CALLER-TIMES PUBLISHING COMPANY, INC., Petitioner, v. TRIAD COMMUNICATIONS, INC., d/b/a Wheels & Keels, Respondent.
No. C-9979.
Supreme Court of Texas.
Feb. 26, 1992.
Dissenting Opinion Nov. 13, 1991. Dissent on Motion for Rehearing Feb. 26, 1992.
826 S.W.2d 576
The majority‘s remarkable willingness to abandon precedent so recently announced demonstrates not only disregard for the law and indifference to the taxpayer, but also abandonment of the children of this state. Our school children have long suffered from the failure of the school finance system. Today they suffer anew from the failure of the justice system to deliver on the promise of the Texas Constitution. The majority offers our children only delay, and they have already had plenty of that. A child who began the first grade when this cause was originally filed in state court is already in high school and will probably have graduated before any new finance plan becomes effective.
Frankly it takes the greatest audacity to cite delays in Edgewood I in 1989—delays which represented part of the price paid for unanimity at this court—as an excuse for having still more delay in 1992 in Edgewood III. In 1989, implementation of this court‘s ruling required cooperation from Governor William Clements. He had repeatedly voiced a dual response to the Edgewood litigation: castigate the messenger—any judge involved—and change the Constitution to lower the standard for the school system. Like other torchbearers of inequality, he urged a simple solution—what Texas needs is not greater equality of educational opportunity, but a weaker Constitution. To cope with this ardent opponent of reform, the court extended the period for a solution.
With more enlightened leadership thankfully in place at the time of Edgewood II and with a determination to avoid another disrupted school year, we limited the time for action to about two months. Moreover, we criticized the delay that the trial court had already permitted and declared that it had “clearly abused its discretion in refusing to enforce the mandate of this Court issued in Edgewood I.” Edgewood II, 804 S.W.2d at 498.
Today the majority offers more unjustified delay as an alternative to a solution. After purposefully delaying release of this very opinion, the majority‘s suggestion that the Legislature move forward “without unnecessary delay,” Op. at 524, rings hollow. The majority‘s vague pronouncements sound more like the Oracle at Delphi than a provider of justice. Its attempt to shift responsibility to the Governor to act more promptly is nothing but a diversion. The delay that will now ensue is attributable not only to the lengthy time frame provided for a legislative response, but in the unresolvable ambiguities created by today‘s opinion. If there was ever a case to prove the old maxim “justice delayed is justice denied,” this is it.
It was for the benefit of our children that the Constitution commanded that education be efficient. It was for their benefit that Demetrio Rodriguez sought relief. It was for their benefit that we decided Edgewood I and II. But now, for the benefit of the privileged, the court turns a deaf ear both to the commanding voice of the law and to the whispered pleas of the children.
MAUZY, J., joins in this dissent.
Arnold Anderson Vickery, E. Landers Vickery, Houston, for respondent.
OPINION ON MOTION FOR REHEARING
COOK, Justice.
Our opinion and judgment of November 13, 1991 are withdrawn. The motion for rehearing is granted in part and overruled in part. We grant the portion of the motion for rehearing requesting a remand to the trial court for a new trial on the antitrust claims.
This case presents a question of first impression requiring us to determine what constitutes predatory pricing for purposes of the Texas Free Enterprise and Antitrust Act of 1983.
I.
The Caller-Times Publishing Company‘s market area is Corpus Christi and the surrounding eleven counties. The company publishes two daily newspapers (The Corpus Christi Caller and The Corpus Christi Times), an advertising circular called the “Pennysaver,” and other supplemental publications. The Caller-Times has a combined circulation rate of 82,000 for its daily newspapers.
In mid-1984, Triad Communications, Inc. purchased an advertising circular called “Wheels and Keels” for $10,000.00. Wheels and Keels was a circular which featured display and classified advertising primarily for automobiles and boats. Its market area was Corpus Christi and the surrounding cities, which placed it in direct competition with the Caller-Times over most of the Caller-Times’ market area.
