufacture and sale of ‘virgin’ aluminum ingot, and that it be dissolved…. The plaintiff filed its complaint on April 23, 1937…. The action came to trial on June 1, 1938, and proceeded without much interruption until August 14, 1940, when the case was closed after more than 40,000 pages of testimony had been taken. The judge took time to consider the evidence, and delivered an oral opinion which occupied him from September 30, to October 9, 1941. Again he took time to prepare findings of fact and conclusions of law which he filed on July 14, 1942; and he entered final judgment dismissing the complaint on July 23rd, of that year. … [T]he Supreme Court, declaring that a quorum of six justices qualified to hear the case was wanting, referred the appeal to this court ….

I. ‘ALCOA’S MONOPOLY OF ‘Virgin’ Ingot. ‘Alcoa’ is … engaged in the production and sale of ‘ingot’ aluminum, and … also in the fabrication of the metal into many finished and semi-finished articles. [Because of ownership of relevant patents,] until February 2, 1909, ‘Alcoa’ had either a monopoly of the manufacture of ‘virgin’ aluminum ingot or the monopoly of a [manufacturing] process which eliminated all competition.

The extraction of aluminum … requires a very large amount of electrical energy, which is ordinarily, though not always, most cheaply obtained from water power. Beginning at least as early as 1895, ‘Alcoa’ secured such power from several companies by contracts, containing in at least three instances, covenants binding the power companies not to sell or let power to anyone else for the manufacture of aluminum. ‘Alcoa’–either itself or by a subsidiary–also entered into four successive ‘cartels’ with foreign manufacturers of aluminum by which, in exchange for certain limitations upon its import into foreign countries, it secured covenants from the foreign producers, either not to import into the United States at all, or to do so under restrictions, which in some cases involved the fixing of prices. These ‘cartels’ and restrictive covenants and certain other practices were the subject of a suit filed by the United States against ‘Alcoa’ on May 16, 1912, in which a decree was entered by consent on June 7, 1912, declaring several of these covenants unlawful and enjoining their performance….

None of the foregoing facts are in dispute, and the most important question in the case is whether the monopoly in ‘Alcoa’s’ production of ‘virgin’ ingot, secured by the two patents until 1909, and in part perpetuated between 1909 and 1912 by the unlawful practices, forbidden by the decree of 1912, continued for the ensuing twenty-eight years; and whether, if it did, it was unlawful under §2 of the Sherman Act…. It is undisputed

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that throughout this period ‘Alcoa’ continued to be the single producer of ‘virgin’ ingot in the United States; and the plaintiff argues that this without more was enough to make it an unlawful monopoly. It also takes an alternative position: that in any event during this period ‘Alcoa’ consistently pursued unlawful exclusionary practices, which made its dominant position certainly unlawful, even though it would not have been, had it been retained only by ‘natural growth.’ …

‘Alcoa’s’ position is that the fact that it alone continued to make ‘virgin’ ingot in this country did not, and does not, give it a monopoly of the market; that it was always subject to the competition of imported ‘virgin’ ingot, and of what is called ‘secondary’ ingot; and that even if it had not been, its monopoly would not have been retained by unlawful means, but would have been the result of a growth which the Act does not forbid, even when it results in a monopoly. We shall first consider the amount and character of this competition; next, how far it established a monopoly; and finally, if it did, whether that monopoly was unlawful under §2 of the Act.

From 1902 onward until 1928 ‘Alcoa’ was making ingot in Canada through a wholly owned subsidiary; so much of this as it imported into the United States it is proper to include with what it produced here. In the year 1912 the sum of these two items represented nearly ninety-one per cent of the total amount of ‘virgin’ ingot available for sale in this country. This percentage varied year by year up to and including 1938: in 1913 it was about seventy-two per cent; in 1921 about sixty-eight per cent; in 1922 about seventy-two; with these exceptions it was always over eighty per cent of the total and for the last five years (1934-1938 inclusive) it averaged over ninety per cent. The effect of such a proportion of the production upon the market we reserve for the time being, for it will be necessary first to consider the nature and uses of ‘secondary’ ingot, the name by which the industry knows ingot made from aluminum scrap. This is of two sorts, though for our purposes it is not important to distinguish between them. One of these is the clippings and trimmings of ‘sheet’ aluminum, when patterns are cut out of it, as a suit is cut from a bolt of cloth. …[T]here is an appreciable ‘sales resistance’ … to this kind of scrap, and for some uses (airplanes and cables among them), fabricators absolutely insist upon ‘virgin’…. The other source of scrap is aluminum which has once been fabricated and the article, after being used, is discarded and sent to the junk heap, as for example, cooking utensils, like kettles and pans, and the pistons or crank cases of motorcars. These are made with a substantial alloy and to restore the metal to its original purity costs more than it is worth. However, if the alloy is known both in quality and amount, scrap, when remelted, can be used again for the same purpose as before. In spite of this, as in the case of clippings and trimmings, the industry will ordinarily not accept ingot so salvaged upon the same terms as ‘virgin.’ …

There are various ways of computing ‘Alcoa’s’ control of the aluminum market–as distinct from its production–depending upon what one regards as competing in that market. The judge figured its share–during the years 1929-1938, inclusive–as only about thirty-three percent; to do so he included ‘secondary,’ and excluded that part of ‘Alcoa’s own production which it fabricated and did not therefore sell as ingot. If, on the other hand, ‘Alcoa’s’ total production, fabricated and sold, be included, and balanced against the sum of imported ‘virgin’ and ‘secondary,’ its share of the market was in the neighborhood of sixty-four per cent for that period. The percentage we have already

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mentioned–over ninety–results only if we both include all ‘Alcoa’s’ production and exclude ‘secondary’. That percentage is enough to constitute a monopoly; it is doubtful whether sixty or sixty-four percent would be enough; and certainly thirty-three per cent is not. Hence it is necessary to settle what he shall treat as competing in the ingot market.

That part of its production which ‘Alcoa’ itself fabricates, does not of course ever reach the market as ingot; and we recognize that it is only when a restriction of production either inevitably affects prices, or is intended to do so, that it violates §1 of the Act. However, even though we were to assume that a monopoly is unlawful under Sec. 2 only in case it controls prices, the ingot fabricated by ‘Alcoa,’ necessarily had a direct effect upon the ingot market. All ingot–with trifling exceptions–is used to fabricate intermediate or end, products; and therefore all intermediate, or end, products which ‘Alcoa’ fabricates and sell, pro tanto reduce the demand for ingot itself. … We cannot therefore agree that the computation of the percentage of ‘Alcoa’s’ control over the ingot market should not include the whole of its ingot production.

As to ‘secondary,’ as we have said, for certain purposes the industry will not accept it at all; but for those for which it will, the difference in price is ordinarily not very great; the judge found that it was between one and two cents a pound, hardly enough margin on which to base a monopoly. Indeed, there are times when all differential disappears, and ‘secondary’ will actually sell at a higher price: i.e. when there is a supply available which contains just the alloy that a fabricator needs for the article which he proposes to make. Taking the industry as a whole, we can say nothing more definite than that, although ‘secondary’ does not compete at all in some uses, (whether because of ‘sales resistance’ only, or because of actual metallurgical inferiority), for most purposes it competes upon a substantial equality with ‘virgin.’ On these facts the judge found that ‘every pound of secondary or scrap aluminum which is sold in commerce displaces a pound of virgin aluminum which otherwise would, or might have been, sold.’ We agree: so far as ‘secondary’ supplies the demand of such fabricators as will accept it, it increases the amount of ‘virgin’ which must seek sale elsewhere; and it therefore results that the supply of that part of the demand which will accept only ‘virgin’ becomes greater in proportion as ‘secondary’ drives away ‘virgin’ from the demand which will accept ‘secondary.’ (This is indeed the same argument which we used a moment ago to include in the supply that part of ‘virgin’ which ‘Alcoa’ fabricates; it is not apparent to us why the judge did not think it applicable to that item as well.) At any given moment therefore ‘secondary’ competes with ‘virgin’ in the ingot market; further, it can, and probably does, set a limit or ‘ceiling’ beyond which the price of ‘virgin’ cannot go, for the cost of its production will in the end depend only upon the expense of scavenging and reconditioning. It might seem for this reason that in estimating ‘Alcoa’s’ control over the ingot market, we ought to include the supply of ‘secondary,’ as the judge did. Indeed, it may be thought a paradox to say that anyone has the monopoly of a market in which at all times he must meet a competition that limits his price. We shall show that it is not.

In the case of a monopoly of any commodity which does not disappear in use and which can be salvaged, the supply seeking sale at any moment will be made up of two components: (1) the part which the putative monopolist can immediately produce and sell; and (2) the part which has been, or can be, reclaimed out of what he has produced and sold in the past. By hypothesis he presently controls the first of these components;

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the second he has controlled in the past, although he no longer does. During the period when he did control the second, if he was aware of his interest, he was guided, not alone by its effect at that time upon the market, but by his knowledge that some part of it was likely to be reclaimed and seek the future market. That consideration will to some extent always affect his production until he decides to abandon the business, or for some other reason ceases to be concerned with the future market. Thus, in the case at bar ‘Alcoa’ always knew that the future supply of ingot would be made up in part of what it produced at the time, and, if it was as far-sighted as it proclaims itself, that consideration must have had its share in determining how much to produce. How accurately it could forecast the effect of present production upon the future market is another matter. Experience, no doubt, would help; but it makes no difference that it had to guess; it is enough that it had an inducement to make the best guess it could, and that it would regulate that part of the future supply, so far as it should turn out to have guessed right. The competition of ‘secondary’ must therefore be disregarded, as soon as we consider the position of ‘Alcoa’ over a period of years; it was as much within ‘Alcoa’s’ control as was the production of the ‘virgin’ from which it had been derived. This can be well illustrated by the case of a lawful monopoly: e.g. a patent or a copyright. The monopolist cannot prevent those to whom he sells from reselling at whatever prices they please. Nor can he prevent their reconditioning articles worn by use, unless they in fact make a new article. At any moment his control over the market will therefore be limited by that part of what he has formerly sold, which the price he now charges may bring upon the market, as second hand or reclaimed articles. Yet no one would think of saying that for this reason the patent or the copyright did not confer a monopoly. …

We conclude therefore that ‘Alcoa’s’ control over the ingot market must be reckoned at over ninety per cent; that being the proportion which its production bears to imported ‘virgin’ ingot. If the fraction which it did not supply were the produce of domestic manufacture there could be no doubt that this percentage gave it a monopoly–lawful or unlawful, as the case might be. The producer of so large a proportion of the supply has complete control within certain limits. It is true that, if by raising the price he reduces the amount which can be marketed–as always, or almost always, happens–he may invite the expansion of the small producers who will try to fill the place left open; nevertheless, not only is there an inevitable lag in this, but the large producer is in a strong position to check such competition; and, indeed, if he has retained his old plant and personnel, he can inevitably do so. There are indeed limits to his power; substitutes are available for almost all commodities, and to raise the price enough is to evoke them. Moreover, it is difficult and expensive to keep idle any part of a plant or of personnel; and any drastic contraction of the market will offer increasing temptation to the small producers to expand. But these limitations also exist when a single producer occupies the whole market: even then, his hold will depend upon his moderation in exerting his immediate power.

The case at bar is however different, because, for aught that appears there may well have been a practically unlimited supply of imports as the price of ingot rose. Assuming that there was no agreement between ‘Alcoa’ and foreign producers not to import, they sold what could bear the handicap of the tariff and the cost of transportation. For the period of eighteen years – 1920-1937 – they sold at times a little above ‘Alcoa’s’ prices, at times a little under; but there was substantially no gross difference between

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what they received and what they would have received, had they sold uniformly at ‘Alcoa’s’ prices. While the record is silent, we may therefore assume–the plaintiff having the burden–that, had ‘Alcoa’ raised its prices, more ingot would have been imported. Thus there is a distinction between domestic and foreign competition: the first is limited in quantity, and can increase only by an increase in plant and personnel; the second is of producers who, we must assume, produce much more than they import, and whom a rise in price will presumably induce immediately to divert to the American market what they have been selling elsewhere. It is entirely consistent with the evidence that it was the threat of greater foreign imports which kept ‘Alcoa’s’ prices where they were, and prevented it from exploiting its advantage as sole domestic producer; indeed, it is hard to resist the conclusion that potential imports did put a ‘ceiling’ upon those prices. Nevertheless, within the limits afforded by the tariff and the cost of transportation, ‘Alcoa’ was free to raise its prices as it chose, since it was free from domestic competition, save as it drew other metals into the market as substitutes. Was this a monopoly within the meaning of §2?

The judge found that, over the whole half century of its existence, ‘Alcoa’s’ profits upon capital invested, after payment of income taxes, had been only about ten per cent…. A profit of ten per cent in such an industry, dependent, in part at any rate, upon continued tariff protection, and subject to the vicissitudes of new demands, to the obsolescence of plant and process–which can never be accurately gauged in advance–to the chance that substitutes may at any moment be discovered which will reduce the demand, and to the other hazards which attend all industry; a profit of ten per cent, so conditioned, could hardly be considered extortionate.

There are however, two answers to any such excuse; and the first is that the profit on ingot was not necessarily the same as the profit of the business as a whole, and that we have no means of allocating its proper share to ingot. … It may be retorted that it was for the plaintiff to prove what was the profit upon ingot in accordance with the general burden of proof. We think not. Having proved that ‘Alcoa’ had a monopoly of the domestic ingot market, the plaintiff had gone far enough; if it was an excuse, that ‘Alcoa’ had not abused its power, it lay upon ‘Alcoa’ to prove that it had not. But the whole issue is irrelevant anyway, for it is no excuse for ‘monopolizing’ a market that the monopoly has not been used to extract from the consumer more than a ‘fair’ profit. The Act has wider purposes. Indeed, even though we disregard all but economic considerations, it would by no means follow that such concentration of producing power is to be desired, when it has not been used extortionately. Many people believe that possession of unchallenged economic power deadens initiative, discourages thrift and depresses energy; that immunity from competition is a narcotic, and rivalry is a stimulant, to industrial progress; that the spur of constant stress is necessary to counteract an inevitable disposition to let well enough alone. Such people believe that competitors, versed in the craft as no consumer can be, will be quick to detect opportunities for saving and new shifts in production, and be eager to profit by them. In any event the mere fact that a producer, having command of the domestic market, has not been able to make more than a ‘fair’ profit, is no evidence that a ‘fair’ profit could not have been made at lower prices. True, it might have been thought adequate to condemn only those monopolies which could not show that they had exercised the highest possible ingenuity, had adopted every possible economy, had anticipated every conceivable improvement, stimulated every

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possible demand. No doubt, that would be one way of dealing with the matter, although it would imply constant scrutiny and constant supervision, such as courts are unable to provide. Be that as it may, that was not the way that Congress chose; it did not condone ‘good trusts’ and condemn ‘bad’ ones; it forbad all. Moreover, in so doing it was not necessarily actuated by economic motives alone. It is possible, because of its indirect social or moral effect, to prefer a system of small producers, each dependent for his success upon his own skill and character, to one in which the great mass of those engaged must accept the direction of a few. These considerations, which we have suggested only as possible purposes of the Act, we think the decisions prove to have been in fact its purposes.

… Starting … with the authoritative premise that all contracts fixing prices are unconditionally prohibited, the only possible difference between them and a monopoly is that while a monopoly necessarily involves an equal, or even greater, power to fix prices, its mere existence might be thought not to constitute an exercise of that power. That distinction is nevertheless purely formal; it would be valid only so long as the monopoly remained wholly inert; it would disappear as soon as the monopoly began to operate; for, when it did–that is, as soon as it began to sell at all–it must sell at some price and the only price at which it could sell is a price which it itself fixed. Thereafter the power and its exercise must needs coalesce. Indeed it would be absurd to condemn such contracts unconditionally, and not to extend the condemnation to monopolies; for the contracts are only steps toward that entire control which monopoly confers: they are really partial monopolies. … [T]here can be no doubt that the vice of restrictive contracts and of monopoly is really one, it is the denial to commerce of the supposed protection of competition. …

We have been speaking only of the economic reasons which forbid monopoly; but, as we have already implied, there are others, based upon the belief that great industrial consolidations are inherently undesirable, regardless of their economic results. In the debates in Congress Senator Sherman himself … showed that among the purposes of Congress in 1890 was a desire to put an end to great aggregations of capital because of the helplessness of the individual before them.1 … Throughout the history of these statutes it has been constantly assumed that one of their purposes was to perpetuate and preserve, for its own sake and in spite of possible cost, an organization of industry in small units which can effectively compete with each other. We hold that ‘Alcoa’s’ monopoly of ingot was of the kind covered by §2.

1 “If the concerted powers of this combination are intrusted to a single man, it is a kingly prerogative, inconsistent with our form of government, and should be subject to the strong resistance of the State and national authorities…. The popular mind is agitated with problems that may disturb social order, and among them all none is more threatening than the inequality of condition, of wealth, and opportunity that has grown within a single generation out of the concentration of capital into vast combinations to control production and trade and to break down competition. These combinations already defy or control powerful transportation corporations and reach State authorities. They reach out their Briarean arms to every part of our country. They are imported from abroad. Congress alone can deal with them, and if we are unwilling or unable there will soon be a trust for every production and a master to fix the price for every necessity of life.” 21 Cong. Record 2457, 2460.

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It does not follow because ‘Alcoa’ had such a monopoly, that it ‘monopolized’ the ingot market: it may not have achieved monopoly; monopoly may have been thrust upon it. … [F]rom the very outset the courts have at least kept in reserve the possibility that the origin of a monopoly may be critical in determining its legality…. This notion has usually been expressed by saying that size does not determine guilt; that there must be some ‘exclusion’ of competitors; that the growth must be something else than ‘natural’ or ‘normal’; that there must be a ‘wrongful intent,’ or some other specific intent; or that some ‘unduly’ coercive means must be used. At times there has been emphasis upon the use of the active verb, ‘monopolize’…. What engendered these compunctions is reasonably plain; persons may unwittingly find themselves in possession of a monopoly, automatically so to say: that is, without having intended either to put an end to existing competition, or to prevent competition from arising when none had existed; they may become monopolists by force of accident. Since the Act makes ‘monopolizing’ a crime, as well as a civil wrong, it would be not only unfair, but presumably contrary to the intent of Congress, to include such instances. A market may, for example, be so limited that it is impossible to produce at all and meet the cost of production except by a plant large enough to supply the whole demand. Or there may be changes in taste or in cost which drive out all but one purveyor. A single producer may be the survivor out of a group of active competitors, merely by virtue of his superior skill, foresight and industry. In such cases a strong argument can be made that, although the result may expose the public to the evils of monopoly, the Act does not mean to condemn the resultant of those very forces which it is its prime object to foster…. The successful competitor, having been urged to compete, must not be turned upon when he wins. …

It would completely misconstrue ‘Alcoa’s’ position in 1940 to hold that it was the passive beneficiary of a monopoly, following upon an involuntary elimination of competitors by automatically operative economic forces. Already in 1909, when its last lawful monopoly ended, it sought to strengthen its position by unlawful practices, and these concededly continued until 1912. In that year it had two plants in New York, at which it produced less than 42 million pounds of ingot; in 1934 it had five plants (the original two, enlarged; one in Tennessee; one in North Carolina; one in Washington), and its production had risen to about 327 million pounds, an increase of almost eight-fold. Meanwhile not a pound of ingot had been produced by anyone else in the United States. This increase, and this continued and undisturbed control, did not fall undesigned into ‘Alcoa’s’ lap; obviously it could not have done so. It could only have resulted, as it did result, from a persistent determination to maintain the control, with which it found itself vested in 1912. There were at least one or two abortive attempts to enter the industry, but ‘Alcoa’ effectively anticipated and forestalled all competition, and succeeded in holding the field alone. True, it stimulated demand and opened new uses for the metal, but not without making sure that it could supply what it had evoked. There is no dispute as to this; ‘Alcoa’ avows it as evidence of the skill, energy and initiative with which it has always conducted its business; as a reason why, having won its way by fair means, it should be commended, and not dismembered. We need charge it with no moral derelictions after 1912; we may assume that all it claims for itself is true. The only question is whether it falls within the exception established in favor of those who do not seek, but cannot avoid, the control of a market. It seems to us that that question scarcely survives its statement. It was not inevitable that it should always anticipate increases in

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the demand for ingot and be prepared to supply them. Nothing compelled it to keep doubling and redoubling its capacity before others entered the field. It insists that it never excluded competitors; but we can think of no more effective exclusion than progressively to embrace each new opportunity as it opened, and to face every newcomer with new capacity already geared into a great organization, having the advantage of experience, trade connections and the elite of personnel. Only in case we interpret ‘exclusion’ as limited to maneuvres not honestly industrial, but actuated solely by a desire to prevent competition, can such a course, indefatigably pursued, be deemed not ‘exclusionary.’ So to limit it would in our judgment emasculate the Act; would permit just such consolidations as it was designed to prevent.

