A Taiwanese auto body parts company (“Manufacturer”) was an early entrant into the U.S. market for replacement truck hoods, with very little competition from only a few other Taiwanese manufacturers. Some of whom participated in joint ventures with Manufacturer. Competitor entered the market for replacement hoods but found that it could not match the prices of Manufacturer and the Taiwanese firms.
Claiming that Manufacturer and the other firms were conspiring to drive it out of business with predatory prices, it brought an antitrust action against Manufacturer. Both parties submitted expert economist reports. Both experts submitted second reports addressing each other’s initial findings, and each party moved to exclude the other’s expert witness testimony. The district court denied Competitor’s motion to exclude Manufacturer’s expert’s reports, but granted in part Manufacturer’s motion to exclude Competitor’s expert’s reports. It specifically excluded Competitor’s expert’s opinions on “predatory intent” and recoupment.
Manufacturer then moved for summary judgment on all antitrust claims, claiming there was no genuine dispute of material fact on either the issue of below-cost pricing or recoupment of losses. The district court granted the motion for summary judgment, stating that there was a lack of evidence that Manufacturer could recoup its costs and that it would not analyze and resolve whether Competitor presented evidence of below-cost pricing.
The U.S. Court of Appeals, Sixth Circuit Judge Julia Smith Gibbons wrote in her opinion that the Court also has required that predatory prices be at least below average total cost. The Court noted that Manufacturer’s prices never fell below the average avoidable cost, and the risk of future entry would undermine any attempt to recoup predatory losses in the markets for the goods. Competitor’s expert witness, however, tried to calculate average variable costs in his first report but found it “very difficult to measure.” Nonetheless, he concluded that Manufacturer’s prices were often above the estimated level of average variable costs, but the difference was frequently very small. He found this “aggressive pricing” “disturbing” and potentially suggestive of a predatory scheme.
In his second report, Competitor’s expert witness revamped his theory of predation and opted for what he called the “no economic sense” test, under which the losses from predation were measured as any downward deviation from a profit-maximizing price. This analysis also addressed the likelihood that Competitor would be forced out of the market, and provided more quantitative explanation of Manufacturer’s recoupment prospects, even comparing those to the “losses” under the “no economic sense” test.
Competitor argued that the district court erred in excluding as unreliable Competitor’s expert’s opinion on two issues: (i) predatory intent and (ii) below-cost pricing. Its expert witness opined in both reports that Manufacturer’s pricing strategy showed an intent to force Competitor out of the market. The district court excluded this part of the report under Rule 702(a) because, in its view, specialized knowledge would not aid the factfinder in determining intent. The Sixth Circuit agreed, explaining that a firm only acts as a “predator” to the extent that it sells at prices below an appropriate measure of cost and stands to recoup its losses through later supra-competitive profits. The judge found that Competitor’s expert’s report had “serious infirmities” relating to the cost-price relationship. No expert testimony was needed on the question of intent. The district court didn’t abuse its discretion in barring Competitor’s expert from testifying on this narrow question.
Competitor also challenged the district court’s holding that the expert’s report contained flawed recoupment analysis, but the Sixth Circuit said it was more applicable to below-cost pricing. In his initial report, Competitor’s expert concluded that he could only say that Manufacturer’s prices were frequently above the estimated level of costs, but the difference between price and cost was often very small. And although he found this proximity “disturbing,” he admitted in his second report that Manufacturer’s “aggressive pricing strategy” couldn’t be shown to fall below average variable or average avoidable costs. As such, the expert analyzed Manufacturer’s short-term losses using what he termed the “no economic sense test.” This test calculated losses as possible profits foregone by not charging a higher price. With this analysis, a predator doesn’t necessarily price below average variable, average avoidable, or average total cost. Instead, it simply charges something less than the profit-maximizing price. Competitor’s expert then compared his estimate of these foregone profits with his calculations of what Manufacturer and its alleged conspirators would profit by forcing Competitor out of the market to reach his conclusion about the likelihood of recoupment.
Judge Gibbons wrote that this wasn’t going to do it and held that the district court was correct that admitting an expert opinion on predation relying on either a “disturbing” proximity test or a “no economic sense” test was contrary to law. Although the appropriate measure of cost has some flexibility, the judge opined, such as between average variable and average total cost, that flexibility extended only to costs directly incurred—not all conceivable opportunity costs. As a result, Competitor’s expert’s analysis of putative losses from predation was inadmissible, and the district court didn’t abuse its discretion in rejecting the “no economic sense” test. The prices also weren’t close to—but above—some measure of cost permissible evidence of anticompetitive conduct. In fact, the judge stated that they were “the essence of competition.”
Competitor, without the benefit of its expert’s “no economic sense” analysis, had little to support an essential element of its claim. Without its expert’s “no economic sense” test, Competitor didn’t have a measurement for the damages; even so, if there was a reasonable inference from the expert reports that Manufacturer’s prices were below average total cost, the burden of production was still on Competitor. Its claims would succeed or fail, Judge Gibbons said, based on an analysis of average variable cost; it wasn’t helpful to Competitor’s case that Manufacturer’s prices may have a “close proximity” to average variable cost, or that any price cuts merely coincided with competitive entry. If the prices were above cost, those actions simply suggested pro-competitive behavior, the Sixth Circuit held.
The judgment of the district court was affirmed.