In 1986, Triad filed suit in state court against the Caller-Times under the Texas Antitrust Act. Triad alleged the Caller-Times engaged in monopolistic activity and predatory pricing practices. Triad also alleged tortious interference with Triad‘s contractual relationships.2 Triad based its
The jury found that the Caller-Times had targeted Triad‘s customers for special deals and that such targeting had proximately caused Triad damages of $364,416.00. Pursuant to jury findings that require the court to treble damages under the Texas Antitrust Act, the trial court rendered judgment for Triad in the amount of $1,096,248.00, and ordered the payment of prejudgment interest and attorney‘s fees. The trial court also rendered an order granting Triad injunctive relief.
The Caller-Times appealed the trial court‘s judgment, arguing first that the trial court erred in overruling its motion for judgment non obstante veredicto. The Caller-Times contended that Triad failed to prove the Caller-Times’ advertising rates were set below its average variable cost. This failure, argued the Caller-Times, was fatal to a claim of predatory pricing. The Caller-Times also argued that the evidence was both legally and factually insufficient to support Triad‘s tortious interference with contract claims. On rehearing, the court of appeals dissolved the injunction on the ground that it was overbroad and vague but affirmed the trial court‘s judgment on the basis of a test the court of appeals promulgated for proving predatory pricing. 791 S.W.2d 163.
The test set out by the court of appeals, which is a hybrid test taken from opinions of the United States Courts of Appeals for the Ninth and Eleventh Circuits, mixes subjective and objective proof of predatory pricing. The test requires that to recover under a claim of predatory pricing, a plaintiff must prove that the defendant (1) set its prices below its average total costs, and (2) exhibited some subjective or objective characteristics of predatory conduct. The court of appeals found that the evidence was replete with proof of subjective intent of predatory conduct because the evidence showed that the Caller-Times had called on Wheels and Keels’ customers and offered them special deals.
The court of appeals determined that the testimony of Stephen Sullivan, the Caller-Times’ publisher, proved the Caller-Times set prices below its average total costs. Sullivan testified that the profit margin on both the Caller-Times and the Pennysaver was twelve percent, plus or minus five percent. Using this general figure, the court of appeals determined that the Caller-Times’ total costs were between eighty-three and ninety-three percent of its revenues. At trial, evidence was offered that the Caller-Times offered deals to Wheels and Keels’ customers of up to fifty percent off the Caller-Times’ regular advertising rates. The court of appeals determined that at fifty percent off its advertising prices, the Caller-Times was pricing its advertising thirty-three percent below its lowest break-even point of eighty-three percent. This, the court of appeals determined, was evidence that the Caller-Times set its advertising rates below its total costs; thus, the jury finding that the Caller-Times engaged in predatory pricing had support in the evidence.
II.
On appeal, the Caller-Times complains of the court of appeals’ judgment in several respects, most notably in regard to the predatory pricing test the court of appeals devised under the Texas Antitrust Act. That statute was a sweeping reform of the former Texas antitrust act originally passed in 1889, one year before Congress passed the Sherman Antitrust Act. Baron, Increasing Importance of State Antitrust Enforcement: The Texas Free Enterprise
The current Texas Antitrust Act is modeled on both the Sherman Antitrust Act and the Clayton Act. Comment, supra, at 1183 n. 9. Consistent with its foundation in federal law, the Texas Antitrust Act provides that it is to be interpreted in harmony with federal judicial interpretations of comparable federal laws.