‘Alcoa’ answers that it positively assisted competitors, instead of discouraging them. That may be true as to fabricators of ingot; but what of that? They were its market for ingot, and it is charged only with a monopoly of ingot. We can find no instance of its helping prospective ingot manufacturers. …

We disregard any question of ‘intent.’ … Although the primary evil was monopoly, the Act also covered preliminary steps, which, if continued, would lead to it. These may do no harm of themselves; but, if they are initial moves in a plan or scheme which, carried out, will result in monopoly, they are dangerous and the law will nip them in the bud. For this reason conduct falling short of monopoly, is not illegal unless it is part of a plan to monopolize, or to gain such other control of a market as is equally forbidden. To make it so, the plaintiff must prove what in the criminal law is known as a ‘specific intent’; an intent which goes beyond the mere intent to do the act. [However,] no monopolist monopolizes unconscious of what he is doing. So here, ‘Alcoa’ meant to keep, and did keep, that complete and exclusive hold upon the ingot market with which it started. That was to ‘monopolize’ that market, however innocently it otherwise proceeded. So far as the judgment held that it was not within §2, it must be reversed.

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IV. The Remedies. Nearly five years have passed since the evidence was closed; during that time the aluminum industry, like most other industries, has been revolutionized by the nation’s efforts in a great crisis. That alone would make it impossible to dispose of the action upon the basis of the record as we have it; and so both sides agree; both appeal to us to take ‘judicial notice’ of what has taken place meanwhile, though they differ as to what should be the result. The plaintiff wishes us to enter a judgment that ‘Alcoa’ shall be dissolved, and that we shall direct it presently to submit a plan, whose execution, however, is to be deferred until after the war. It also asks a termination of all shareholding in common between ‘Alcoa’ and ‘Limited’; and that injunctions shall go against any resumption of the putative unlawful practices. On the other hand, ‘Alcoa’ argues that, when we look at the changes that have taken place- particularly the enormous capacity of plaintiff’s aluminum plants–it appears that, even though we should conclude that-it had ‘monopolized’ the ingot industry up to 1941, the plaintiff now has in its hands the means to prevent any possible ‘monopolization’ of the industry after the war, which it may use as it wills; and that the occasion has therefore passed forever which might call for, or justify, a dissolution: the litigation has become moot. … We do not agree with either side….

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[I]t is impossible to say what will be ‘Alcoa’s’ position in the industry after the war. The plaintiff has leased to it all its new plants and the leases do not expire until 1947 and 1948, though they may be surrendered earlier. No one can now forecast in the remotest way what will be the form of the industry after the plaintiff has disposed of these plants, upon their surrender. It may be able to transfer all of them to persons who can effectively compete with ‘Alcoa’; it may be able to transfer some; conceivably, it may be unable to dispose of any. The measure of its success will be at least one condition upon the propriety of dissolution, and upon the form which it should take, if there is to be any. It is as idle for the plaintiff to assume that dissolution will be proper, as it is for ‘Alcoa’ to assume that it will not be; and it would be particularly fatuous to prepare a plan now, even if we could be sure that eventually some form of dissolution is not a penalty but a remedy; if the industry will not need it for its protection, it will be a disservice to break up an aggregation which has for so long demonstrated its efficiency. The need for such a remedy will be for the district court in the first instance….

$ $ $ $ $ $ $SPECTRUM SPORTS, INC. v. McQUILLAN

506 U.S. 447 (1993)

Justice WHITE delivered the opinion of the Court. Section 2 of the Sherman Act … makes it an offense for any person to “monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part or the trade or commerce among the several States.” The jury in this case returned a verdict finding that petitioners had monopolized, attempted to monopolize, and/or conspired to monopolize. The District Court entered a judgment ruling that petitioners had violated §2, and the Court of Appeals affirmed on the ground that petitioners had attempted to monopolize. The issue we have before us is whether the District Court and the Court of Appeals correctly defined the elements of that offense.

I. Sorbothane is a patented elastic polymer whose shock-absorbing characteristics make it useful in a variety of medical, athletic, and equestrian products. BTR, Inc. (BTR), owns the patent rights to sorbothane, and its wholly owned subsidiaries manufacture the product in the United States and Britain. Hamilton-Kent Manufacturing Company (Hamilton-Kent) and Sorbothane, Inc. (S.I.) were at all relevant times owned by BTR. S.I. was formed in 1982 to take over Hamilton-Kent’s sorbothane business. Respondents Shirley and Larry McQuillan, doing business as Sorboturf Enterprises, were regional distributors of sorbothane products from 1981 to 1983. Petitioner Spectrum Sports, Inc. (Spectrum), was also a distributor of sorbothane products. Petitioner Kenneth B. Leighton, Jr., is a co-owner of Spectrum. Kenneth Leighton, Jr., is the son of Kenneth Leighton, Sr., the president of Hamilton-Kent and S.I. at all relevant times.

In 1980, respondents Shirley and Larry McQuillan signed a letter of intent with Hamilton-Kent, which then owned all manufacturing and distribution rights to sorbothane. The letter of intent granted the McQuillans exclusive rights to purchase sorbothane for use in equestrian products. Respondents were designing a horseshoe pad using sorbothane.

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In 1981, Hamilton-Kent decided to establish five regional distributorships for sorbothane. Respondents were selected to be distributors of all sorbothane products, including medical products and shoe inserts, in the Southwest. Spectrum was selected as distributor for another region.

In January 1982, Hamilton-Kent shifted responsibility for selling medical products from five regional distributors to a single national distributor. In April 1982, Hamilton-Kent told respondents that it wanted them to relinquish their athletic shoe distributorship as a condition for retaining the right to develop and distribute equestrian products. As of May 1982, BTR had moved the sorbothane business from Hamilton-Kent to S.I. In May, the marketing manager of S.I. again made clear that respondents had to sell their athletic distributorship to keep their equestrian distribution rights. At a meeting scheduled to discuss the sale of respondents’ athletic distributorship to petitioner Leighton, Jr., Leighton, Jr., informed Shirley McQuillan that if she did not come to agreement with him she would be “‘looking for work.’” Respondents refused to sell and continued to distribute athletic shoe inserts.

In the fall of 1982, Leighton, Sr., informed respondents that another concern had been appointed as the national equestrian distributor, and that they were “no longer involved in equestrian products.” In January 1983, S.I. began marketing through a national distributor a sorbothane horseshoe pad allegedly indistinguishable from the one designed by respondents. In August 1983, S.I. informed respondents that it would no longer accept their orders. Spectrum thereupon became national distributor of sorbothane athletic shoe inserts. Respondents sought to obtain sorbothane from the BTR’s British subsidiary, but were informed by that subsidiary that it would not sell sorbothane in the United States. Respondents’ business failed.

Respondents sued petitioners seeking damages for alleged violations of §§1 and 2 of the Sherman Act, §3 of the Clayton Act, the Racketeer Influenced and Corrupt Organizations Act, and two provisions of California business law. Respondents also alleged fraud, breach of oral contract, interference with prospective business advantage, bad faith denial of the existence of an oral contract, and conversion.

The case was tried to a jury, which returned a verdict against one or more of the defendants on each of the 11 alleged violations on which it was to return a verdict. All of the defendants were found to have violated §2 by, in the words of the verdict sheet, “monopolizing, attempting to monopolize, and/or conspiring to monopolize.” Petitioners were also found to have violated civil RICO and the California unfair practices law, but not §1 of the Sherman Act. The jury awarded $1,743,000 in compensatory damages on each of the violations found to have occurred. This amount was trebled under §4 of the Clayton Act. The District Court also awarded nearly $1 million in attorneys’ fees and denied motions for judgment notwithstanding the verdict and for a new trial.

The Court of Appeals for the Ninth Circuit affirmed the judgment in an unpublished opinion. The court expressly ruled that the trial court had properly instructed the jury on the Sherman Act claims and found that the evidence supported the liability verdicts as well as the damages awards on these claims. The court then affirmed the judgment of the District Court, finding it unnecessary to rule on challenges to other violations found by the jury. On the §2 issue that petitioners present here, the Court of

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Appeals, noting that the jury had found that petitioners had violated §2 without specifying whether they had monopolized, attempted to monopolize, or conspired to monopolize, held that the verdict would stand if the evidence supported any one of the three possible violations of §2. The court went on to conclude that a case of attempted monopolization had been established.4 The court rejected petitioners’ argument that attempted monopolization had not been established because respondents had failed to prove that petitioners had a specific intent to monopolize a relevant market. The court also held that in order to show that respondents’ attempt to monopolize was likely to succeed it was not necessary to present evidence of the relevant market or of the defendants’ market power. In so doing, the Ninth Circuit relied on Lessig v. Tidewater Oil Co., 327 F.2d 459 (CA9), cert. denied, 377 U.S. 993 (1964), and its progeny. The Court of Appeals noted that these cases, in dealing with attempt to monopolize claims, had ruled that “if evidence of unfair or predatory conduct is presented, it may satisfy both the specific intent and dangerous probability elements of the offense, without any proof of relevant market or the defendant’s marketpower [sic].” If, however, there is insufficient evidence of unfair or predatory conduct, there must be a showing of “relevant market or the defendant’s marketpower [sic].” The court went on to find:

There is sufficient evidence from which the jury could conclude that the S.I. Group and Spectrum Group engaged in unfair or predatory conduct and thus inferred that they had the specific intent and the dangerous probability of success and, therefore, McQuillan did not have to prove relevant market or the defendant’s marketing power.

The decision below, and the Lessig line of decisions on which it relies, conflicts with holdings of courts in other Circuits. Every other Court of Appeals has indicated that proving an attempt to monopolize requires proof of a dangerous probability of monopolization of a relevant market. We granted certiorari to resolve this conflict among the Circuits. We reverse.

II. While §1 of the Sherman Act forbids contracts or conspiracies in restraint of trade or commerce, §2 addresses the actions of single firms that monopolize or attempt to monopolize, as well as conspiracies and combinations to monopolize. Section 2 does not define the elements of the offense of attempted monopolization. Nor is there much guidance to be had in the scant legislative history of that provision, which was added late in the legislative process. The legislative history does indicate that much of the interpretation of the necessarily broad principles of the Act was to be left for the courts in particular cases.

4 The District Court’s jury instructions were transcribed as follows:In order to win on the claim of attempted monopoly, the Plaintiff must prove each of the following elements by a preponderance of the evidence: first, that the Defendants had a specific intent to achieve monopoly power in the relevant market; second, that the Defendants engaged in exclusionary or restrictive conduct in furtherance of its specific intent; third, that there was a dangerous probability that Defendants could sooner or later achieve [their] goal of monopoly power in the relevant market; fourth, that the Defendants' conduct occurred in or affected interstate commerce; and, fifth, that the Plaintiff was injured in the business or property by the Defendants' exclusionary or restrictive conduct. … If the Plaintiff has shown that the Defendant engaged in predatory conduct, you may infer from that evidence the specific intent and the dangerous probability element of the offense without any proof of the relevant market or the Defendants' marketing [sic] power.

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This Court first addressed the meaning of attempt to monopolize under §2 in Swift & Co. v. U.S., 196 U.S. 375 (1905). The Court’s opinion, written by Justice Holmes, contained the following passage:

Where acts are not sufficient in themselves to produce a result which the law seeks to prevent–for instance, the monopoly–but require further acts in addition to the mere forces of nature to bring that result to pass, an intent to bring it to pass is necessary in order to produce a dangerous probability that it will happen. … But when that intent and the consequent dangerous probability exist, this statute, like many others and like the common law in some cases, directs itself against that dangerous probability as well as against the completed result.

The Court went on to explain, however, that not every act done with intent to produce an unlawful result constitutes an attempt. “It is a question of proximity and degree.” Swift thus indicated that intent is necessary, but alone is not sufficient, to establish the dangerous probability of success that is the object of §2’s prohibition of attempts.7 The Court’s decisions since Swift have reflected the view that the plaintiff charging attempted monopolization must prove a dangerous probability of actual monopolization, which has generally required a definition of the relevant market and examination of market power. In Walker Process Equipment v. Food Machinery & Chemical Corp., 382 U.S. 172, 177 (1965), we found that enforcement of a fraudulently obtained patent claim could violate the Sherman Act. We stated that, to establish monopolization or attempt to monopolize under §2 of the Sherman Act, it would be necessary to appraise the exclusionary power of the illegal patent claim in terms of the relevant market for the product involved. The reason was that “[w]ithout a definition of that market there is no way to measure [the defendant’s] ability to lessen or destroy competition.”

Similarly, this Court reaffirmed in Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 768 (1984), that “Congress authorized Sherman Act scrutiny of single firms only when they pose a danger of monopolization. Judging unilateral conduct in this manner reduces the risk that the antitrust laws will dampen the competitive zeal of a single aggressive entrepreneur.” Thus, the conduct of a single firm, governed by §2, “is unlawful only when it threatens actual monopolization.”

The Courts of Appeals other than the Ninth Circuit have followed this approach. Consistent with our cases, it is generally required that to demonstrate attempted monopolization a plaintiff must prove (1) that the defendant has engaged in predatory or anticompetitive conduct with (2) a specific intent to monopolize and (3) a dangerous probability of achieving monopoly power. In order to determine whether there is a dangerous probability of monopolization, courts have found it necessary to consider the relevant market and the defendant’s ability to lessen or destroy competition in that market.

7 Justice Holmes confirmed that this was his interpretation of Swift in Hyde v. U.S., 225 U.S. 347, 387-388. In dissenting in that case on other grounds, the Justice, citing Swift, stated that an attempt may be found where the danger of harm is very great; however, “combination, intention and overt act may all be present without amounting to a criminal attempt.... There must be dangerous proximity to success.”

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Notwithstanding the array of authority contrary to Lessig, the Court of Appeals in this case reaffirmed its prior holdings; indeed, it did not mention either this Court’s decisions discussed above or the many decisions of other Courts of Appeals reaching contrary results. Respondents urge us to affirm the decision below. We are not at all inclined, however, to embrace Lessig’s interpretation of §2, for there is little if any support for it in the statute or the case law, and the notion that proof of unfair or predatory conduct alone is sufficient to make out the offense of attempted monopolization is contrary to the purpose and policy of the Sherman Act.

The Lessig opinion claimed support from the language of §2, which prohibits attempts to monopolize “any part” of commerce, and therefore forbids attempts to monopolize any appreciable segment of interstate sales of the relevant product. The “any part” clause, however, applies to charges of monopolization as well as to attempts to monopolize, and it is beyond doubt that the former requires proof of market power in a relevant market. Grinnell; DuPont.

In support of its determination that an inference of dangerous probability was permissible from a showing of intent, the Lessig opinion cited, and added emphasis to, this Court’s reference in its opinion in Swift to “intent and the consequent dangerous probability.” 327 F.2d at 474 n.46, quoting 196 U.S. at 396. But any question whether dangerous probability of success requires proof of more than intent alone should have been removed by the subsequent passage in Swift which stated that “not every act that may be done with an intent to produce an unlawful result ... constitutes an attempt. It is a question of proximity and degree.” 196 U.S. at 402. …

It is also our view that Lessig and later Ninth Circuit decisions refining and applying it are inconsistent with the policy of the Sherman Act. The purpose of the Act is not to protect businesses from the working of the market; it is to protect the public from the failure of the market. The law directs itself not against conduct which is competitive, even severely so, but against conduct which unfairly tends to destroy competition itself. It does so not out of solicitude for private concerns but out of concern for the public interest. Thus, this Court and other courts have been careful to avoid constructions of §2 which might chill competition, rather than foster it. It is sometimes difficult to distinguish robust competition from conduct with long-term anticompetitive effects; moreover, single-firm activity is unlike concerted activity covered by §1, which “inherently is fraught with anticompetitive risk.” Copperweld, 467 U.S., at 767-769. For these reasons, §2 makes the conduct of a single firm unlawful only when it actually monopolizes or dangerously threatens to do so. The concern that §2 might be applied so as to further anticompetitive ends is plainly not met by inquiring only whether the defendant has engaged in “unfair” or “predatory” tactics. Such conduct may be sufficient to prove the necessary intent to monopolize, which is something more than an intent to compete vigorously, but demonstrating the dangerous probability of monopolization in an attempt case also requires inquiry into the relevant product and geographic market and the defendant’s economic power in that market.III. We hold that petitioners may not be liable for attempted monopolization under §2 of the Sherman Act absent proof of a dangerous probability that they would monopolize a particular market and specific intent to monopolize. In this case, the trial instructions allowed the jury to infer specific intent and dangerous probability of success from the

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defendants’ predatory conduct, without any proof of the relevant market or of a realistic probability that the defendants could achieve monopoly power in that market. In this respect, the instructions misconstrued §2, as did the Court of Appeals in affirming the judgment of the District Court. Since the affirmance of the §2 judgment against petitioners rested solely on the legally erroneous conclusion that petitioners had attempted to monopolize in violation of §2 and since the jury’s verdict did not negate the possibility that the §2 verdict rested on the attempt to monopolize ground alone, the judgment of the Court of Appeals is reversed, and the case is remanded for further proceedings consistent with this opinion.

B. Dominant Firm Conduct Under §21. Refusal to Deal with Rivals

ASPEN SKIING CO. v. ASPEN HIGHLANDS SKIING CORP.472 U.S. 585 (1985)

Justice STEVENS delivered the opinion of the Court: In a private treble-damages action, the jury found that petitioner Aspen Skiing Company (Ski Co.) had monopolized the market for downhill skiing services in Aspen, Colorado. The question presented is whether … a firm with monopoly power has a duty to cooperate with its smaller rivals in a marketing arrangement…. I. Aspen is a destination ski resort…. Between 1945 and 1960, private investors independently developed three major facilities for downhill skiing: Aspen Mountain (Ajax), Aspen Highlands (Highlands), and Buttermilk. A fourth mountain, Snowmass, opened in 1967. The development of any major additional facilities is hindered by practical considerations and regulatory obstacles….