Triad sued the Caller-Times for damages caused by its allegedly monopolistic conduct, seeking to invoke the protection of
Initially, we note that both the Sherman Act and the Texas Antitrust Act cover monopoly and attempted monopoly. Triad alleges monopoly, which is established if two elements are proven: “(1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historical accident.” United States v. I.T.T. Grinnell Corp., 384 U.S. 563, 570-71 (1966). The first element, which is not an issue on appeal, was resolved in favor of Triad when the jury found that the Caller-Times had monopoly power in the relevant market. A plaintiff may establish the second element with a showing that the monopolist charged predatory prices.3 The second element was resolved in favor of Triad when the trial court found predatory pricing based on evidence of subjective intent. Triad presented no evidence on cost data. 791 S.W.2d at 167. The court of appeals held that Triad must show that the Caller-Times was charging below its average total cost and that a statement by the Caller-Times’ publisher on the profit margin of the Caller-Times was sufficient to show below average-total-cost pricing.
The issue on appeal is what constitutes proof of predatory pricing. This is a question of first impression under the Texas Antitrust Act. Federal courts, however, have addressed the question of predatory pricing on a number of occasions.
A test for predatory pricing cannot be developed in a vacuum. We note several policies which underlie an appropriate test.
Further, a vague standard has a chilling effect on business.5 Business must be able to determine prospectively what price it may legally charge. See Henry v. Chloride, Inc., 809 F.2d 1334, 1346 (8th Cir. 1987); International Air Industries, Inc. v. American Excelsior Co., 517 F.2d 714, 722-23 (5th Cir. 1975). When a court focuses on subjective intent, a seller cannot predict where it may legally set a price. The test developed by the court of appeals focuses on subjective intent. This standard creates a lack of predictability in the law which punishes those who would engage in vigorous competition.
III.
The appropriate test for predatory pricing under the Texas Antitrust Act has two elements. The first element is whether the predatory pricing is economically feasible. See Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 598 (1986) (rational economic motive is a threshold question); Henry v. Chloride, Inc., 809 F.2d at 1345. Unless predatory pricing is economically plausible, business has no motive to engage in that practice.6 See Matsushita, 475 U.S. at 595; United States v. Syufy Enterprises, 903 F.2d 659 (9th Cir. 1990); A.A. Poultry Farms, Inc. v. Rose Acre Farms, Inc., 881 F.2d 1396, 1401 (7th Cir. 1989), cert. denied, 494 U.S. 1019 (1990); S. Breyer, Regulation and its Reform 32 (1982); F. Scherer, Industrial Market Structure and Economic Performance 335-340 (2nd ed. 1980). Predatory pricing is only economically feasible when a company has an objectively reasonable expectation of recouping its losses from predatory pricing by charging higher prices later. See Cargill, 479 U.S. at 117-19; A.A. Poultry Farms, 881 F.2d at 1401; Henry v. Chloride, Inc., 809 F.2d at 1345; Adjusters Replace-A-Car v. Agency Rent-A-Car, Inc., 735 F.2d 884, 894 (5th Cir. 1984), cert. denied, 469 U.S. 1160 (1985); Barry Wright Corp., 724 F.2d at 231; Northeastern
The requirement that predatory pricing be economically feasible is consistent with the goal of providing the benefits of competition to the consumers of the state. This standard helps create a rule that businesses can readily follow which allows them to cut prices as low as possible. Low prices for consumers are an ultimate goal of the Texas Antitrust Act. If the market structure does not allow recoupment later, then consumers benefit from a period of low prices. There is no down side because, by definition, if the market does not allow later recoupment the monopolist cannot charge higher prices later. Consumers cannot lose if the market does not allow recoupment. See A.A. Poultry Farms, 881 F.2d at 1401.