Between 1958 and 1964, three independent companies operated Ajax, Highlands, and Buttermilk. In the early years, each company offered its own day or half-day tickets for use of its mountain. In 1962, however, the three competitors also introduced an interchangeable ticket. The 6-day, all-Aspen ticket provided convenience to the vast majority of skiers who visited the resort for weekly periods, but preferred to remain flexible about what mountain they might ski each day during the visit. It also emphasized the unusual variety in ski mountains available in Aspen.

As initially designed, the all-Aspen ticket program consisted of booklets containing six coupons, each redeemable for a daily lift ticket at Ajax, Highlands, or Buttermilk. The price of the booklet was often discounted from the price of six daily tickets, but all six coupons had to be used within a limited period of time–seven days, for example. The revenues from the sale of the 3-area coupon books were distributed in accordance with the number of coupons collected at each mountain. In 1964, Buttermilk was purchased by Ski Co., but the interchangeable ticket program continued. In *most seasons after it acquired Buttermilk, Ski Co. offered 2-area, 6- or 7-day tickets featuring Ajax and Buttermilk in competition with the 3-area, 6-coupon booklet. Although it sold briskly, the all-Aspen ticket did not sell as well as Ski Co.’s multiarea ticket until Ski Co. opened Snowmass in 1967. Thereafter, the all-Aspen coupon booklet began to outsell Ski Co.’s ticket featuring only its mountains.

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In the 1971-1972 season, the coupon booklets were discontinued and an “around the neck” all-Aspen ticket was developed. This refinement on the interchangeable ticket was advantageous to the skier, who no longer found it necessary to visit the ticket window every morning before gaining access to the slopes. Lift operators at Highlands monitored usage of the ticket in the 1971-1972 season by recording the ticket numbers of persons going onto the slopes of that mountain. Highlands officials periodically met with Ski Co. officials to review the figures recorded at Highlands, and to distribute revenues based on that count.

There was some concern that usage of the all-Aspen ticket should be monitored by a more scientific method than the one used in the 1971-1972 season. After a one-season absence, the 4-area ticket returned in the 1973-1974 season with a new method of allocating revenues based on usage. Like the 1971-1972 ticket, the 1973-1974 4-area ticket consisted of a badge worn around the skier’s neck. Lift operators punched the ticket when the skier first sought access to the mountain each day. A random-sample survey was commissioned to determine how many skiers with the 4-area ticket used each mountain, and the parties allocated revenues from the ticket sales in accordance with the survey’s results. In the next four seasons, Ski Co. and Highlands used such surveys to allocate the revenues from the 4-area, 6-day ticket. Highlands’ share of the revenues from the ticket was 17.5% in 1973-1974, 18.5% in 1974-1975, 16.8% in 1975-1976, and 13.2% in 1976-1977. During these four seasons, Ski Co. did not offer its own 3-area, multi-day ticket in competition with the all-Aspen ticket. By 1977, multi-area tickets accounted for nearly 35% of the total market. ... Between 1962 and 1977, Ski Co. and Highlands had independently offered various mixes of 1-day, 3-day, and 6-day passes at their own mountains. In every season except one, however, they had also offered some form of all-Aspen, 6-day ticket, and divided the revenues from those sales on the basis of usage. Nevertheless, for the 1977-1978 season, Ski Co. offered to continue the all-Aspen ticket only if Highlands would accept a 13.2% fixed share of the ticket’s revenues.

Although that had been Highlands’ share of the ticket revenues in 1976-1977, Highlands contended that that season was an inaccurate measure of its market performance since it had been marked by unfavorable weather and an unusually low number of visiting skiers. Moreover, Highlands wanted to continue to divide revenues on the basis of actual usage, as that method of distribution allowed it to compete for the daily loyalties of the skiers who had purchased the tickets. Fearing that the alternative might be no interchangeable ticket at all, and hoping to persuade Ski Co. to reinstate the usage division of revenues, Highlands eventually accepted a fixed percentage of 15% for the 1977-1978 season. No survey was made during that season of actual usage of the 4-area ticket at the two competitors’ mountains. In the 1970’s the management of Ski Co. increasingly expressed their dislike for the all-Aspen ticket. They complained that a coupon method of monitoring usage was administratively cumbersome. They doubted the accuracy of the survey and decried the “appearance, deportment, [and] attitude” of the college students who were conducting it. In addition, Ski Co.’s president had expressed the view that the 4-area ticket was siphoning off revenues that could be recaptured by Ski Co. if the ticket was discontinued.

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In fact, Ski Co. had reinstated its 3-area, 6-day ticket during the 1977-1978 season, but that ticket had been outsold by the 4-area, 6-day ticket nearly two to one.

In March 1978, the Ski Co. management recommended to the board of directors that the 4-area ticket be discontinued for the 1978-1979 season. The board decided to offer Highlands a 4-area ticket provided that Highlands would agree to receive a 12.5% fixed percentage of the revenue–considerably below Highlands’ historical average based on usage. Later in the 1978-1979 season, a member of Ski Co.’s board of directors candidly informed a Highlands official that he had advocated making Highlands “an offer that [it] could not accept.” Finding the proposal unacceptable, Highlands suggested a distribution of the revenues based on usage to be monitored by coupons, electronic counting, or random sample surveys. If Ski Co. was concerned about who was to conduct the survey, Highlands proposed to hire disinterested ticket counters at its own expense–”somebody like Price Waterhouse”–to count or survey usage of the 4-area ticket at Highlands. Ski Co. refused to consider any counterproposals, and Highlands finally rejected the offer of the fixed percentage.

As far as Ski Co. was concerned, the all-Aspen ticket was dead. In its place Ski Co. offered the 3-area, 6-day ticket featuring only its mountains. In an effort to promote this ticket, Ski Co. embarked on a national advertising campaign that strongly implied to people who were unfamiliar with Aspen that Ajax, Buttermilk, and Snowmass were the only ski mountains in the area. … Ski Co. took additional actions that made it extremely difficult for Highlands to market its own multiarea package to replace the joint offering. Ski Co. discontinued the 3-day, 3-area pass for the 1978-1979 season,13 and also refused to sell Highlands any lift tickets, either at the tour operator’s discount or at retail. Highlands finally developed an alternative product, the “Adventure Pack,” which consisted of a 3-day pass at Highlands and three vouchers, each equal to the price of a daily lift ticket at a Ski Co. mountain. The vouchers were guaranteed by funds on deposit in an Aspen bank, and were redeemed by Aspen merchants at full value. Ski Co., however, refused to accept them. Later, Highlands redesigned the Adventure Pack to contain American Express Traveler’s Checks or money orders instead of vouchers. Ski Co. eventually accepted these negotiable instruments in exchange for daily lift tickets. Despite some strengths of the product, the Adventure Pack met considerable resistance from tour operators and consumers who had grown accustomed to the convenience and flexibility provided by the all-Aspen ticket. … Highlands’ share of the market for downhill skiing services in Aspen declined steadily after the 4-area ticket based on usage was abolished in 1977: from 20.5% in 1976-1977 … to 11% in 1980-1981. Highlands’ revenues from associated skiing services

13 Highlands’ owner explained that there was a key difference between the 3-day, 3-area ticket and the 6-day, 3-area ticket: “with the three day ticket, a person could ski on the ... Aspen Skiing Corporation mountains for three days and then there would be three days in which he could ski on our mountain; but with the six-day ticket, we are absolutely locked out of those people.” As a result of “tremendous consumer demand” for a 3-day ticket, Ski Co. reinstated it late in the 1978-1979 season, but without publicity or a discount off the daily rate.

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like the ski school, ski rentals, amateur racing events, and restaurant facilities declined sharply as well.II. In 1979, Highlands filed a complaint [alleging] that Ski Co. had monopolized the market for downhill skiing services at Aspen in violation of §2 of the Sherman Act, and prayed for treble damages. The case was tried to a jury which rendered a verdict finding Ski Co. guilty of the §2 violation and calculating Highlands’ actual damages at $2.5 million.

In her instructions to the jury, the District Judge explained that the offense of monopolization under §2 of the Sherman Act has two elements: (1) the possession of monopoly power in a relevant market, and (2) the willful acquisition, maintenance, or use of that power by anticompetitive or exclusionary means or for anticompetitive or exclusionary purposes. Although the first element was vigorously disputed at the trial and in the Court of Appeals, in this Court Ski Co. does not challenge the jury’s special verdict finding that it possessed monopoly power.20 Nor does Ski Co. criticize the trial court’s instructions to the jury concerning the second element of the §2 offense. On this element, the jury was instructed that it had to consider whether “Aspen Skiing Corporation willfully acquired, maintained, or used that power by anti-competitive or exclusionary means or for anti-competitive or exclusionary purposes.” The instructions elaborated:

In considering whether the means or purposes were anti-competitive or exclusionary, you must draw a distinction here between practices which tend to exclude or restrict competition on the one hand and the success of a business which reflects only a superior product, a well-run business, or luck, on the other. The line between legitimately gained monopoly, its proper use and maintenance, and improper conduct has been described in various ways. It has been said that obtaining or maintaining monopoly power cannot represent monopolization if the power was gained and maintained by conduct that was honestly industrial. Or it is said that monopoly power which is thrust upon a firm due to its superior business ability and efficiency does not constitute monopolization.For example, a firm that has lawfully acquired a monopoly position is not barred from taking advantage of scale economies by constructing a large and efficient factory. These benefits are a consequence of size and not an exercise of monopoly power. Nor is a corporation which possesses monopoly power under a duty to cooperate with its business rivals. Also a company which possesses monopoly power and which refuses to enter into a joint operating agreement with a competitor or otherwise refuses to deal with a competitor in some manner does not violate Section 2 if valid business reasons exist for that refusal.In other words, if there were legitimate business reasons for the refusal, then the defendant, even if he is found to possess monopoly power in a relevant market, has not violated the law. We are concerned with conduct which unnecessarily excludes or handicaps competitors. This is conduct which does not benefit consumers by making a better product or service available–or in other ways–and instead has the effect of impairing competition.

20 The jury found that the relevant product market was "[d]ownhill skiing at destination ski resorts," that the "Aspen area" was a relevant geographic submarket, and that during the years 1977-1981, Ski Co. possessed monopoly power, defined as the power to control prices in the relevant market or to exclude competitors.

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To sum up, you must determine whether Aspen Skiing Corporation gained, maintained, or used monopoly power in a relevant market by arrangements and policies which rather than being a consequence of a superior product, superior business sense, or historic element, were designed primarily to further any domination of the relevant market or sub-market.

The jury answered a specific interrogatory finding the second element of the offense as defined in these instructions.

Ski Co. filed a motion for judgment notwithstanding the verdict, contending that the evidence was insufficient to support a §2 violation as a matter of law. … The District Court denied Ski Co.’s motion and entered a judgment awarding Highlands treble damages of $7,500,000, costs and attorney’s fees. The Court of Appeals affirmed in all respects. …III. In this Court, Ski Co. contends that even a firm with monopoly power has no duty to engage in joint marketing with a competitor, that a violation of §2 cannot be established without evidence of substantial exclusionary conduct, and that none of its activities can be characterized as exclusionary. …

“The central message of the Sherman Act is that a business entity must find new customers and higher profits through internal expansion–that is, by competing successfully rather than by arranging treaties with its competitors.” U.S. v. Citizens & Southern National Bank, 422 U.S. 86, 116 (1975). Ski Co., therefore, is surely correct in submitting that even a firm with monopoly power has no general duty to engage in a joint marketing program with a competitor. Ski Co. is quite wrong, however, in suggesting that the judgment in this case rests on any such proposition of law. For the trial court unambiguously instructed the jury that a firm possessing monopoly power has no duty to cooperate with its business rivals.

The absence of an unqualified duty to cooperate does not mean that every time a firm declines to participate in a particular cooperative venture, that decision may not have evidentiary significance, or that it may not give rise to liability in certain circumstances. The absence of a duty to transact business with another firm is, in some respects, merely the counterpart of the independent businessman’s cherished right to select his customers and his associates. The high value that we have placed on the right to refuse to deal with other firms does not mean that the right is unqualified.27

In Lorain Journal Co. v. U.S., 342 U.S. 143 (1951), we squarely held that this right was not unqualified. Between 1933 and 1948 the publisher of the Lorain Journal, a newspaper, was the only local business disseminating news and advertising in that Ohio town. In 1948, a small radio station was established in a nearby community. In an effort to destroy its small competitor, and thereby regain its “pre-1948 substantial monopoly over the mass dissemination of all news and advertising,” the Journal refused to sell advertising to persons that patronized the radio station.

In holding that this conduct violated §2 of the Sherman Act, the Court dispatched the same argument raised by the monopolist here:

27 Under §1 of the Sherman Act, a business “generally has a right to deal, or refuse to deal, with whomever it likes, as long as it does so independently.” Monsanto; Colgate.

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The publisher claims a right as a private business concern to select its customers and to refuse to accept advertisements from whomever it pleases. We do not dispute that general right. ‘But the word “right” is one of the most deceptive of pitfalls; it is so easy to slip from a qualified meaning in the premise to an unqualified one in the conclusion. … The right claimed by the publisher is neither absolute nor exempt from regulation. Its exercise as a purposeful means of monopolizing interstate commerce is prohibited by the Sherman Act. The operator of the radio station, equally with the publisher of the newspaper, is entitled to the protection of that Act. ‘In the absence of any purpose to create or maintain a monopoly, the act does not restrict the long recognized right of trader or manufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal.’ … U.S. v. Colgate & Co., 250 U.S. 300, 307.

The Court approved the entry of an injunction ordering the Journal to print the advertisements of the customers of its small competitor. …

The qualification on the right of a monopolist to deal with whom he pleases is not so narrow that it encompasses no more than the circumstances of Lorain Journal. In the actual case that we must decide, the monopolist did not merely reject a novel offer to participate in a cooperative venture that had been proposed by a competitor. Rather, the monopolist elected to make an important change in a pattern of distribution that had originated in a competitive market and had persisted for several years. The all-Aspen, 6-day ticket with revenues allocated on the basis of usage was first developed when three independent companies operated three different ski mountains in the Aspen area. It continued to provide a desirable option for skiers when the market was enlarged to include four mountains, and when the character of the market was changed by Ski Co.’s acquisition of monopoly power. Moreover, since the record discloses that interchangeable tickets are used in other multi-mountain areas which apparently are competitive, it seems appropriate to infer that such tickets satisfy consumer demand in free competitive markets.

Ski Co.’s decision to terminate the all-Aspen ticket was thus a decision by a monopolist to make an important change in the character of the market.31 Such a decision is not necessarily anticompetitive, and Ski Co. contends that neither its decision, nor the conduct in which it engaged to implement that decision, can fairly be characterized as exclusionary in this case. It recognizes, however, that as the case is presented to us, we must interpret the entire record in the light most favorable to Highlands and give to it the benefit of all inferences which the evidence fairly supports, even though contrary inferences might reasonably be drawn.

3 1 In any business, patterns of distribution develop over time; these may reasonably be thought to be more efficient than alternative patterns of distribution that do not develop. The patterns that do develop and persist we may call the optimal patterns. By disturbing optimal distribution patterns one rival can impose costs upon another, that is, force the other to accept higher costs.

BORK, ANTITRUST REVOLUTION 156.

In §1 cases where this Court has applied the per se approach to invalidity to concerted refusals to deal, “the boycott often cut off access to a supply, facility or market necessary to enable the boycotted firm to compete, ... and frequently the boycotting firms possessed a dominant position in the relevant market.” Northwest Wholesale Stationers.

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Moreover, we must assume that the jury followed the court’s instructions. The jury must, therefore, have drawn a distinction “between practices which tend to exclude or restrict competition on the one hand, and the success of a business which reflects only a superior product, a well-run business, or luck, on the other.” Since the jury was unambiguously instructed that Ski Co.’s refusal to deal with Highlands “does not violate Section 2 if valid business reasons exist for that refusal,” we must assume that the jury concluded that there were no valid business reasons for the refusal. The question then is whether that conclusion finds support in the record.IV. The question whether Ski Co.’s conduct may properly be characterized as exclusionary cannot be answered by simply considering its effect on Highlands. In addition, it is relevant to consider its impact on consumers and whether it has impaired competition in an unnecessarily restrictive way.32 If a firm has been “attempting to exclude rivals on some basis other than efficiency,” [R. BORK, THE ANTITRUST PARADOX 138 (1978)] it is fair to characterize its behavior as predatory. It is, accordingly, appropriate to examine the effect of the challenged pattern of conduct on consumers, on Ski Co.’s smaller rival, and on Ski Co. itself.

Superior Quality of the All-Aspen Ticket. The average Aspen visitor “is a well-educated, relatively affluent, experienced skier who has skied a number of times in the past....” Over 80% of the skiers visiting the resort each year have been there before–40% of these repeat visitors have skied Aspen at least five times. Over the years, they developed a strong demand for the 6-day, all-Aspen ticket in its various refinements. Most experienced skiers quite logically prefer to purchase their tickets at once for the whole period that they will spend at the resort; they can then spend more time on the slopes and enjoying apres-ski amenities and less time standing in ticket lines. The 4-area attribute of the ticket allowed the skier to purchase his 6-day ticket in advance while reserving the right to decide in his own time and for his own reasons which mountain he would ski on each day. It provided convenience and flexibility, and expanded the vistas and the number of challenging runs available to him during the week’s vacation.34

32 “Thus, ‘exclusionary’ comprehends at the most behavior that not only (1) tends to impair the opportunities of rivals, but also (2) either does not further competition on the merits or does so in an unnecessarily restrictive way.” 3 P. AREEDA & D. TURNER, ANTITRUST LAW 78 (1978).

34 Highlands’ expert marketing witness testified that visitors to the Aspen resort

are looking for a variety of skiing experiences, partly because they are going to be there for a week and they are going to get bored if they ski in one area for very long; and also they come with people of varying skills. They need some variety of slopes so that if they want to go out and ski the difficult areas, their spouses or their buddies who are just starting out skiing can go on the bunny hill or the not-so-difficult slopes.

The owner of a condominium management company added:

The guest is coming for a first-class destination ski experience, and part of that, I think, is the expectation of perhaps having available to him the ability to ski all of what is there; i.e., four mountains vs. three mountains. It helps enhance the quality of the vacation experience.

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While the 3-area, 6-day ticket offered by Ski Co. possessed some of these attributes, the evidence supports a conclusion that consumers were adversely affected by the elimination of the 4-area ticket. In the first place, the actual record of competition between a 3-area ticket and the all-Aspen ticket in the years after 1967 indicated that skiers demonstrably preferred four mountains to three. Highlands’ expert marketing witness testified that many of the skiers who come to Aspen want to ski the four mountains, and the abolition of the 4-area pass made it more difficult to satisfy that ambition. A consumer survey undertaken in the 1979-1980 season indicated that 53.7% of the respondents wanted to ski Highlands, but would not; 39.9% said that they would not be skiing at the mountain of their choice because their ticket would not permit it.

Expert testimony and anecdotal evidence supported these statistical measures of consumer preference. A major wholesale tour operator asserted that he would not even consider marketing a 3-area ticket if a 4-area ticket were available. During the 1977-1978 and 1978-1979 seasons, people with Ski Co.’s 3-area ticket came to Highlands “on a very regular basis” and attempted to board the lifts or join the ski school.36 Highlands officials were left to explain to angry skiers that they could only ski at Highlands or join its ski school by paying for a 1-day lift ticket. Even for the affluent, this was an irritating situation because it left the skier the option of either wasting 1 day of the 6-day, 3-area pass or obtaining a refund which could take all morning and entailed the forfeit of the 6-day discount. An active officer in the Atlanta Ski Club testified that the elimination of the 4-area pass “infuriated” him.