The dissent attributes this Court‘s economic position to Robert H. Bork and his work The Antitrust Paradox (1978). The Court neither cites nor relies on The Antitrust Paradox. Rather, the Court relies on the decision of the United States Supreme Court in Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574 (1986). The Supreme Court‘s economic analysis in Matsushita follows from a line of Supreme Court precedent starting with Brown Shoe Co., Inc. v. United States, 370 U.S. 294 (1962). See, e.g., Brunswick Corp. v. Riegel Textile Corp., 752 F.2d 261, 266 (7th Cir. 1984).8
The starting point for a predatory pricing analysis in the federal circuit courts is Areeda & Turner, Predatory Pricing and Related Practices Under Section 2 of the Sherman Act,
The Ninth Circuit used the Areeda and Turner test as a starting point and then expanded the inquiry into a three-part analysis. The analysis creates different presumptions depending on whether the price charged is below average variable cost, between average variable cost and average total cost, or above average total cost. Inglis, 668 F.2d 1014, 1035-36 (creates the first two elements); Transamerica Computer Co., Inc. v. International Business Machines Corp., 698 F.2d 1377, 1388 (9th Cir.), cert. denied, 464 U.S. 955 (1983) (adds the third element). The Inglis/Transamerica test provides that: (1) when prices are above average total cost the plaintiff has the burden of proving by clear and convincing evidence that there was predatory pricing (Transamerica); (2) when prices are below average total cost but above average variable cost the plaintiff has the burden of proving by a preponderance of the evidence that there was predatory pricing (Inglis); and (3) when prices are below average variable cost a prima facie case of predatory pricing is established and the defendant has the burden of proving by a preponderance of the evidence that its prices were justified without regard to any anticipated destructive effect they might have (Inglis).
The Inglis segments of the Ninth Circuit test for predatory pricing have been followed to varying degrees by the Sixth,15 Eighth,16 Tenth,17 and Eleventh18 Circuits. The Transamerica segment of the Ninth
We decline to follow the Ninth Circuit approach to prices above average variable cost. The Ninth Circuit divides costs above average variable costs into two groups: (1) those above average total cost; and (2) those above average variable cost but below average total cost. Initially, the Ninth Circuit approach to prices above average total cost is clearly against the great weight of federal authority.19 Second, the Ninth Circuit approach to finding predatory
pricing in prices that are above average variable cost is inconsistent with the stated objectives of the Texas Antitrust Act. The Ninth Circuit notes that “[p]ricing below average total cost may be a legitimate means of minimizing losses, particularly when the firm is ‘temporarily’ experiencing ‘excess capacity’ in its productive facilities.” Inglis, 668 F.2d at 1035. We can also foresee other situations where a firm may legitimately price below its average total cost. Start-up periods, periods of falling demand, loss-leaders and promotional activities are other examples of legitimate pricing below average total cost.20 In the short-run, a firm maximizes its profits when its prices are above its average variable costs. Forcing a company to charge above its marginal cost is a waste of economic resources. See International Air, 517 F.2d at 724.
The Ninth Circuit notes that “[a]lthough pricing below average total cost and above average variable cost is not inherently predatory, it does not follow, however, that such prices are never predatory.” Inglis, 668 F.2d at 1035. The Ninth Circuit‘s primary concern with prices that are above average variable price appears to be the practice of limit pricing.21 Inglis, 668 F.2d at 1033. Although we share the Ninth Circuit‘s concern, we seek a solution that
The other widely used test for predatory pricing, besides that of the Ninth Circuit, focuses on average variable cost and is used by the First, Second, and Fifth Circuits. Like the Ninth Circuit approach, the First, Second, and Fifth Circuits start with the test proposed by Areeda and Turner. The Fifth Circuit addressed the Areeda and Turner approach first in International Air Industries, Inc. v. American Excelsior Co., 517 F.2d 714 (5th Cir. 1975), cert. denied, 424 U.S. 943 (1976). The International Air court adopted the basic Areeda and Turner formulation but carved out an exception for cases of limit pricing. 517 F.2d at 724. The First and Second Circuits independently developed tests based solely on pricing above or below average variable cost without following International Air. All three circuits have the presumption that prices above average variable cost are legal and prices below average variable cost are illegal.