Highlands’ Ability to Compete. The adverse impact of Ski Co.’s pattern of conduct on Highlands is not disputed in this Court. Expert testimony described the extent of its pecuniary injury. The evidence concerning its attempt to develop a substitute product either by buying Ski Co.’s daily tickets in bulk, or by marketing its own Adventure Pack, demonstrates that it tried to protect itself from the loss of its share of the patrons of the all-Aspen ticket. The development of a new distribution system for providing the experience that skiers had learned to expect in Aspen proved to be prohibitively expensive. As a result, Highlands’ share of the relevant market steadily declined after the 4-area ticket was terminated. The size of the damages award also confirms the substantial character of the effect of Ski Co.’s conduct upon Highlands.38

Ski Co.’s Business Justification. Perhaps most significant, however, is the evidence relating to Ski Co. itself, for Ski Co. did not persuade the jury that its conduct

36 For example, the marketing director of Highlands’ ski school reported that one frustrated consumer was a dentist from

the Des Moines area [who] came out with two of his children, and he had been told by our base lift operator that he could not board. He became somewhat irate and she had referred him to my office, which is right there on the ski slopes. He came into my office and started out, ‘Well, I want to go skiing here, and I don’t understand why I can’t.’ When we got the situation slowed down and explained that there were two different tickets, well, what came out is irritation occurred because he had intended when he came to Aspen to be able to ski all areas....

38 In considering the competitive effect of Ski Co.’s refusal to deal or cooperate with Highlands, it is not irrelevant to note that similar conduct carried out by the concerted action of three independent rivals with a similar share of the market would constitute a per se violation of §1….

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was justified by any normal business purpose. Ski Co. was apparently willing to forgo daily ticket sales both to skiers who sought to exchange the coupons contained in Highlands’ Adventure Pack, and to those who would have purchased Ski Co. daily lift tickets from Highlands if Highlands had been permitted to purchase them in bulk. The jury may well have concluded that Ski Co. elected to forgo these short-run benefits because it was more interested in reducing competition in the Aspen market over the long run by harming its smaller competitor.

That conclusion is strongly supported by Ski Co.’s failure to offer any efficiency justification whatever for its pattern of conduct. In defending the decision to terminate the jointly offered ticket, Ski Co. claimed that usage could not be properly monitored. The evidence, however, established that Ski Co. itself monitored the use of the 3-area passes based on a count taken by lift operators, and distributed the revenues among its mountains on that basis. Ski Co. contended that coupons were administratively cumbersome, and that the survey takers had been disruptive and their work inaccurate. Coupons, however, were no more burdensome than the credit cards accepted at Ski Co. ticket windows. Moreover, in other markets Ski Co. itself participated in interchangeable lift tickets using coupons. As for the survey, its own manager testified that the problems were much overemphasized by Ski Co. officials, and were mostly resolved as they arose. Ski Co.’s explanation for the rejection of Highlands’ offer to hire–at its own expense–a reputable national accounting firm to audit usage of the 4-area tickets at Highlands’ mountain, was that there was no way to “control” the audit. In the end, Ski Co. was pressed to justify its pattern of conduct on a desire to disassociate itself from what it considered the inferior skiing services offered at Highlands. The all-Aspen ticket based on usage, however, allowed consumers to make their own choice on these matters of quality. Ski Co.’s purported concern for the relative quality of Highlands’ product was supported in the record by little more than vague insinuations, and was sharply contested by numerous witnesses. Moreover, Ski Co. admitted that it was willing to associate with what it considered to be inferior products in other markets.

… [T]he record in this case comfortably supports an inference that the monopolist made a deliberate effort to discourage its customers from doing business with its smaller rival. The sale of its 3-area, 6-day ticket, particularly when it was discounted below the daily ticket price, deterred the ticket holders from skiing at Highlands. The refusal to accept the Adventure Pack coupons in exchange for daily tickets was apparently motivated entirely by a decision to avoid providing any benefit to Highlands even though accepting the coupons would have entailed no cost to Ski Co. itself, would have provided it with immediate benefits, and would have satisfied its potential customers. Thus the evidence supports an inference that Ski Co. was not motivated by efficiency concerns and that it was willing to sacrifice short-run benefits and consumer goodwill in exchange for a perceived long-run impact on its smaller rival. Because we are satisfied that the evidence in the record, construed most favorably in support of Highlands’ position, is adequate to support the verdict under the instructions given by the trial court, the judgment of the Court of Appeals is Affirmed.

$ $ $ $ $ $ $

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LAW OFFICES OF CURTIS v. TRINKO540 U.S. 398 (2004)

SCALIA, J., delivered the opinion of the Court. … Petitioner Verizon Communications Inc. is the incumbent local exchange carrier (LEC) serving New York State. Before the 1996 Act, Verizon, like other incumbent LECs, enjoyed an exclusive franchise within its local service area. The 1996 Act sought to “uproo[t]” the incumbent LECs’ monopoly and to introduce competition in its place. Central to the scheme of the Act is the incumbent LEC’s obligation under 47 U.S.C. §251(c) to share its network with competitors, including provision of access to individual elements of the network on an “unbundled” basis. New entrants, so-called competitive LECs, resell these unbundled network elements (UNEs), recombined with each other or with elements belonging to the LECs.

Verizon, like other incumbent LECs, has taken two significant steps within the Act’s framework in the direction of increased competition. First, Verizon has signed interconnection agreements with rivals such as AT&T, as it is obliged to do under §252, detailing the terms on which it will make its network elements available. (Because Verizon and AT&T could not agree upon terms, the open issues were subjected to compulsory arbitration under §§252(b) and (c).) In 1997, the state regulator, New York’s Public Service Commission (PSC), approved Verizon’s interconnection agreement with AT&T.

Second, Verizon has taken advantage of the opportunity provided by the 1996 Act for incumbent LECs to enter the long-distance market (from which they had long been excluded). That required Verizon to satisfy, among other things, a 14-item checklist of statutory requirements, which includes compliance with the Act’s network-sharing duties. Checklist item two, for example, includes “nondiscriminatory access to network elements in accordance with the requirements” of §251(c)(3). Whereas the state regulator approves an interconnection agreement, for long-distance approval the incumbent LEC applies to the Federal Communications Commission (FCC). In December 1999, the FCC approved Verizon’s [long-distance] application for New York..

Part of Verizon’s UNE obligation under §251(c)(3) is the provision of access to operations support systems (OSS), a set of systems used by incumbent LECs to provide services to customers and ensure quality. Verizon’s interconnection agreement and long-distance authorization each specified the mechanics by which its OSS obligation would be met. As relevant here, a competitive LEC sends orders for service through an electronic interface with Verizon’s ordering system, and as Verizon completes certain steps in filling the order, it sends confirmation back through the same interface. Without OSS access a rival cannot fill its customers’ orders.

In late 1999, competitive LECs complained to regulators that many orders were going unfilled, in violation of Verizon’s obligation to provide access to OSS functions. The PSC and FCC opened parallel investigations, which led to a series of orders by the PSC and a consent decree with the FCC. Under the FCC consent decree, Verizon undertook to make a “voluntary contribution” to the U.S. Treasury in the amount of $3 million; under the PSC orders, Verizon incurred liability to the competitive LECs in the amount of $10 million. Under the consent decree and orders, Verizon was subjected to new performance measurements and new reporting requirements …, with additional

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penalties for continued noncompliance. In June 2000, the FCC terminated the consent decree. The next month the PSC relieved Verizon of the heightened reporting requirement.

Respondent Law Offices of Curtis V. Trinko, LLP, a New York City law firm, was a local telephone service customer of AT&T. The day after Verizon entered its consent decree with the FCC, respondent filed a complaint in the District Court for the Southern District of New York, on behalf of itself and a class of similarly situated customers. The complaint, as later amended, alleged that Verizon had filled rivals’ orders on a discriminatory basis as part of an anticompetitive scheme to discourage customers from becoming or remaining customers of competitive LECs, thus impeding the competitive LECs’ ability to enter and compete in the market for local telephone service. … The complaint set forth a single example of the alleged “failure to provide adequate access to [competitive LECs],” namely the OSS failure that resulted in the FCC consent decree and PSC orders. It asserted that the result of Verizon’s improper “behavior with respect to providing access…” was to “deter potential customers [of rivals] from switching.” The complaint sought damages and injunctive relief for violation of §2 of the Sherman Act…. The complaint also alleged violations of the 1996 Act, §202(a) of the Communications Act of 1934, and state law.

The District Court dismissed the complaint in its entirety. … The Court of Appeals for the Second Circuit reinstated the complaint in part, including the antitrust claim. We granted certiorari, limited to the question whether the Court of Appeals erred in reversing the District Court’s dismissal of respondent’s antitrust claims.

To decide this case, we must first determine what effect (if any) the 1996 Act has upon the application of traditional antitrust principles. …[A] detailed regulatory scheme such as that created by the 1996 Act ordinarily raises the question whether the regulated entities are not shielded from antitrust scrutiny altogether by the doctrine of implied immunity. … Congress, however, precluded that interpretation. Section 601(b)(1) of the 1996 Act is an antitrust-specific saving clause providing that “nothing in this Act or the amendments made by this Act shall be construed to modify, impair, or supersede the applicability of any of the antitrust laws.” This bars a finding of implied immunity. … But just as the 1996 Act preserves claims that satisfy existing antitrust standards, it does not create new claims that go beyond existing antitrust standards; that would be equally inconsistent with the saving clause’s mandate that nothing in the Act “modify, impair, or supersede the applicability” of the antitrust laws. We turn, then, to whether the activity of which respondent complains violates preexisting antitrust standards.

III. The complaint alleges that Verizon denied interconnection services to rivals in order to limit entry. If that allegation states an antitrust claim at all, it does so under §2 of the Sherman Act, which declares that a firm shall not “monopolize” or “attempt to monopolize.” It is settled law that this offense requires, in addition to the possession of monopoly power in the relevant market, “the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.” Grinnell. The mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system. The opportunity to charge monopoly prices--at least for a short period--is what attracts “business acumen” in the

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first place; it induces risk taking that produces innovation and economic growth. To safeguard the incentive to innovate, the possession of monopoly power will not be found unlawful unless it is accompanied by an element of anticompetitive conduct.

Firms may acquire monopoly power by establishing an infrastructure that renders them uniquely suited to serve their customers. Compelling such firms to share the source of their advantage is in some tension with the underlying purpose of antitrust law, since it may lessen the incentive for the monopolist, the rival, or both to invest in those economically beneficial facilities. Enforced sharing also requires antitrust courts to act as central planners, identifying the proper price, quantity, and other terms of dealing--a role for which they are ill-suited. Moreover, compelling negotiation between competitors may facilitate the supreme evil of antitrust: collusion. Thus, as a general matter, the Sherman Act “does not restrict the long recognized right of [a] trader or manufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal.” Colgate.

However, “[t]he high value that we have placed on the right to refuse to deal with other firms does not mean that the right is unqualified.” Aspen Skiing. Under certain circumstances, a refusal to cooperate with rivals can constitute anticompetitive conduct and violate §2. We have been very cautious in recognizing such exceptions, because of the uncertain virtue of forced sharing and the difficulty of identifying and remedying anticompetitive conduct by a single firm. The question before us today is whether the allegations of respondent’s complaint fit within existing exceptions or provide a basis, under traditional antitrust principles, for recognizing a new one.

The leading case for §2 liability based on refusal to cooperate with a rival … is Aspen Skiing. … Aspen Skiing is at or near the outer boundary of §2 liability. The Court there found significance in the defendant’s decision to cease participation in a cooperative venture. The unilateral termination of a voluntary (and thus presumably profitable) course of dealing suggested a willingness to forsake short-term profits to achieve an anticompetitive end. Similarly, the defendant’s unwillingness to renew the ticket even if compensated at retail price revealed a distinctly anticompetitive bent.

The refusal to deal alleged in the present case does not fit within the limited exception recognized in Aspen Skiing. The complaint does not allege that Verizon voluntarily engaged in a course of dealing with its rivals, or would ever have done so absent statutory compulsion. Here, therefore, the defendant’s prior conduct sheds no light upon the motivation of its refusal to deal--upon whether its regulatory lapses were prompted not by competitive zeal but by anticompetitive malice. The contrast between the cases is heightened by the difference in pricing behavior. In Aspen Skiing, the defendant turned down a proposal to sell at its own retail price, suggesting a calculation that its future monopoly retail price would be higher. Verizon’s reluctance to interconnect at the cost-based rate of compensation available under §251(c)(3) tells us nothing about dreams of monopoly.

The specific nature of what the 1996 Act compels makes this case different from Aspen Skiing in a more fundamental way. In Aspen Skiing, what the defendant refused to provide to its competitor was a product that it already sold at retail--to oversimplify slightly, lift tickets representing a bundle of services to skiers. Similarly, in Otter Tail,

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another case relied upon by respondent, the defendant was already in the business of providing a service to certain customers (power transmission over its network), and refused to provide the same service to certain other customers. In the present case, by contrast, the services allegedly withheld are not otherwise marketed or available to the public. The sharing obligation imposed by the 1996 Act created “something brand new”--”the wholesale market for leasing network elements.” The unbundled elements offered pursuant to §251(c)(3) exist only deep within the bowels of Verizon; they are brought out on compulsion of the 1996 Act and offered not to consumers but to rivals, and at considerable expense and effort. New systems must be designed and implemented simply to make that access possible--indeed, it is the failure of one of those systems that prompted the present complaint. 3

We conclude that Verizon’s alleged insufficient assistance in the provision of service to rivals is not a recognized antitrust claim under this Court’s existing refusal-to-deal precedents. This conclusion would be unchanged even if we considered to be established law the “essential facilities” doctrine crafted by some lower courts, under which the Court of Appeals concluded respondent’s allegations might state a claim. See generally Areeda, Essential Facilities: An Epithet in Need of Limiting Principles, 58 Antitrust L.J. 841 (1989). We have never recognized such a doctrine and we find no need either to recognize it or to repudiate it here. It suffices for present purposes to note that the indispensable requirement for invoking the doctrine is the unavailability of access to the “essential facilities”; where access exists, the doctrine serves no purpose. Thus, it is said that “essential facility claims should ... be denied where a state or federal agency has effective power to compel sharing and to regulate its scope and terms.” P. AREEDA & H. HOVENKAMP, ANTITRUST LAW, p. 150, ¶773e (2003 Supp.). Respondent believes that the existence of sharing duties under the 1996 Act supports its case. We think the opposite: The 1996 Act’s extensive provision for access makes it unnecessary to impose a judicial doctrine of forced access. To the extent respondent’s “essential facilities” argument is distinct from its general §2 argument, we reject it.

IV. Finally, we do not believe that traditional antitrust principles justify adding the present case to the few existing exceptions from the proposition that there is no duty to aid competitors. Antitrust analysis must always be attuned to the particular structure and circumstances of the industry at issue. … One factor of particular importance is the existence of a regulatory structure designed to deter and remedy anticompetitive harm. Where such a structure exists, the additional benefit to competition provided by antitrust enforcement will tend to be small, and it will be less plausible that the antitrust laws contemplate such additional scrutiny. Where, by contrast, “[t]here is nothing built into the regulatory scheme which performs the antitrust function,” Silver v. New York Stock Exchange, 373 U.S. 341, 358 (1963), the benefits of antitrust are worth its sometimes considerable disadvantages. …

3 Respondent also relies upon United States v. Terminal Railroad Assn. of St. Louis, 224 U.S. 383 (1912), and Associated Press v. United States, 326 U.S. 1 (1945). These cases involved concerted action, which presents greater anticompetitive concerns and is amenable to a remedy that does not require judicial estimation of free-market forces: simply requiring that the outsider be granted nondiscriminatory admission to the club.

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[Here, the regulatory scheme includes] statutory restrictions upon Verizon’s entry into the potentially lucrative market for long-distance service. To be allowed to enter the long-distance market in the first place, an incumbent LEC must be on good behavior in its local market. Authorization by the FCC requires state-by-state satisfaction of §271’s competitive checklist, which as we have noted includes the nondiscriminatory provision of access to UNEs. …

The FCC’s §271 authorization order for Verizon to provide long-distance service in New York discussed at great length Verizon’s commitments to provide access to UNEs, including the provision of OSS. Those commitments are enforceable by the FCC through continuing oversight; a failure to meet an authorization condition can result in an order that the deficiency be corrected, in the imposition of penalties, or in the suspension or revocation of long-distance approval. Verizon also subjected itself to oversight by the PSC under a so-called “Performance Assurance Plan” (PAP). The PAP… provides specific financial penalties in the event of Verizon’s failure to achieve detailed performance requirements. …

The regulatory response to the OSS failure complained of in respondent’s suit provides a vivid example of how the regulatory regime operates. When several competitive LECs complained about deficiencies in Verizon’s servicing of orders, the FCC and PSC responded. The FCC soon concluded that Verizon was in breach of its sharing duties under §251(c), imposed a substantial fine, and set up sophisticated measurements to gauge remediation, with weekly reporting requirements and specific penalties for failure. The PSC found Verizon in violation of the PAP even earlier, and imposed additional financial penalties and measurements with daily reporting requirements. In short, the regime was an effective steward of the antitrust function.

Against the slight benefits of antitrust intervention here, we must weigh a realistic assessment of its costs. Under the best of circumstances, applying the requirements of §2 “can be difficult” because “the means of illicit exclusion, like the means of legitimate competition, are myriad.” United States v. Microsoft Corp., 253 F.3d 34, 58 (C.A.D.C.2001) (en banc) (per curiam). Mistaken inferences and the resulting false condemnations “are especially costly, because they chill the very conduct the antitrust laws are designed to protect.” Matsushita. The cost of false positives counsels against an undue expansion of §2 liability. One false-positive risk is that an incumbent LEC’s failure to provide a service with sufficient alacrity might have nothing to do with exclusion. Allegations of violations of §251(c)(3) duties are difficult for antitrust courts to evaluate, not only because they are highly technical, but also because they are likely to be extremely numerous, given the incessant, complex, and constantly changing interaction of competitive and incumbent LECs implementing the sharing and interconnection obligations. … Judicial oversight under the Sherman Act would seem destined to distort investment and lead to a new layer of interminable litigation, atop the variety of litigation routes already available to and actively pursued by competitive LECs.

Even if the problem of false positives did not exist, conduct consisting of anticompetitive violations of §251 may be, as we have concluded with respect to above-cost predatory pricing schemes, “beyond the practical ability of a judicial tribunal to control.” Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 223

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(1993). Effective remediation of violations of regulatory sharing requirements will ordinarily require continuing supervision of a highly detailed decree. We think that Professor Areeda got it exactly right: “No court should impose a duty to deal that it cannot explain or adequately and reasonably supervise. The problem should be deemed irremedia[ble] by antitrust law when compulsory access requires the court to assume the day-to-day controls characteristic of a regulatory agency.” Areeda, 58 Antitrust L. J., at 853. In this case, respondent has requested an equitable decree to “[p]reliminarily and permanently enjoi[n] [Verizon] from providing access to the local loop market ... to [rivals] on terms and conditions that are not as favorable” as those that Verizon enjoys. An antitrust court is unlikely to be an effective day-to-day enforcer of these detailed sharing obligations.4

The 1996 Act is in an important respect much more ambitious than the antitrust laws. It attempts “to eliminate the monopolies enjoyed by the inheritors of AT&T’s local franchises.” Verizon Communications Inc. v. FCC, 535 U.S., at 476 (emphasis added). Section 2 of the Sherman Act, by contrast, seeks merely to prevent unlawful monopolization. It would be a serious mistake to conflate the two goals. The Sherman Act is indeed the “Magna Carta of free enterprise,” Topco, but it does not give judges carte blanche to insist that a monopolist alter its way of doing business whenever some other approach might yield greater competition. We conclude that respondent’s complaint fails to state a claim under the Sherman Act.5 …

Justice STEVENS, with whom Justice SOUTER and Justice THOMAS join, concurring in the judgment. In complex cases it is usually wise to begin by deciding whether the plaintiff has standing to maintain the action. Respondent, the plaintiff in this case, is a local telephone service customer of AT&T. Its complaint alleges that it has received unsatisfactory service because Verizon has engaged in conduct that adversely affects AT&T’s ability to serve its customers, in violation of §2 of the Sherman Act. Respondent seeks from Verizon treble damages, a remedy that §4 of the Clayton Act makes available to “any person who has been injured in his business or property.” The threshold question presented by the complaint is whether, assuming the truth of its allegations, respondent is a “person” within the meaning of §4.

Respondent would unquestionably be such a “person” if we interpreted the text of the statute literally. But we have eschewed a literal reading of §4, particularly in cases in which there is only an indirect relationship between the defendant’s alleged misconduct and the plaintiff’s asserted injury. Associated Gen. Contractors of Cal., Inc. v. Carpenters, 459 U.S. 519, 529-535 (1983). In such cases, “the importance of avoiding either the risk of duplicate recoveries on the one hand, or the danger of complex apportionment of damages on the other,” weighs heavily against a literal reading of §4.

4 The Court of Appeals also thought that respondent’s complaint might state a claim under a “monopoly leveraging” theory (a theory barely discussed by respondent). We disagree. To the extent the Court of Appeals dispensed with a requirement that there be a “dangerous probability of success” in monopolizing a second market, it erred, Spectrum Sports. In any event, leveraging presupposes anticompetitive conduct, which in this case could only be the refusal-to-deal claim we have rejected.5 Our disposition makes it unnecessary to consider petitioner’s alternative contention that respondent lacks antitrust standing.

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Id., at 543-544. Our interpretation of §4 has thus adhered to Justice Holmes’ observation that the “general tendency of the law, in regard to damages at least, is not to go beyond the first step.” Southern Pacific Co. v. Darnell-Taenzer Lumber Co., 245 U.S. 531, 533 (1918).

I would not go beyond the first step in this case. Although respondent contends that its injuries were, like the plaintiff’s injuries in Blue Shield of Va. v. McCready, 457 U.S. 465, 479 (1982), “the very means by which ... [Verizon] sought to achieve its illegal ends,” it remains the case that whatever antitrust injury respondent suffered because of Verizon’s conduct was purely derivative of the injury that AT&T suffered. And for that reason, respondent’s suit, unlike McCready, runs both the risk of duplicative recoveries and the danger of complex apportionment of damages. The task of determining the monetary value of the harm caused to respondent by AT&T’s inferior service, the portion of that harm attributable to Verizon’s misconduct, whether all or just some of such possible misconduct was prohibited by the Sherman Act, and what offset, if any, should be allowed to make room for a recovery that would make AT&T whole, is certain to be daunting. AT&T, as the direct victim of Verizon’s alleged misconduct, is in a far better position than respondent to vindicate the public interest in enforcement of the antitrust laws. Denying a remedy to AT&T’s customer is not likely to leave a significant antitrust violation undetected or unremedied, and will serve the strong interest “in keeping the scope of complex antitrust trials within judicially manageable limits.” Associated Gen. Contractors, 459 U.S., at 543.

In my judgment, our reasoning in Associated General Contractors requires us to reverse the judgment of the Court of Appeals. I would not decide the merits of the §2 claim unless and until such a claim is advanced by either AT&T or a similarly situated competitive local exchange carrier.

$ $ $ $ $ $ $Lower Court Refusal to Deal Cases Under §2

(1) Twin Labs (2d Cir. 1990): P & D both sell mineral supplements for muscle-builders (no market power) and muscle magazines (D has market power). D stops allowing P to advertise P’s supplements in D’s magazines.

A. No violation because P lost no market share after the ads stopped running, so there was no evidence of harm.

B. Court not asked to address whether the mere attempt to utilize market power by monopolist, whether or not effective, could violate the statute.

(2) Zschaler (D. Vermont 1997): P & D compete in providing rental accomodations near a popular ski resort. D also runs an 800 number providing information to tourists about accomodations in the area. The court allowed P’s §2 claim to go to trial where Ps proffered evidence that 80% of the reservations in the area were made through the 800 number and that the Ds had stated that they would steer callers to their own units first.

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(3) Virginia Vermiculite (W.D. Virginia 1997): 2 major processors of Vermiculite

A. D has 57% of market; P has 23%. D has substantial holdings allegedly containing 40% of known vermiculite. P offers to purchase, but instead D donates to a non-profit organization whose stated purpose is to prevent the mining of vermiculite in the area. D gets big tax deduction and vermiculite supply is severely limited.

B. Trial Court holds these allegations state §2 cause of action for attempting to give D monopoly power by excluding P from the supply of the mineral.

C. D claim that tax benefits provided a legitimate business reason for donation is a fact question that can’t be settled on a 12(b)(6) motion.

2. Predatory Pricing and Bidding Introduction to Predatory Conduct

I. Overview of Predation & Predatory PricingA. Predation is conduct by a monopolist that involves incurring short term losses intending to

1. drive out or deter a potential competitor AND2. subsequently recoup the losses by earning monopoly profits

B. Thus, predatory pricing is keeping prices artificially low to drive competitors out of market, intending to reap high profits with monopoly prices afterward

C. Unclear empirically how often happens; most plausible for multi-market playersD. Concerns with aggressive attacks on monopolist prices that appear predatory:

1. We don't want to discourage low prices2. Theoretical argument: Unlikely b/c very risky strategy

a. High Entry Barriers: rival will stay long timeb. Low barriers: rivals come back as soon as raise prices to monopoly level

3. Failed predatory pricing strategy helps consumers (cf. failed cartel)II. Supreme Court on Predatory Pricing

A. No §2 cases, so info from horizontal conspiracy cases: 1. Matsushita: Alleged agreement by Japanese electronics firms to drive out American firms2. Brown & Williamson: Alleged use of predatory pricing as cartel enforcement mechanism3. Language suggests gen’l applicability to all predatory pricing claims

a. Court displays skepticism about likelihood, but willing to allow claim if enough evidenceb. Two Necessary Elements

i) Price below appropriate measure of costii) Dangerous probability of recoupment

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B. Price below appropriate measure of cost1. SCt hasn’t specified2. E.g., “Areeda/Turner Test”: below AVC pricing only3. Leaves open what to do about “limit pricing”

a. above marginal cost, but below monopoly profit-maxb. low enough to scare off most likely entrant

C. Dangerous probability of recoupment (from Brown & Williamson)1. w/o recoupment, aggregate benefit to consumers.2. must show capable of having effect on intended target 3. then show objective evidence of likely rise in prices sufficient to recoup

a. evidence of actual supra-competitive prices in market –OR-b. market evidence that conduct likely to have led to monopoly/oligopoly pricing

4. subjective belief insufficient b/c without recoupment, consumers not harmed.D. Last word: Weyerhaeuser (U.S. 2007): Predatory Bidding claim

1. D runs sawmills & has dominant market position in region2. Claim: predatory bidding

a. using monopsony power to drive up prices of logs above what competitors could affordb. predatory b/c losing money in short run by paying too much with intent to recoup when competitors gone

3. Court says analytically like predatory pricing, so Brown & Williamson standards apply

$ $ $ $ $ $ $BARRY WRIGHT CORP. v. ITT GRINNELL CORP.

724 F.2d 227 (1st Cir. 1983)

BREYER, Circuit Judge: The question that this case presents is whether defendant Pacific Scientific Company (“Pacific”) engaged in “exclusionary practices” in violation of … Sherman Act §2. The practices at issue are embodied in agreements between Pacific and ITT Grinnell (“Grinnell”), under which Pacific agreed to sell its product (mechanical snubbers) to Grinnell at a specially low price … The district court found that the relevant contract provisions did not violate the antitrust laws. We agree with the district court on this matter… and we affirm its judgment.

I. … Pacific produces mechanical snubbers; they are shock absorbers used in building pipe systems for nuclear power plants. No other domestic firm makes mechanical snubbers; foreign mechanical snubbers do not satisfy Nuclear Regulatory Commission standards; and snubber users have found the closest substitute, namely, hydraulic snubbers, to be less reliable than the mechanical version. …

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Grinnell makes and installs nuclear plant pipe systems; it is a major snubber user. … By 1976, most of Grinnell’s pipe system customers were requiring Grinnell to use mechanical snubbers. Recognizing Pacific’s strong market position, Grinnell sought to develop an alternate mechanical snubber source. Hence, it entered into a contract with Barry Wright Corporation (“Barry”), the plaintiff here, under which it would help Barry develop a full mechanical snubber line. Grinnell agreed to contribute to Barry’s development costs. It also agreed to use Barry as an exclusive source of supply between 1977 and 1979…. Barry was to have its full line of six snubber sizes in production by the first quarter of 1977.

While waiting for Barry, Grinnell satisfied its current needs by buying mechanical snubbers from Pacific at Pacific’s ordinary “discount” price–20 percent below list. Pacific noticed that Grinnell’s orders seemed small in relation to its likely needs. And, by September, 1976, Pacific realized that Grinnell was trying to develop its own supply source through Barry. In August, 1976, Pacific offered Grinnell a special price break–a 30 percent discount from list for small snubbers, 25 percent for larger ones–in return for a large $5.7 million order that would have met Grinnell’s snubber needs through 1977. Grinnell, after tentatively accepting this proposal, consulted with Barry and then rejected Pacific’s offer. Instead, it placed a smaller $1 million order at the standard 20 percent discount.

Barry could not meet the required January, 1977 production schedule. By mid-January, 1977, it told Grinnell that it would not be able to produce small snubbers until August, 1977 nor large ones until February, 1978. Grinnell then met with Pacific and (at the end of January, 1977) negotiated a $4.3 million snubber contract–enough snubbers to meet Grinnell’s estimated needs for the next twelve months. Pacific gave Grinnell the large 30 percent/25 percent discounts. …

Grinnell then told Barry that its production delays were unacceptable and that Barry had breached its development contract. Grinnell wanted Barry to continue its efforts, but it would not promise to buy more than $3.6 million worth of snubbers through 1979. Barry said this modification of the development contract was unjustified. It continued to try to develop snubbers. The extent of its progress is in dispute, but there is considerable evidence that it fell further behind its production schedules.

At the end of May, 1977, Grinnell and Pacific agreed further that Grinnell would buy $6.9 million worth of Pacific’s snubbers for 1978 and $5 million for 1979. … Pacific granted the special 30 percent/25 percent price discounts…. In June, 1977, Grinnell told Barry that their collaboration was at an end. Barry looked for other potential snubber buyers and then abandoned its snubber efforts. Subsequently, Barry brought this lawsuit against Pacific (and against Grinnell, as well, although Barry and Grinnell have reached a settlement). Barry charged that Pacific’s efforts to sell snubbers to Grinnell and the terms of its contracts violated Sections 1 and 2 of the Sherman Act .…

The district court found that Barry failed to establish that Pacific’s conduct was improper. … [W]e find the district court’s conclusion about the lawfulness of Pacific’s behavior adequately supported. …

II. Barry’s central claim is that Pacific’s conduct violates Sherman Act §2…. Monopolization has two elements: first, the “possession of monopoly power in the

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relevant market” and, second, the “acquisition or maintenance of that power” by other than such legitimate means as patents, “superior product, business acumen, or historic accident.” Grinnell. On this appeal, the parties do not dispute Pacific’s monopoly power in the relevant market, which the district court identified as the domestic market for snubbers (whether mechanical or hydraulic). Nor do they dispute the legitimacy of Pacific’s acquisition of this power. … [T]he issue that is in dispute [is] whether Pacific maintained its monopoly position against the threat of Barry’s entry through improper means.

In this context, a practice, a method, a means, is “improper” if it is “exclusionary.” U.S. v. United Shoe Machinery Corp., 110 F.Supp. 295, 342 (D.Mass.1953), aff’d per curiam, 347 U.S. 521 (1954). To decide whether Pacific’s conduct was exclusionary, we should ask whether its dealings with Grinnell went beyond the needs of ordinary business dealings, beyond the ambit of ordinary business skill, and “unnecessarily excluded competition” from the snubber market. Greyhound Computer Corp. v. International Business Machines Corp., 559 F.2d 488, 498 (9th Cir.1977), cert. denied, 434 U.S. 1040 (1978). Professors Areeda and Turner have put the matter nicely: “ ‘Exclusionary’ conduct is conduct, other than competition on the merits or restraints reasonably ‘necessary’ to competition on the merits, that reasonably appears capable of making a significant contribution to creating or maintaining monopoly power.” 3 P. AREEDA AND D. TURNER, ANTITRUST LAW ¶626 at 83 (1978). Was Pacific’s conduct reasonable in light of its business needs or did it unreasonably restrict competition? …

A. Barry … argues that Pacific’s discounted prices were unreasonably low. This argument founders, however, on the district court finding that these prices, while lower than normal, nonetheless generated revenues more than sufficient to cover the total cost of producing the goods to which they applied. Barry does not attack that finding; but, instead, it argues that price cutting by a monopolist may still prove unlawful, even if prices remain above total cost. While some circuits have accepted a form of Barry’s argument, see, e.g., Transamerica Computer Co. v. International Business Machines Corp., 698 F.2d 1377 (9th Cir.), cert. denied, 104 S.Ct. 370 (1983); International Air Industries v. American Excelsior Co., 517 F.2d 714, 724 (5th Cir.1975), cert. denied, 424 U.S. 943 (1976), we do not.

To understand the basis of our disagreement, one must ask why the Sherman Act ever forbids price cutting. After all, lower prices help consumers. The competitive marketplace that the antitrust laws encourage and protect is characterized by firms willing and able to cut prices in order to take customers from their rivals. And, in an economy with a significant number of concentrated industries, price cutting limits the ability of large firms to exercise their “market power,” see J. BAIN, INDUSTRIAL ORGANIZATION ch. 5 (2d ed. 1968); F. SCHERER, INDUSTRIAL MARKET STRUCTURE AND ECONOMIC PERFORMANCE 56-70, 222-25 (2d ed. 1980); at a minimum it likely moves “concentrated market” prices in the “right” direction–towards the level they would reach under competitive conditions. See 2 P. AREEDA & D. TURNER, ANTITRUST LAW ¶404; J. BAIN, supra, at 118-23; F. SCHERER, supra, ch. 5. Thus, a legal precedent or rule of law that prevents a firm from unilaterally cutting its prices risks interference with one of the Sherman Act’s most basic objectives: the low price levels that one would find in well-functioning competitive markets.

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Despite these considerations, courts have reasoned that it is sometimes possible to identify circumstances in which a price cut will make consumers worse off, not better off. Suppose, for example, a firm cuts prices to unsustainably low levels–prices below “incremental” costs. Suppose it drives competitors out of business, and later on it raises prices to levels higher than it could have sustained had its competitors remained in the market. Without special circumstances there is little to be said in economic or competitive terms for such a price cut. Yet, how often firms engage in such “predatory” price cutting, whether they ever do so, and precisely when, is all much disputed–a dispute that is not surprising given the difficulties of measuring costs, discerning intent, and predicting future market conditions.

Despite this dispute, there is general agreement that a profit-maximizing firm might sometimes find it rational to engage in predatory pricing; it might do so if it knows (1) that it can cut prices deeply enough to outlast and to drive away all competitors, and (2) that it can then raise prices high enough to recoup lost profits (and then some) before new competitors again enter the market. See Areeda & Turner, Predatory Pricing and Related Practices Under Section 2 of the Sherman Act, 88 HARV.L.REV. 697, 698-99 (1975) [hereafter cited as Areeda & Turner, Predatory Pricing ]. There is also general agreement that the antitrust courts’ major task is to set rules and precedents that can segregate the economically harmful price-cutting goats from the more ordinary price-cutting sheep, in a manner precise enough to avoid discouraging desirable price-cutting activity.

Barry, of course, suggests that Pacific’s price cut is a “goat,” arguing that Pacific “intended” to drive Barry from the market place. Some courts have written as if one might look to a firm’s “intent to harm” to separate “good” from “bad.” But “intent to harm” without more offers too vague a standard in a world where executives may think no further than “Let’s get more business,” and long-term effects on consumers depend in large measure on competitors’ responses. Moreover, if the search for intent means a search for documents or statements specifically reciting the likelihood of anticompetitive consequences or of subsequent opportunities to inflate prices, the knowledgeable firm will simply refrain from overt description. If it is meant to refer to a set of objective economic conditions that allow the court to “infer” improper intent, then, using Occam’s razor, we can slice “intent” away. Thus, most courts now find their standard, not in intent, but in the relation of the suspect price to the firm’s costs. And, despite the absence of any perfect touchstone, modern antitrust courts look to the relation of price to “avoidable” or “incremental” costs as a way of segregating price cuts that are “suspect” from those that are not.

One can understand the intuitive idea behind this test by supposing, for example, that a firm charges prices that fail to cover these “avoidable” or “incremental” costs–the costs that the firm would save by not producing the additional product it can sell at that price. Suppose further that the firm cannot show that this low price is “promotional,” e.g., a “free sample.” Nor can it show that it expects costs to fall when sales increase. Then one would know that the firm cannot rationally plan to maintain this low price; if it does not expect to raise its price, it would do better to discontinue production. Moreover, equally efficient competitors cannot permanently match this low price and stay in business. Further, competitive industries are typically characterized by prices that are

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roughly equal to, not below, “incremental” costs. At a minimum, one would wonder why this firm would cut prices on “incremental production” below its “avoidable” costs unless it later expected to raise its prices and recoup its losses. When prices exceed incremental costs, one cannot argue that they must rise for the firm to stay in business. Nor will such prices have a tendency to exclude or eliminate equally efficient competitors. Moreover, a price cut that leaves prices above incremental costs was probably moving prices in the “right” direction–towards the competitive norm. These considerations have typically led courts to question, and often to forbid, price cuts below “incremental costs,” (or “avoidable costs”), while allowing those where the resulting price is higher.

In fact, the use of cost-based standards is more complicated than this brief discussion suggests. But, we need not explore here the arguments about how best to measure “incremental” or “avoidable” costs (e.g., whether “average variable cost” is an appropriate surrogate). Nor need we consider the theoretical difficulties that arise when prices fall between “incremental costs” and “average (total) costs,” a circumstance that can arise either when production is at a level below full capacity and the firm lowers prices to levels that do not cover a “fair share” of fixed costs or when a plant is pushed beyond its “full” capacity at prices that do not cover the specially high costs of the extraordinary production levels. Here we have a price that exceeds both “average cost” and “incremental cost”–that exceeds cost however plausibly measured. And as to those prices, “virtually every court and commentator agrees” that they are lawful, “perhaps conclusively, but at least presumptively.” P. AREEDA & D. TURNER, ANTITRUST LAW ¶711.1c at 118 (1982 Supp.).