The Second Circuit noted in Northeastern Telephone Co. v. American Telephone & Telegraph Co. that the appropriate inquiry for developing a price standard is to determine when prices become unremunerative. 651 F.2d 76, 87 (2nd Cir. 1981), cert. denied, 455 U.S. 943 (1982). Marginal cost pricing allows a firm to recover its cost of producing the last unit sold. If a seller cannot cover its marginal cost then it should normally discontinue production. The seller is not only losing its fixed costs but is losing its incremental costs as well. See Barry Wright, 724 F.2d at 232. Marginal cost pricing fosters competition on the basis of relative efficiency. See Northeastern Telephone, 651 F.2d at 87. This is consistent with the Texas Antitrust Act‘s stated purpose of maintaining and promoting economic competition for the benefit of consumers. Marginal cost pricing is remunerative and should be permissible. As we have noted, average variable cost is the accountant‘s surrogate for marginal cost. Therefore, a price above average variable cost will not support a charge of predatory pricing unless there are substantial barriers to entry into the relevant market.
The Fifth Circuit recognizes an exception to the general rule when there are substantial barriers to market entry. International Air, 517 F.2d at 724. This exception is supported by Matsushita, in which the Supreme Court stated that unless there were barriers to entry into a market it would presumably be impossible to maintain prices above a competitive level for an extended time. 475 U.S. at 591 n. 15. Prices above a competitive level are necessary for a predator to recoup the losses incurred in pricing below average variable cost and profit from its actions. Without the ability to price above a competitive level there is no economic motive to engage in predatory pricing.
The Fifth Circuit‘s exception for when substantial barriers to market entry exist requires that the price charged be above the seller‘s short-run profit-maximizing price. Adjusters Replace-A-Car v. Agency Rent-A-Car, Inc., 735 F.2d 884, 890-91 (5th Cir. 1984), cert. denied, 469 U.S. 1160 (1985); International Air, 517 F.2d at 724. This exception addresses the limit pricing problem that appears to have been the driving force behind the Ninth Circuit‘s treatment of
The subjective intent of a seller should not be a factor in determining whether its prices are predatory. This is the approach taken by the First,22 Second,23 Fifth,24 Seventh,25 and Eighth26 Circuits. The danger of evidence of subjective intent is that “[p]redatory pricing is difficult to distinguish from vigorous price competition” and subjective evidence blurs the distinction. Northeastern Telephone, 651 F.2d at 88. This is because subjective evidence of predatory intent can be ambiguous and misleading. As a result, juries may “erroneously condemn competitive behavior.” Morgan v. Ponder, 892 F.2d 1355, 1359 (8th Cir. 1989).
Claims of predatory pricing generally arise when a seller seeks to increase market share through price cutting. These efforts are permissible even if their result is to decrease the rivals’ share. See Cargill, Inc. v. Monfort of Colorado, Inc., 479 U.S. 104, 116 (1986). This is just recognition that the goal of all competition is to capture as much, if not all, of the business for yourself which will necessarily affect, if not destroy your competitors. Antitrust laws do not prohibit this activity.
Rivalry is harsh, and consumers gain the most when firms slash costs to the bone and pare price down to cost, all in pursuit of more business.... If courts use the vigorous, nasty pursuit of sales as evidence of forbidden ‘intent,’ they run the risk of penalizing the motivation forces of competition. A.A. Poultry Farms, 881 F.2d at 1401-02.
Not only is evidence of subjective intent misleading to the jury, but it also leaves a standard that is too vague for businesses to follow. Barry Wright Corp., 724 F.2d at 227, 232. In the absence of a clear standard, business will tend to err on the side of keeping prices high and consumers will be the ultimate losers. Id. This result is contrary to the purpose stated in
The legal environment for small business is tough enough. An antitrust standard which focuses on whether a seller had improper thoughts about its competitors only makes the legal environment worse. A test focusing on conduct provides a much more certain guideline for business.