Barry points, however, to a possible exception to this rule–an “exception” created by the Ninth Circuit making certain price cuts unlawful even when the resulting revenues exceed total costs. In [William Inglis & Sons Baking Co. v. ITT Continental Baking Co., 668 F.2d 1014. 1035 (9th Cir.1981) cert. denied, 459 U.S. 825 (1982)], that circuit held that a price cut is unlawful if the anticipated benefits of defendant’s price depended on its tendency to discipline or eliminate competition and thereby enhance the firm’s long-term ability to reap the benefits of monopoly power.

In the Ninth Circuit’s view, prices below “average variable costs” (a surrogate for “incremental costs”) produce a presumption of “predatory pricing.” When prices exceed “average variable cost,” but are “below average total cost,” the plaintiff must prove by a preponderance of the evidence that the defendant’s pricing policy depends on its exclusionary or disciplinary tendency. And, in a case like this one–a case that the Ninth Circuit would describe as “prices above average total cost”–the plaintiff can still win if it proves “by clear and convincing evidence–i.e., that it is highly probably true–that the defendant’s pricing policy was predatory,” in the sense defined in Inglis. Transamerica Computer Co., 698 F.2d at 1388.

The virtue of the Ninth Circuit test is that it recognizes an economic circumstance in which even “above total cost” price cutting might not be procompetitive and might, in theory, hurt the consumer. See [id.] at 1387. For instance, if a dominant firm’s costs are lower than its competitors’, it could use an “above cost” price cut to drive out competition, and then later raise prices to levels higher than they otherwise would be. Moreover, if the price cut meant less profit for the firm unless (1) it drove out

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competitors and (2) higher prices later followed, the cut might be viewed as lying outside the range of normal, desirable, competitive processes. Even though such a price cut would only injure or eliminate firms that were less efficient than the price-cutter, one could argue that, other things being equal, their continued presence helps the competitive process (say, by constraining price rises) and may lead to greater efficiency in the future. Why should the antitrust laws not forbid this potentially harmful behavior? Indeed, economists have identified this type of pricing behavior (and certain other forms of above-cost pricing behavior) as potentially harmful, see, e.g., Brodley & Hay, Predatory Pricing: Competing Economic Theories and the Evolution of Legal Standards, 66 CORNELL L.REV. 738, 743-46 (1981); SCHERER, supra (discussing other, more complex anticompetitive pricing strategies involving above-cost prices); Williamson, Predatory Pricing: A Strategic Welfare Analysis, 87 YALE L.J. 284 (1977) (same).

Nonetheless, while technical economic discussion helps to inform the antitrust laws, those laws cannot precisely replicate the economists’ (sometimes conflicting) views. For, unlike economics, law is an administrative system the effects of which depend upon the content of rules and precedents only as they are applied by judges and juries in courts and by lawyers advising their clients. Rules that seek to embody every economic complexity and qualification may well, through the vagaries of administration, prove counter-productive, undercutting the very economic ends they seek to serve. Thus, despite the theoretical possibility of finding instances in which horizontal price fixing, or vertical price fixing, are economically justified, the courts have held them unlawful per se, concluding that the administrative virtues of simplicity outweigh the occasional “economic” loss. Conversely, we must be concerned lest a rule or precedent that authorizes a search for a particular type of undesirable pricing behavior end up by discouraging legitimate price competition. Indeed, it is this risk that convinces us not to follow the Ninth Circuit’s approach.

Thus, we believe we should not adopt the Ninth Circuit’s exception because of the combined effect of the following considerations. For one thing, a price cut that ends up with a price exceeding total cost–in all likelihood a cut made by a firm with market power–is almost certainly moving price in the “right” direction (towards the level that would be set in a competitive marketplace). The antitrust laws very rarely reject such beneficial “birds in hand” for the sake of more speculative (future low-price) “birds in the bush.” To do so opens the door to similar speculative claims that might seek to legitimate even the most settled unlawful practices. (Should a price-fixer be allowed to argue that a cartel will help weaker firms survive bad times, leaving them as a competitive force when times are good?…) For another thing, the scope of the Ninth Circuit’s test is vague. Is it meant to include, for example, “limit pricing”–the common practice of firms in concentrated industries not to price “too high” for fear of attracting new competition? The “anticipated benefits” of such a price arguably depend “on its tendency to discipline or eliminate competition” thereby enhancing “the firm’s long-term ability to reap the benefits of monopoly power.” Does the test mean to include every common instance of a firm (with market power) deciding not to raise its prices? If it means to include either of these sorts of circumstances, the rule risks making of the antitrust laws a powerful force for price increases. But, if the rule does not mean to include these sorts of circumstance, which prices do, and which do not, fall within the test’s proscription?

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Further, even were the test more specific, it seems to us as a practical matter most difficult to distinguish in any particular case between a firm that is cutting price to “discipline” or to displace a rival and one cutting price “better to compete.” No one would condemn a price cut designed to maximize profits in the short run, i.e., by increasing sales at the lower price, not by destroying competition and then raising prices. But the general troubles surrounding proof of firm costs, only hint at the difficulty of deciding whether or not a firm’s price cut is profit-maximizing in the short-run, a determination that hinges not only on cost data, but also on elasticity of demand, competitors’ responses to price shifts, and changes in unit costs with variations in production volume. Direct statements by firm executives concerning their expectations will probably not be found; and, one might ask, in light of uncertain and changing market conditions, how much will the firm itself know? One can foresee conflicting testimony by economic experts, with the eventual determination made, not by economists or accountants, but by a jury. Of course, one might claim that such are the dangers inherent in many antitrust cases. But the consequence of a mistake here is not simply to force a firm to forego legitimate business activity it wishes to pursue; rather, it is to penalize a procompetitive price cut, perhaps the most desirable activity (from an antitrust perspective) that can take place in a concentrated industry where prices typically exceed costs.

Additionally, if private plaintiffs are allowed to attack the “above total cost disciplinary price,” we are unlikely to lack for plaintiffs willing to make the effort. After all, even the most competitive of price cuts may hurt rivals; indeed, such may well be its object. And those rivals, if seriously damaged, may well bring suit, hoping or believing they can fit within the Inglis/Transamerica standard.

Finally, we ask ourselves what advice a lawyer, faced with the Transamerica rule, would have to give a client firm considering procompetitive price-cutting tactics in a concentrated industry. Would he not have to point out the risks of suit–whether ultimately successful or not–by an injured competitor claiming that the cut was “disciplinary?” Price cutting in concentrated industries seems sufficiently difficult to stimulate that we hesitate before embracing a rule that could, in practice, stabilize “tacit cartels” and further encourage interdependent pricing behavior. This risk could be minimized only if the conditions imposed by the words “clear and convincing evidence” were so stringent that the claim could almost never be proved. But then, one might ask, would the Transamerica “exception” be worth the trouble?

We reiterate that these considerations might not prove sufficient to make the difference were we dealing with a price that, although above average total costs, was below incremental costs–a price that in the absence of special circumstances proves unsustainable. But, here we deal with a price that is above both incremental and total cost.

In sum, we believe that such above-cost price cuts are typically sustainable; that they are normally desirable (particularly in concentrated industries); that the “disciplinary cut” is difficult to distinguish in practice; that it, in any event, primarily injures only higher cost competitors; that its presence may well be “wrongly” asserted in a host of cases involving legitimate competition; and that to allow its assertion threatens to “chill” highly desirable procompetitive price cutting. For these reasons, we believe that

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a precedent allowing this type of attack on prices that exceed both incremental and average costs would more likely interfere with the procompetitive aims of the antitrust laws than further them. Hence, we conclude that the Sherman Act does not make unlawful prices that exceed both incremental and average costs.

Even if we are wrong, however, and Inglis and Transamerica contain the correct legal standard, Barry would fail. Barry has not demonstrated by “clear and convincing evidence” that Pacific offered Grinnell an additional 5 or 10 percent price discount only because it wished to keep Barry out of the market. Rather, Pacific testified that the additional discount was related to additional cost savings. Grinnell’s firm order for snubbers in 1977 was larger than the total volume of Pacific sales of snubbers in any previous year. Pacific had excess snubber capacity. The price discount, by securing the firm order, allowed Pacific to operate this capacity more efficiently, saved Pacific money, and thereby produced more profit than a higher price (without the firm order) could have done, without regard to any impact on Barry. At least there is evidence this was so–that this was the sort of price cut a firm would have made under competitive conditions in a fully competitive industry. And, the evidence in the record to this effect precludes the possibility of “clear and convincing evidence” to the contrary. Thus, even under the Transamerica test, Pacific’s price cut would not be found anticompetitive or exclusionary. …

The judgment of the district court is Affirmed.

$ $ $ $ $ $ $BROOKE GROUP LTD. v.

BROWN & WILLIAMSON TOBACCO CORP.509 U.S. 209 (1993)

Justice KENNEDY delivered the opinion of the Court: This case stems from a market struggle that erupted in the domestic cigarette industry in the mid-1980’s. Petitioner Brooke Group, Ltd., whom we, like the parties to the case, refer to as Liggett because of its former corporate name, charges that to counter its innovative development of generic cigarettes, respondent Brown & Williamson Tobacco Corporation introduced its own line of generic cigarettes in an unlawful effort to stifle price competition in the economy segment of the national cigarette market. Liggett contends that Brown & Williamson cut prices on generic cigarettes below cost and offered discriminatory volume rebates to wholesalers to force Liggett to raise its own generic cigarette prices and introduce oligopoly pricing in the economy segment. We hold that Brown & Williamson is entitled to judgment as a matter of law.

I. In 1980, Liggett pioneered the development of the economy segment of the national cigarette market by introducing a line of “black and white” generic cigarettes. The economy segment of the market, sometimes called the generic segment, is characterized by its bargain prices and comprises a variety of different products: black and whites, which are true generics sold in plain white packages with simple black lettering describing their contents; private label generics, which carry the trade dress of a specific purchaser, usually a retail chain; branded generics, which carry a brand name but which,

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like black and whites and private label generics, are sold at a deep discount and with little or no advertising; and “Value-25s,” packages of 25 cigarettes that are sold to the consumer some 12.5% below the cost of a normal 20-cigarette pack. By 1984, when Brown & Williamson entered the generic segment and set in motion the series of events giving rise to this suit, Liggett’s black and whites represented 97% of the generic segment, which in turn accounted for a little more than 4% of domestic cigarette sales. Prior to Liggett’s introduction of black and whites in 1980, sales of generic cigarettes amounted to less than 1% of the domestic cigarette market.

…[W]e view the evidence in the light most favorable to Liggett. The parties are in basic agreement, however, regarding the central, historical facts. Cigarette manufacturing has long been one of America’s most concentrated industries; and for decades, production has been dominated by six firms: R.J. Reynolds, Philip Morris, American Brands, Lorillard, and the two litigants involved here, Liggett and Brown & Williamson. R.J. Reynolds and Philip Morris, the two industry leaders, enjoyed respective market shares of about 28% and 40% at the time of trial. Brown & Williamson ran a distant third, its market share never exceeding 12% at any time relevant to this dispute. Liggett’s share of the market was even less, from a low of just over 2% in 1980 to a high of just over 5% in 1984.

The cigarette industry also has long been one of America’s most profitable, in part because for many years there was no significant price competition among the rival firms. List prices for cigarettes increased in lock-step, twice a year, for a number of years, irrespective of the rate of inflation, changes in the costs of production, or shifts in consumer demand. Substantial evidence suggests that in recent decades, the industry reaped the benefits of prices above a competitive level….

By 1980, however, broad market trends were working against the industry. Overall demand for cigarettes in the United States was declining, and no immediate prospect of recovery existed. As industry volume shrank, all firms developed substantial excess capacity. This decline in demand, coupled with the effects of nonprice competition, had a severe negative impact on Liggett. Once a major force in the industry, with market shares in excess of 20%, Liggett’s market share had declined by 1980 to a little over 2%. With this meager share of the market, Liggett was on the verge of going out of business.

At the urging of a distributor, Liggett took an unusual step to revive its prospects: It developed a line of black and white generic cigarettes. When introduced in 1980, black and whites were offered to consumers at a list price roughly 30% lower than the list price of full-priced, branded cigarettes. They were also promoted at the wholesale level by means of rebates that increased with the volume of cigarettes ordered. Black and white cigarettes thus represented a new marketing category. The category’s principal competitive characteristic was low price. Liggett’s black and whites were an immediate and considerable success, growing from a fraction of a percent of the market at their introduction to over 4% of the total cigarette market by early 1984.

As the market for Liggett’s generic cigarettes expanded, the other cigarette companies found themselves unable to ignore the economy segment. In general, the growth of generics came at the expense of the other firms’ profitable sales of branded

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cigarettes. Brown & Williamson was hardest hit, because many of Brown & Williamson’s brands were favored by consumers who were sensitive to changes in cigarette prices. Although Brown & Williamson sold only 11.4% of the market’s branded cigarettes, 20% of the converts to Liggett’s black and whites had switched from a Brown & Williamson brand. Losing volume and profits in its branded products, Brown & Williamson determined to enter the generic segment of the cigarette market. In July 1983, Brown & Williamson had begun selling Value-25s, and in the spring of 1984, it introduced its own black and white cigarette.

Brown & Williamson was neither the first nor the only cigarette company to recognize the threat posed by Liggett’s black and whites and to respond in the economy segment. R.J. Reynolds had also introduced a Value-25 in 1983. And before Brown & Williamson introduced its own black and whites, R.J. Reynolds had repriced its “Doral” branded cigarette at generic levels. To compete with Liggett’s black and whites, R.J. Reynolds dropped its list price on Doral about 30% and used volume rebates to wholesalers as an incentive to spur orders. Doral was the first competition at Liggett’s price level.

Brown & Williamson’s entry was an even graver threat to Liggett’s dominance of the generic category. Unlike R.J. Reynolds’ Doral, Brown & Williamson’s product was also a black and white and so would be in direct competition with Liggett’s product at the wholesale level and on the retail shelf. Because Liggett’s and Brown & Williamson’s black and whites were more or less fungible, wholesalers had little incentive to carry more than one line. And unlike R.J. Reynolds, Brown & Williamson not only matched Liggett’s prices but beat them. At the retail level, the suggested list price of Brown & Williamson’s black and whites was the same as Liggett’s, but Brown & Williamson’s volume discounts to wholesalers were larger. Brown & Williamson’s rebate structure also encompassed a greater number of volume categories than Liggett’s, with the highest categories carrying special rebates for orders of very substantial size. Brown & Williamson marketed its black and whites to Liggett’s existing distributors as well as to its own full list of buyers, which included a thousand wholesalers who had not yet carried any generic products.

Liggett responded to Brown & Williamson’s introduction of black and whites in two ways. First, Liggett increased its own wholesale rebates. This precipitated a price war at the wholesale level, in which Liggett five times attempted to beat the rebates offered by Brown & Williamson. At the end of each round, Brown & Williamson maintained a real advantage over Liggett’s prices. Although it is undisputed that Brown & Williamson’s original net price for its black and whites was above its costs, Liggett contends that by the end of the rebate war, Brown & Williamson was selling its black and whites at a loss. This rebate war occurred before Brown & Williamson had sold a single black and white cigarette.

Liggett’s second response was to file a lawsuit. Two weeks after Brown & Williamson announced its entry into the generic segment, again before Brown & Williamson had sold any generic cigarettes, Liggett filed a complaint in the United States District Court for the Middle District of North Carolina alleging trademark infringement and unfair competition. Liggett later amended its complaint to add an antitrust claim under §2(a) of the Clayton Act …, which alleged illegal price discrimination between

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Brown & Williamson’s full-priced branded cigarettes and its low-priced generics. These claims were either dismissed on summary judgment, see id., or rejected by the jury. They were not appealed.

Liggett also amended its complaint to add a second Robinson-Patman Act claim, which is the subject of the present controversy. Liggett alleged that Brown & Williamson’s volume rebates to wholesalers amounted to price discrimination that had a reasonable possibility of injuring competition, in violation of §2(a). Liggett claimed that Brown & Williamson’s discriminatory volume rebates were integral to a scheme of predatory pricing, in which Brown & Williamson reduced its net prices for generic cigarettes below average variable costs. According to Liggett, these below-cost prices were not promotional but were intended to pressure it to raise its list prices on generic cigarettes, so that the percentage price difference between generic and branded cigarettes would narrow. Liggett explained that it would have been unable to reduce its wholesale rebates without losing substantial market share to Brown & Williamson; its only choice, if it wished to avoid prolonged losses on its principal product line, was to raise retail prices. The resulting reduction in the list price gap, it was said, would restrain the growth of the economy segment and preserve Brown & Williamson’s supracompetitive profits on its branded cigarettes.

The trial began in the fall of 1989. By that time, all six cigarette companies had entered the economy segment. The economy segment was the fastest growing segment of the cigarette market, having increased from about 4% of the market in 1984, when the rebate war in generics began, to about 15% in 1989. Black and white generics had declined as a force in the economy segment as consumer interest shifted toward branded generics, but Liggett’s overall volume had increased steadily to 9 billion generic cigarettes sold. Overall, the 2.8 billion generic cigarettes sold in 1981 had become 80 billion by 1989.

The consumer price of generics had increased along with output. For a year, the list prices for generic cigarettes established at the end of the rebate war remained stable. But in June of 1985, Liggett raised its list price, and the other firms followed several months later. The precise effect of the list price increase is difficult to assess, because all of the cigarette firms offered a variety of discounts, coupons, and other promotions directly to consumers on both generic and branded cigarettes. Nonetheless, at least some portion of the list price increase was reflected in a higher net price to the consumer.

In December 1985, Brown & Williamson attempted to increase its list prices, but retracted the announced increase when the other firms adhered to their existing prices. Thus, after Liggett’s June 1985 increase, list prices on generics did not change again until the summer of 1986, when a pattern of twice yearly increases in tandem with the full-priced branded cigarettes was established. The dollar amount of these increases was the same for generic and full-priced cigarettes, which resulted in a greater percentage price increase in the less expensive generic cigarettes and a narrowing of the percentage gap between the list price of branded and black and white cigarettes, from approximately 38% at the time Brown & Williamson entered the segment, to approximately 27% at the time of trial. Also by the time of trial, five of the six manufacturers, including Liggett, had introduced so-called “subgenerics,” a category of branded generic cigarette that sold at a discount of 50% or more off the list price of full-priced branded cigarettes.

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After a 115-day trial involving almost 3,000 exhibits and over a score of witnesses, the jury returned a verdict in favor of Liggett, finding on the special verdict form that Brown & Williamson had engaged in price discrimination that had a reasonable possibility of injuring competition in the domestic cigarette market as a whole. The jury awarded Liggett $49.6 million in damages, which the District Court trebled to $148.8 million. After reviewing the record, however, the District Court held that Brown & Williamson was entitled to judgment as a matter of law on three separate grounds: lack of injury to competition, lack of antitrust injury to Liggett, and lack of a causal link between the discriminatory rebates and Liggett’s alleged injury. With respect to the first issue, which is the only one before us, the District Court found that no slowing of the growth rate of generics, and thus no injury to competition, was possible unless there had been tacit coordination of prices in the economy segment of the cigarette market by the various manufacturers. The District Court held that a reasonable jury could come to but one conclusion about the existence of such coordination among the firms contending for shares of the economy segment: it did not exist, and Brown & Williamson therefore had no reasonable possibility of limiting the growth of the segment.

The U.S. Court of Appeals for the Fourth Circuit affirmed. The Court of Appeals held that the dynamic of conscious parallelism among oligopolists could not produce competitive injury in a predatory pricing setting, which necessarily involves a price cut by one of the oligopolists. In the Court of Appeals’ view, “[t]o rely on the characteristics of an oligopoly to assure recoupment of losses from a predatory pricing scheme after one oligopolist has made a competitive move is ... economically irrational.” We granted certiorari, and now affirm.

II. A. Price discrimination is made unlawful by §2(a) of the Clayton Act, as amended by the Robinson-Patman Act.... By its terms, the Robinson-Patman Act condemns price discrimination only to the extent that it threatens to injure competition....

Liggett contends that Brown & Williamson’s discriminatory volume rebates to wholesalers threatened substantial competitive injury by furthering a predatory pricing scheme designed to purge competition from the economy segment of the cigarette market. This type of injury, which harms direct competitors of the discriminating seller, is known as primary-line injury. ... [P]rimary-line competitive injury under the Robinson-Patman Act is of the same general character as the injury inflicted by predatory pricing schemes actionable under §2 of the Sherman Act. There are, to be sure, differences between the two statutes. For example, we interpret §2 of the Sherman Act to condemn predatory pricing when it poses “a dangerous probability of actual monopolization,” Spectrum Sports, whereas the Robinson-Patman Act requires only that there be “a reasonable possibility” of substantial injury to competition before its protections are triggered. But whatever additional flexibility the Robinson-Patman Act standard may imply, the essence of the claim under either statute is the same: A business rival has priced its products in an unfair manner with an object to eliminate or retard competition and thereby gain and exercise control over prices in the relevant market.

Accordingly, whether the claim alleges predatory pricing under §2 of the Sherman Act or primary-line price discrimination under the Robinson-Patman Act, two prerequisites to recovery remain the same. First, a plaintiff seeking to establish competitive injury resulting from a rival’s low prices must prove that the prices

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complained of are below an appropriate measure of its rival’s costs.1 See, e.g., Cargill, Inc. v. Monfort of Colorado, Inc., 479 U.S. 104, 117 (1986); Matsushita. Although Cargill and Matsushita reserved as a formal matter the question “ ‘whether recovery should ever be available ... when the pricing in question is above some measure of incremental cost,’ “ Cargill, 479 U.S., at 117-118, n. 12 (quoting Matsushita), the reasoning in both opinions suggests that only below-cost prices should suffice, and we have rejected elsewhere the notion that above-cost prices that are below general market levels or the costs of a firm’s competitors inflict injury to competition cognizable under the antitrust laws. See Atlantic Richfield Co. v. USA Petroleum Co., 495 U.S. 328, 340 (1990). ... As a general rule, the 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.” Cargill, 479 U.S., at 116.

Even in an oligopolistic market, when a firm drops its prices to a competitive level to demonstrate to a maverick the unprofitability of straying from the group, it would be illogical to condemn the price cut: The antitrust laws then would be an obstacle to the chain of events most conducive to a breakdown of oligopoly pricing and the onset of competition. Even if the ultimate effect of the cut is to induce or reestablish supracompetitive pricing, discouraging a price cut and forcing firms to maintain supracompetitive prices, thus depriving consumers of the benefits of lower prices in the interim, does not constitute sound antitrust policy.

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. “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.” Matsushita. 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.

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.” Brown Shoe Co. v. United States, 370 U.S. 294, 320 (1962). Earlier this Term, we held in the Sherman Act §2 context that it was not enough to inquire “whether the defendant has engaged in

1 Because the parties in this case agree that the relevant measure of cost is average variable cost, however, we again decline to resolve the conflict among the lower courts over the appropriate measure of cost. See Cargill, 479 U.S. at 117-118 n.12; Matsushita.

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‘unfair’ or ‘predatory’ tactics”; rather, we insisted that the plaintiff prove “a dangerous probability that [the defendant] would monopolize a particular market.” Spectrum Sports. Even an act of pure malice by one business competitor against another does not, without more, state a claim under the federal antitrust laws; those laws do not create a federal law of unfair competition....

For recoupment to occur, below-cost pricing must be capable, as a threshold matter, of producing the intended effects on the firm’s rivals, whether driving them from the market, or, as was alleged to be the goal here, causing them to raise their prices to supracompetitive levels within a disciplined oligopoly. This requires an understanding of the extent and duration of the alleged predation, the relative financial strength of the predator and its intended victim, and their respective incentives and will. The inquiry is whether, given the aggregate losses caused by the below-cost pricing, the intended target would likely succumb.

If circumstances indicate that below-cost pricing could likely produce its intended effect on the target, there is still the further question whether it would likely injure competition in the relevant market. The plaintiff must demonstrate that there is a likelihood that the predatory scheme alleged would cause a rise in prices above a competitive level that would be sufficient to compensate for the amounts expended on the predation, including the time value of the money invested in it. As we have observed on a prior occasion, “[i]n order to recoup their losses, [predators] must obtain enough market power to set higher than competitive prices, and then must sustain those prices long enough to earn in excess profits what they earlier gave up in below-cost prices.” Matsushita.

Evidence of below-cost pricing is not alone sufficient to permit an inference of probable recoupment and injury to competition. Determining whether recoupment of predatory losses is likely requires an estimate of the cost of the alleged predation and a close analysis of both the scheme alleged by the plaintiff and the structure and conditions of the relevant market. If market circumstances or deficiencies in proof would bar a reasonable jury from finding that the scheme alleged would likely result in sustained supracompetitive pricing, the plaintiff’s case has failed. In certain situations–for example, where the market is highly diffuse and competitive, or where new entry is easy, or the defendant lacks adequate excess capacity to absorb the market shares of his rivals and cannot quickly create or purchase new capacity–summary disposition of the case is appropriate.

These prerequisites to recovery are not easy to establish, but they are not artificial obstacles to recovery; rather, they are essential components of real market injury. As we have said in the Sherman Act context, “predatory pricing schemes are rarely tried, and even more rarely successful,” Matsushita, and the costs of an erroneous finding of liability are high. “[T]he mechanism by which a firm engages in predatory pricing–lowering prices–is the same mechanism by which a firm stimulates competition; because ‘cutting prices in order to increase business often is the very essence of competition ...[;] mistaken inferences ... are especially costly, because they chill the very conduct the antitrust laws are designed to protect.’” Cargill, 479 U.S. at 122 n.17 (quoting Matsushita). It would be ironic indeed if the standards for predatory pricing liability were so low that antitrust suits themselves became a tool for keeping prices high.

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B. Liggett does not allege that Brown & Williamson sought to drive it from the market but that Brown & Williamson sought to preserve supracompetitive profits on branded cigarettes by pressuring Liggett to raise its generic cigarette prices through a process of tacit collusion with the other cigarette companies. Tacit collusion, sometimes called oligopolistic price coordination or conscious parallelism, describes the process, not in itself unlawful, by which firms in a concentrated market might in effect share monopoly power, setting their prices at a profit-maximizing, supracompetitive level by recognizing their shared economic interests and their interdependence with respect to price and output decisions.

In Matsushita, we remarked upon the general implausibility of predatory pricing. Matsushita observed that such schemes are even more improbable when they require coordinated action among several firms. Matsushita involved an allegation of an express conspiracy to engage in predatory pricing. The Court noted that in addition to the usual difficulties that face a single firm attempting to recoup predatory losses, other problems render a conspiracy “incalculably more difficult to execute.” In order to succeed, the conspirators must agree on how to allocate present losses and future gains among the firms involved, and each firm must resist powerful incentives to cheat on whatever agreement is reached.

However unlikely predatory pricing by multiple firms may be when they conspire, it is even less likely when, as here, there is no express coordination. Firms that seek to recoup predatory losses through the conscious parallelism of oligopoly must rely on uncertain and ambiguous signals to achieve concerted action. The signals are subject to misinterpretation and are a blunt and imprecise means of ensuring smooth cooperation, especially in the context of changing or unprecedented market circumstances. This anticompetitive minuet is most difficult to compose and to perform, even for a disciplined oligopoly.

From one standpoint, recoupment through oligopolistic price coordination could be thought more feasible than recoupment through monopoly: In the oligopoly setting, the victim itself has an economic incentive to acquiesce in the scheme. If forced to choose between cutting prices and sustaining losses, maintaining prices and losing market share, or raising prices and enjoying a share of supracompetitive profits, a firm may yield to the last alternative. Yet on the whole, tacit cooperation among oligopolists must be considered the least likely means of recouping predatory losses. In addition to the difficulty of achieving effective tacit coordination and the high likelihood that any attempt to discipline will produce an outbreak of competition, the predator’s present losses in a case like this fall on it alone, while the later supracompetitive profits must be shared with every other oligopolist in proportion to its market share, including the intended victim. In this case, for example, Brown & Williamson, with its 11-12% share of the cigarette market, would have had to generate around $9 in supracompetitive profits for each $1 invested in predation; the remaining $8 would belong to its competitors, who had taken no risk.

Liggett suggests that these considerations led the Court of Appeals to rule out its theory of recovery as a matter of law. Although the proper interpretation of the Court of Appeals’ opinion is not free from doubt, there is some indication that it held as a matter of law that the Robinson-Patman Act does not reach a primary-line injury claim in which

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tacit coordination among oligopolists provides the alleged basis for recoupment. The Court of Appeals’ opinion does not contain the traditional apparatus of fact review; rather, it focuses on theoretical and legal arguments. The final paragraph appears to state the holding: Brown & Williamson may not be held liable because oligopoly pricing does not “provide an economically rational basis” for recouping predatory losses.

To the extent that the Court of Appeals may have held that the interdependent pricing of an oligopoly may never provide a means for achieving recoupment and so may not form the basis of a primary-line injury claim, we disagree. A predatory pricing scheme designed to preserve or create a stable oligopoly, if successful, can injure consumers in the same way, and to the same extent, as one designed to bring about a monopoly. However unlikely that possibility may be as a general matter, when the realities of the market and the record facts indicate that it has occurred and was likely to have succeeded, theory will not stand in the way of liability. See Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451(1992). ... We decline to create a per se rule of nonliability for predatory price discrimination when recoupment is alleged to take place through supracompetitive oligopoly pricing.

III. Although Liggett’s theory of liability, as an abstract matter, is within the reach of the statute, we agree with the Court of Appeals and the District Court that Liggett was not entitled to submit its case to the jury. It is not customary for this Court to review the sufficiency of the evidence, but we will do so when the issue is properly before us and the benefits of providing guidance concerning the proper application of a legal standard and avoiding the systemic costs associated with further proceedings justify the required expenditure of judicial resources. See, e.g., Aspen Skiing; Monsanto. The record in this case demonstrates that the anticompetitive scheme Liggett alleged, when judged against the realities of the market, does not provide an adequate basis for a finding of liability.

A. Liggett’s theory of competitive injury through oligopolistic price coordination depends upon a complex chain of cause and effect: Brown & Williamson would enter the generic segment with list prices matching Liggett’s but with massive, discriminatory volume rebates directed at Liggett’s biggest wholesalers; as a result, the net price of Brown & Williamson’s generics would be below its costs; Liggett would suffer losses trying to defend its market share and wholesale customer base by matching Brown & Williamson’s rebates; to avoid further losses, Liggett would raise its list prices on generics or acquiesce in price leadership by Brown & Williamson; higher list prices to consumers would shrink the percentage gap in retail price between generic and branded cigarettes; and this narrowing of the gap would make generics less appealing to the consumer, thus slowing the growth of the economy segment and reducing cannibalization of branded sales and their associated supracompetitive profits.

Although Brown & Williamson’s entry into the generic segment could be regarded as procompetitive in intent as well as effect, the record contains sufficient evidence from which a reasonable jury could conclude that Brown & Williamson envisioned or intended this anticompetitive course of events. There is also sufficient evidence in the record from which a reasonable jury could conclude that for a period of approximately 18 months, Brown & Williamson’s prices on its generic cigarettes were below its costs, and that this below-cost pricing imposed losses on Liggett that Liggett was unwilling to sustain, given its corporate parent’s effort to locate a buyer for the

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company. Liggett has failed to demonstrate competitive injury as a matter of law, however, because its proof is flawed in a critical respect: The evidence is inadequate to show that in pursuing this scheme, Brown & Williamson had a reasonable prospect of recovering its losses from below-cost pricing through slowing the growth of generics. As we have noted, “[t]he 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.” Matsushita.

No inference of recoupment is sustainable on this record, because no evidence suggests that Brown & Williamson–whatever its intent in introducing black and whites may have been–was likely to obtain the power to raise the prices for generic cigarettes above a competitive level. Recoupment through supracompetitive pricing in the economy segment of the cigarette market is an indispensable aspect of Liggett’s own proffered theory, because a slowing of growth in the economy segment, even if it results from an increase in generic prices, is not itself anticompetitive. Only if those higher prices are a product of nonmarket forces has competition suffered. If prices rise in response to an excess of demand over supply, or segment growth slows as patterns of consumer preference become stable, the market is functioning in a competitive manner. Consumers are not injured from the perspective of the antitrust laws by the price increases; they are in fact causing them. Thus, the linchpin of the predatory scheme alleged by Liggett is Brown & Williamson’s ability, with the other oligopolists, to raise prices above a competitive level in the generic segment of the market. Because relying on tacit coordination among oligopolists as a means of recouping losses from predatory pricing is “highly speculative,” P. AREEDA & H. HOVENKAMP, ANTITRUST LAW ¶711.2c, at 647 (Supp.1992), competent evidence is necessary to allow a reasonable inference that it poses an authentic threat to competition. The evidence in this case is insufficient to demonstrate the danger of Brown & Williamson’s alleged scheme.

B. Based on Liggett’s theory of the case and the record it created, there are two means by which one might infer that Brown & Williamson had a reasonable prospect of producing sustained supracompetitive pricing in the generic segment adequate to recoup its predatory losses: first, if generic output or price information indicates that oligopolistic price coordination in fact produced supracompetitive prices in the generic segment; or second, if evidence about the market and Brown & Williamson’s conduct indicate that the alleged scheme was likely to have brought about tacit coordination and oligopoly pricing in the generic segment, even if it did not actually do so.

1. In this case, the price and output data do not support a reasonable inference that Brown & Williamson and the other cigarette companies elevated prices above a competitive level for generic cigarettes. Supracompetitive pricing entails a restriction in output. In the present setting, in which output expanded at a rapid rate following Brown & Williamson’s alleged predation, output in the generic segment can only have been restricted in the sense that it expanded at a slower rate than it would have absent Brown & Williamson’s intervention. Such a counterfactual proposition is difficult to prove in the best of circumstances; here, the record evidence does not permit a reasonable inference that output would have been greater without Brown & Williamson’s entry into the generic segment.

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Following Brown & Williamson’s entry, the rate at which generic cigarettes were capturing market share did not slow; indeed, the average rate of growth doubled. ... While this ... tends to show that Brown & Williamson’s participation in the economy segment did not restrict output, it is not dispositive. One could speculate, for example, that the rate of segment growth would have tripled, instead of doubled, without Brown & Williamson’s alleged predation. But there is no concrete evidence of this. Indeed, the only industry projection in the record estimating what the segment’s growth would have been without Brown & Williamson’s entry supports the opposite inference. In 1984, Brown & Williamson forecast in an important planning document that the economy segment would account for 10% of the total cigarette market by 1988 if it did not enter the segment. In fact, in 1988, after what Liggett alleges was a sustained and dangerous anticompetitive campaign by Brown & Williamson, the generic segment accounted for over 12% of the total market. Thus the segment’s output expanded more robustly than Brown & Williamson had estimated it would had Brown & Williamson never entered....

In arguing that Brown & Williamson was able to exert market power and raise generic prices above a competitive level in the generic category through tacit price coordination with the other cigarette manufacturers, Liggett places its principal reliance on direct evidence of price behavior. This evidence demonstrates that the list prices on all cigarettes, generic and branded alike, rose to a significant degree during the late 1980’s. From 1986 to 1989, list prices on both generic and branded cigarettes increased twice a year by similar amounts. Liggett’s economic expert testified that these price increases outpaced increases in costs, taxes, and promotional expenditures. The list prices of generics, moreover, rose at a faster rate than the prices of branded cigarettes, thus narrowing the list price differential between branded and generic products. Liggett argues that this would permit a reasonable jury to find that Brown & Williamson succeeded in bringing about oligopolistic price coordination and supracompetitive prices in the generic category sufficient to slow its growth, thereby preserving supracompetitive branded profits and recouping its predatory losses.

A reasonable jury, however, could not have drawn the inferences Liggett proposes. All of Liggett’s data is based upon the list prices of various categories of cigarettes. Yet the jury had before it undisputed evidence that during the period in question, list prices were not the actual prices paid by consumers. As the market became unsettled in the mid-1980s, the cigarette companies invested substantial sums in promotional schemes, including coupons, stickers, and giveaways, that reduced the actual cost of cigarettes to consumers below list prices. This promotional activity accelerated as the decade progressed. Many wholesalers also passed portions of their volume rebates on to the consumer, which had the effect of further undermining the significance of the retail list prices. Especially in an oligopoly setting, in which price competition is most likely to take place through less observable and less regulable means than list prices, it would be unreasonable to draw conclusions about the existence of tacit coordination or supracompetitive pricing from data that reflects only list prices.

Even on its own terms, the list price data relied upon by Liggett to demonstrate a narrowing of the price differential between generic and full-priced branded cigarettes could not support the conclusion that supracompetitive pricing had been introduced into the generic segment. Liggett’s gap data ignores the effect of “subgeneric” cigarettes,

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which were priced at discounts of 50% or more from the list prices of normal branded cigarettes. Liggett itself, while supposedly under the sway of oligopoly power, pioneered this development in 1988 with the introduction of its “Pyramid” brand. By the time of trial, five of the six major manufacturers offered a cigarette in this category at a discount from the full list price of at least 50%. Thus, the price difference between the highest priced branded cigarette and the lowest price cigarettes in the economy segment, instead of narrowing over the course of the period of alleged predation as Liggett would argue, grew to a substantial extent. In June 1984, before Brown & Williamson entered the generic segment, a consumer could obtain a carton of black and white generic cigarettes from Liggett at a 38% discount from the list price of a leading brand; after the conduct Liggett complains of, consumers could obtain a branded generic from Liggett for 52% off the list price of a leading brand.

It may be that a reasonable jury could conclude that the cumulative discounts attributable to subgenerics and the various consumer promotions did not cancel out the full effect of the increases in list prices, and that actual prices to the consumer did indeed rise, but rising prices do not themselves permit an inference of a collusive market dynamic. Even in a concentrated market, the occurrence of a price increase does not in itself permit a rational inference of conscious parallelism or supracompetitive pricing. Where, as here, output is expanding at the same time prices are increasing, rising prices are equally consistent with growing product demand. Under these conditions, a jury may not infer competitive injury from price and output data absent some evidence that tends to prove that output was restricted or prices were above a competitive level.

Quite apart from the absence of any evidence of that sort, an inference of supracompetitive pricing would be particularly anomalous in this case, as the very party alleged to have been coerced into pricing through oligopolistic coordination denied that such coordination existed: Liggett’s own officers and directors consistently denied that they or other firms in the industry priced their cigarettes through tacit collusion or reaped supracompetitive profits. ...

2. Not only does the evidence fail to show actual supracompetitive pricing in the generic segment, it also does not demonstrate its likelihood. At the time Brown & Williamson entered the generic segment, the cigarette industry as a whole faced declining demand and possessed substantial excess capacity. These circumstances tend to break down patterns of oligopoly pricing and produce price competition. The only means by which Brown & Williamson is alleged to have established oligopoly pricing in the face of these unusual competitive pressures is through tacit price coordination with the other cigarette firms.

Yet the situation facing the cigarette companies in the 1980’s would have made such tacit coordination unmanageable. Tacit coordination is facilitated by a stable market environment, fungible products, and a small number of variables upon which the firms seeking to coordinate their pricing may focus. Uncertainty is an oligopoly’s greatest enemy. By 1984, however, the cigarette market was in an obvious state of flux. The introduction of generic cigarettes in 1980 represented the first serious price competition in the cigarette market since the 1930’s. This development was bound to unsettle previous expectations and patterns of market conduct and to reduce the cigarette firms’ ability to predict each other’s behavior.

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The larger number of product types and pricing variables also decreased the probability of effective parallel pricing. When Brown & Williamson entered the economy segment in 1984, the segment included value-25s, black and whites, and branded generics. With respect to each product, the net price in the market was determined not only by list prices, but also by a wide variety of discounts and promotions to consumers, and by rebates to wholesalers. In order to coordinate in an effective manner and eliminate price competition, the cigarette companies would have been required, without communicating, to establish parallel practices with respect to each of these variables, many of which, like consumer stickers or coupons, were difficult to monitor. Liggett has not even alleged parallel behavior with respect to these other variables, and the inherent limitations of tacit collusion suggest that such multivariable coordination is improbable.

In addition, ... [i]t is undisputed ... that R.J. Reynolds acted without regard to the supposed benefits of oligopolistic coordination when it repriced Doral at generic levels in the spring of 1984 and that the natural and probable consequence of its entry into the generic segment was procompetitive. Indeed, Reynolds’ apparent objective in entering the segment was to capture a significant amount of volume in order to regain its number one sales position in the cigarette industry from Philip Morris. There is no evidence that R.J. Reynolds accomplished this goal during the period relevant to this case, or that its commitment to achieving that goal changed. Indeed, R.J. Reynolds refused to follow Brown & Williamson’s attempt to raise generic prices in June 1985. The jury thus had before it undisputed evidence that contradicts the suggestion that the major cigarette companies shared a goal of limiting the growth of the economy segment; one of the industry’s two major players concededly entered the segment to expand volume and compete.

Even if all the cigarette companies were willing to participate in a scheme to restrain the growth of the generic segment, they would not have been able to coordinate their actions and raise prices above a competitive level unless they understood that Brown & Williamson’s entry into the segment was not a genuine effort to compete with Liggett. If even one other firm misinterpreted Brown & Williamson’s entry as an effort to expand share, a chain reaction of competitive responses would almost certainly have resulted, and oligopoly discipline would have broken down, perhaps irretrievably. ...

Liggett argues that the means by which Brown & Williamson signaled its anticompetitive intent to its rivals was through its pricing structure. According to Liggett, maintaining existing list prices while offering substantial rebates to wholesalers was a signal to the other cigarette firms that Brown & Williamson did not intend to attract additional smokers to the generic segment by its entry. But a reasonable jury could not conclude that this pricing structure eliminated or rendered insignificant the risk that the other firms might misunderstand Brown & Williamson’s entry as a competitive move. The likelihood that Brown & Williamson’s rivals would have regarded its pricing structure as an important signal is low, given that Liggett itself, the purported target of the predation, was already using similar rebates, as was R.J. Reynolds in marketing its Doral branded generic. A Reynolds executive responsible for Doral testified that given its and Liggett’s use of wholesaler rebates, Brown & Williamson could not have competed effectively without them. And despite extensive discovery of the corporate

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records of R.J. Reynolds and Philip Morris, no documents appeared that indicated any awareness of Brown & Williamson’s supposed signal by its principal rivals. Without effective signaling, it is difficult to see how the alleged predation could have had a reasonable chance of success through oligopoly pricing.

Finally, although some of Brown & Williamson’s corporate planning documents speak of a desire to slow the growth of the segment, no objective evidence of its conduct permits a reasonable inference that it had any real prospect of doing so through anticompetitive means. It is undisputed that when Brown & Williamson introduced its generic cigarettes, it offered them to a thousand wholesalers who had never before purchased generic cigarettes. The inevitable effect of this marketing effort was to expand the segment, as the new wholesalers recruited retail outlets to carry generic cigarettes. Even with respect to wholesalers already carrying generics, Brown & Williamson’s unprecedented volume rebates had a similar expansionary effect. Unlike many branded cigarettes, generics came with no sales guarantee to the wholesaler; any unsold stock represented pure loss to the wholesaler. By providing substantial incentives for wholesalers to place large orders, Brown & Williamson created strong pressure for them to sell more generic cigarettes. In addition, as we have already observed, many wholesalers passed portions of the rebates about which Liggett complains on to consumers, thus dropping the retail price of generics and further stimulating demand. Brown & Williamson provided a further, direct stimulus, through some $10 million it spent during the period of alleged predation placing discount stickers on its generic cartons to reduce prices to the ultimate consumer. In light of these uncontested facts about Brown & Williamson’s conduct, it is not reasonable to conclude that Brown & Williamson threatened in a serious way to restrict output, raise prices above a competitive level, and artificially slow the growth of the economy segment of the national cigarette market.

To be sure, Liggett’s economic expert explained Liggett’s theory of predatory price discrimination and testified that he believed it created a reasonable possibility that Brown & Williamson could injure competition in the United States cigarette market as a whole. But this does not alter our analysis. When an expert opinion is not supported by sufficient facts to validate it in the eyes of the law, or when indisputable record facts contradict or otherwise render the opinion unreasonable, it cannot support a jury’s verdict. Expert testimony is useful as a guide to interpreting market facts, but it is not a substitute for them. As we observed in Matsushita, “expert opinion evidence ... has little probative value in comparison with the economic factors” that may dictate a particular conclusion. Here, Liggett’s expert based his opinion that Brown & Williamson had a reasonable prospect of recouping its predatory losses on three factors: Brown & Williamson’s black and white pricing structure, corporate documents showing an intent to shrink the price differential between generic and branded cigarettes, and evidence of below-cost pricing. Because, as we have explained, this evidence is insufficient as a matter of law to support a finding of primary-line injury under the Robinson-Patman Act, the expert testimony cannot sustain the jury’s verdict.

IV. We understand that the chain of reasoning by which we have concluded that Brown & Williamson is entitled to judgment as a matter of law is demanding. But a reasonable jury is presumed to know and understand the law, the facts of the case, and the

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realities of the market. We hold that the evidence cannot support a finding that Brown & Williamson’s alleged scheme was likely to result in oligopolistic price coordination and sustained supracompetitive pricing in the generic segment of the national cigarette market. Without this, Brown & Williamson had no reasonable prospect of recouping its predatory losses and could not inflict the injury to competition the antitrust laws prohibit. The judgment of the Court of Appeals is Affirmed.

Justice STEVENS, with whom Justice WHITE and Justice BLACKMUN join, dissenting. ... The Court of Appeals ... found that Liggett could not succeed on its claim, because B & W, as an independent actor controlling only 12% of the national cigarette market, could not injure competition. Today, the Court properly rejects that holding. Instead of remanding the case to the Court of Appeals to resolve the other issues raised by the parties, however, the Court goes on to review portions of the voluminous trial record, and comes to the conclusion that the evidence does not support the jury’s finding that B & W’s price discrimination “had a reasonable possibility of injuring competition.” In my opinion, the evidence is plainly sufficient to support that finding.

I. The fact that a price war may not have accomplished its purpose as quickly or as completely as originally intended does not immunize conduct that was illegal when it occurred. A proper understanding of this case therefore requires a brief description of the situation before the war began in July 1984; the events that occurred during the period between July of 1984 and the end of 1985; and, finally, the facts bearing on the predictability of competitive harm during or at the end of that period.

Background. B & W is the third largest firm in a highly concentrated industry. For decades, the industry has been marked by the same kind of supracompetitive pricing that is characteristic of the textbook monopoly. Without the necessity of actual agreement among the six major manufacturers, “prices for cigarettes increased in lock-step, twice a year, for a number of years, irrespective of the rate of inflation, changes in the costs of production, or shifts in consumer demand.” Notwithstanding the controversy over the health effects of smoking and the increase in the federal excise tax, profit margins improved “handsomely” during the period between 1972 and 1983.

The early 1980’s brought two new developments to the cigarette market. First, in 1980, when its share of the market had declined to 2.3%, Liggett introduced a new line of generic cigarettes in plain black and white packages, offered at an effective price of approximately 30% less than branded cigarettes. A B & W memorandum described this action as “the first time that a [cigarette] manufacturer has used pricing as a strategic marketing weapon in the U.S. since the depression era.” This novel tactic proved successful; by 1984, Liggett’s black and whites represented about 4% of the total market and generated substantial profits. The next development came in 1984, when R.J. Reynolds (RJR), the second largest company in the industry, “repositioned” one of its established brands, Doral, by selling it at discount prices comparable to Liggett’s black and whites.

B & W executives prepared a number of internal memoranda planning responses to these two market developments. With respect to RJR, B & W decided to “follo[w] precisely the pathway” of that company, reasoning that “introduction of a branded generic by B & W now appears to be feasible as RJR has the clout and sales force

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coverage to maintain the price on branded generics.” Accordingly, B & W planned to introduce a new “branded generic” of its own, known as Hallmark, to be sold at the same prices as RJR’s Doral.

B & W took a more aggressive approach to Liggett’s black and whites. It decided to launch its own line of black and white cigarettes with the “[s]ame style array” and list price as Liggett’s, but with “[s]uperior discounts/allowances.” B & W estimated that its own black and whites would generate a “trading profit” of $5.1 million for the second half of 1984 and $43.6 million for 1985. At the same time, however, B & W, anticipating “competitive counterattacks,” was “prepared to redistribute this entire amount in the form of additional trade allowances.” ... Notwithstanding its ultimate aim to “limit generic segment growth,” B & W estimated an aggregate potential trading profit on black and whites of $342 million for 1984 to 1988. Though B & W recognized that it might be required to use “some or all of this potential trading profit” to maintain its market position, it also believed that it would recoup its losses as the segment became “more profitable, particularly as it approaches maturity.”

B & W began to implement its plan even before it made its first shipment of black and whites in July 1984, with a series of price announcements in June of that year. When B & W announced its first volume discount schedule for distributors, Liggett responded by increasing its own discounts. Though Liggett’s discounts remained lower than B & W’s, B & W responded in turn by increasing its rebates still further. After four or five moves and countermoves, the dust settled with B & W’s net prices to distributors lower than Liggett’s. B & W’s deep discounts not only forfeited all of its $48.7 million in projected trading profits for the next 18 months, but actually resulted in sales below B & W’s average variable cost.

Assessing the pre-July 1984 evidence tending to prove that B & W was motivated by anticompetitive intent, the District Court observed that the documentary evidence was “more voluminous and detailed than any other reported case. This evidence not only indicates B & W wanted to injure Liggett, it also details an extensive plan to slow the growth of the generic cigarette segment.”

The 18-Month Price War. ... The rebate program was intended to harm Liggett and in fact caused it serious injury.10 The jury found that Liggett had suffered actual damages of $49.6 million.... To inflict this injury, B & W sustained a substantial loss. During the full 18-month period, B & W’s revenues ran consistently below its total variable costs, with an average deficiency of approximately $0.30 per carton and a total loss on B & W black and whites of almost $15 million. That B & W executives were willing to accept losses of this magnitude during the entire 18 months is powerful evidence of their belief that prices ultimately could be “managed up” to a level that would allow B & W to recoup its investment.

The Aftermath. At the end of 1985, the list price of branded cigarettes was $33.15 per carton, and the list price of black and whites, $19.75 per carton. Over the next four

10 Because the parties in this case agree that the relevant measure of cost is average variable cost, however, we again decline to resolve the conflict among the lower courts over the appropriate measure of cost. See Cargill, 479 U.S. at 117-118 n.12; Matsushita.

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years, the list price on both branded and black and white cigarettes increased twice a year, by identical amounts. The June 1989 increases brought the price of branded cigarettes to $46.15 per carton, and the price of black and whites to $33.75–an amount even higher than the price for branded cigarettes when the war ended in December 1985.11 Because the rate of increase was higher on black and whites than on brandeds, the price differential between the two types of cigarettes narrowed from roughly 40% in 1985 to 27% in 1989.

The expert economist employed by Liggett testified that the post-1985 price increases were unwarranted by increases in manufacturing or other costs, taxes, or promotional expenditures. To be sure, some portion of the volume rebates granted distributors was passed on to consumers in the form of promotional activity, so that consumers did not feel the full brunt of the price increases. Nevertheless, the record amply supports the conclusion that the post-1985 price increases in list prices produced higher consumer prices, as well as higher profits for the manufacturers.

The legal question presented by this evidence is whether the facts as they existed during and at the close of the 18-month period, and all reasonable inferences to be drawn from those facts, justified the finding by the jury that B & W’s discriminatory pricing campaign “had a reasonable possibility of injuring competition.”

II. ... The Robinson-Patman Act was designed to reach discriminations “in their incipiency, before the harm to competition is effected. It is enough that they ‘may’ have the prescribed effect.” Corn Products Refining Co. v. FTC, 324 U.S. 726, 738 (1945) ... In this case, then, Liggett need not show any actual harm to competition, but only the reasonable possibility that such harm would flow from B & W’s conduct.

The evidence presented supports the conclusion that B & W’s price war was intended to discipline Liggett for its unprecedented use of price competition in an industry that had enjoyed handsome supracompetitive profits for about half a century. The evidence also demonstrates that B & W executives were confident enough in the feasibility of their plan that they were willing to invest millions of company dollars in its outcome. And all of this, of course, must be viewed against a background of supracompetitive, parallel pricing, in which “prices for cigarettes increased in lock-step, twice a year ... irrespective of the rate of inflation, changes in the cost of production, or shifts in consumer demand,” bringing with them dramatic increases in profit margins. In this context, it is surely fair to infer that B & W’s disciplinary program had a reasonable prospect of persuading Liggett to forego its maverick price reductions and return to parallel pricing policies, and thus to restore the same kind of supracompetitive pricing that had characterized the industry in the past. When the facts are viewed in the light most favorable to Liggett, I think it clear that there is sufficient evidence in the record that the “reasonable possibility” of competitive injury required by the statute actually existed.

11 It is also true that these same years, other major manufacturers entered the generic market and expanded their generic sales. Their entry is entirely consistent with the possibility that lock-step increases in the price of generics brought them to a level that was supracompetitive, though lower than that charged on branded cigarettes.

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III. After 115 days of trial, during which it considered 2,884 exhibits, 85 deposition excerpts, and testimony from 23 live witnesses, the jury deliberated for nine days and then returned a verdict finding that B & W engaged in price discrimination with a “reasonable possibility of injuring competition.” The Court’s contrary conclusion rests on a hodgepodge of legal, factual, and economic propositions that are insufficient, alone or together, to overcome the jury’s assessment of the evidence.

First, as a matter of law, the Court reminds us that the Robinson-Patman Act is concerned with consumer welfare and competition, as opposed to protecting individual competitors from harm; “the antitrust laws were passed for the protection of competition, not competitors.” For that reason, predatory price-cutting is not unlawful unless the predator has a reasonable prospect of recouping his investment from supracompetitive profits. The jury, of course, was so instructed, and no one questions that proposition here.

As a matter of fact, the Court emphasizes the growth in the generic segment following B & W’s entry. As the Court notes, generics’ expansion to close to 15% of the total market by 1988 exceeds B & W’s own forecast that the segment would grow to only about 10%, assuming no entry by B & W. What these figures do not do, however, is answer the relevant question: whether the prices of generic cigarettes during the late 1980’s were competitive or supracompetitive.

On this point, there is ample, uncontradicted evidence that the list prices on generic cigarettes, as well as the prices on branded cigarettes, rose regularly and significantly during the late 1980’s, in a fashion remarkably similar to the price change patterns that characterized the industry in the 1970’s when supracompetitive, oligopolistic pricing admittedly prevailed. Given its knowledge of the industry’s history of parallel pricing, I think the jury plainly was entitled to draw an inference that these increased prices were supracompetitive.

The Court responds to this evidence dismissively, suggesting that list prices have no bearing on the question because promotional activities of the cigarette manufacturers may have offset such price increases. That response is insufficient for three reasons. First, the promotions to which the majority refers related primarily to branded cigarettes; accordingly, while they narrowed the differential between branded prices and black and white prices, they did not reduce the consumer price of black and whites. Second, the Court’s speculation is inconsistent with record evidence that the semiannual list price increases were not offset by consumer promotions. Finally, to the extent there is a dispute regarding the effect of promotional activities on consumer prices for generics, the jury presumably resolved that dispute in Liggett’s favor, and the Court’s contrary speculation is an insufficient basis for setting aside that verdict.15

15 In finding an absence of actual supracompetitive pricing, the Court also relies on the testimony of Liggett executives, who stated that industry prices were fair. Illustrative is the following exchange:

Q I want to know–yes or no–sir, whether or not you say that the price you charged for branded cigarettes, which is the same price you say everybody else charged, was a fair and equitable price for that product to the American consumer.A It’s what the industry set, and based on that it’s a fair price.

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As a matter of economics, ... the Court insists that a predatory pricing program in an oligopoly is unlikely to succeed absent actual conspiracy. Though it has rejected a somewhat stronger version of this proposition as a rule of decision, the Court comes back to the same economic theory, relying on the supposition that an “anticompetitive minuet is most difficult to compose and to perform, even for a disciplined oligopoly.” I would suppose, however, that the professional performers who had danced the minuet for 40 to 50 years would be better able to predict whether their favorite partners would follow them in the future than would an outsider, who might not know the difference between Haydn and Mozart. In any event, the jury was surely entitled to infer that at the time of the price war itself, B & W reasonably believed that it could signal its intentions to its fellow oligopolists, assuring their continued cooperation.

Perhaps the Court’s most significant error is the assumption that seems to pervade much of the final sections of its opinion: that Liggett had the burden of proving either the actuality of supracompetitive pricing, or the actuality of tacit collusion. In my opinion, the jury was entitled to infer from the succession of price increases after 1985–when the prices for branded and generic cigarettes increased every six months from $33.15 and $19.75, respectively, to $46.15 and $33.75–that B & W’s below-cost pricing actually produced supracompetitive prices, with the help of tacit collusion among the players. But even if that were not so clear, the jury would surely be entitled to infer that B & W’s predatory plan, in which it invested millions of dollars for the purpose of achieving an admittedly anticompetitive result, carried a “reasonable possibility” of injuring competition. Accordingly, I respectfully dissent.

The problem with this testimony, and testimony like it, is that it relates to the period before the price war, as well as after, when there is no real dispute but that prices were supracompetitive. … Some of the testimony cited by the Court, for instance, is that of an outside director who served only from 1977 or 1978 until 1980; his belief in the competitiveness of his industry must be viewed against the “[s]ubstantial evidence suggest[ing] that in recent decades, the industry reaped the benefits of prices above a competitive level” to which the majority itself refers. The jury was, of course, entitled to discount the probative force of testimony from executives to the effect that there was no collusion among tobacco manufacturers, and that they had appeared before a congressional committee to vouch for the competitive nature of their industry. The jury was also free to give greater weight to the documentary evidence presented, the inferences to be drawn therefrom, and the testimony of experts who agreed with the textbook characterization of the industry.

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