In addition to applying an incorrect standard, the court of appeals improperly combined a showing of predatory pricing with a
We therefore adopt the following test for predatory pricing: (1) the seller has an objectively reasonable expectation of recouping its losses due to the alleged predatory pricing by charging higher prices later, that is, the predatory pricing is economically feasible; and (2)(a) the price charged is below average variable cost; or (b)(i) there are substantial barriers to market entry; (ii) the seller is charging a price below its short-run profit-maximizing price and its average total cost;28 and (iii) the benefits of the seller‘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.
IV.
The appropriate measure of cost for establishing a claim of predatory pricing was the focus on appeal. Therefore, we address that element of the test before considering the other elements. The test provides that there is predatory pricing when the price charged is below average variable cost. When considering claims of predatory pricing, the trier of fact must have sufficiently precise cost information to allow it to determine average variable cost. See Clamp All Corp. v. Cast Iron Soil Pipe Institute, 851 F.2d 478, 483 (1st Cir. 1988), cert. denied, 488 U.S. 1007 (1989). In the case at hand, Triad introduced no evidence that the Caller-Times priced its advertisements below the Caller-Times’ average variable cost, 791 S.W.2d at 169, or, indeed, below any measure of cost. The testimony of the Caller-Times’ publisher that the Caller-Times’ profit margin was twelve percent plus or minus five percent does not provide a basis for determining any relevant measure of cost. The evidence that Triad presented at trial shows only that the Caller-Times engaged in “vigorous competition.” This is clearly not prohibited under antitrust statutes. Absent any evidence that the Caller-Times set its prices below average variable cost, Triad‘s monopolization claim fails under this element. Triad may not seek refuge in the exception to the second part of the test because there was no evidence of substantial barriers to entry to the relevant market.29 Because Triad did not meet its burden on the second part of the test for predatory pricing, we need not consider the first part: whether the alleged predatory pricing was economically feasible.
V.
Having decided that Triad has not established an antitrust violation, we are left with the question whether to remand the antitrust issue for a new trial based on this decision or to render judgment for the Caller-Times. We may remand if the interest of justice demands a new trial.
VI.
Triad received a favorable jury verdict on the basis of its claims of tortious interference with its business relations in addition to the favorable verdict on the
The court of appeals affirmed the trial court‘s judgment on the basis of Triad‘s antitrust claims and did not address the issues raised under the independent ground of tortious interference. We decline to address the issues raised by the tortious interference with business relations claims as they were not addressed by the court of appeals. We therefore reverse the portion of the court of appeals’ judgment holding that the Caller-Times violated the Texas Antitrust Act and remand the cause to the court of appeals for consideration of the Caller-Times’ points of error on Triad‘s alternative ground of recovery. After the court of appeals considers the Caller-Times’ points of error on the alternative grounds of recovery, the court of appeals shall, if requested by Triad, remand to the trial court for a new trial on the antitrust claims. Of course Triad may only have judgment rendered on one of the alternative theories. However, Triad may elect the more favorable judgment after all of the proceedings we have set out.30
The motion for rehearing is granted in part and overruled in part.
DOGGETT, J., dissents joined by MAUZY, J.
DISSENTING OPINION
November 13, 1991*
DOGGETT, Justice.
“Put [them] out of business. Do whatever it takes. Squish [them] like a bug.”1 A Texas jury will never be able to hear these words, no matter how malicious the utterance of a predator intent on annihilating a Texas business. Representing an extraordinary setback for consumers, independent businesses, and law enforcement, today‘s opinion imposes faulty economic theory instead of implementing the realistic antitrust protection that the legislature mandated.
Today‘s opinion embraces the peculiar philosophy of Judge Robert Bork, who has long insisted that the best way to address predatory pricing, price fixing, and other anticompetitive practices is to treat them as curious abstractions and accord them legal approval. Categorizing antitrust cases as “economic asininities,”2 Bork claims that “efficiency-based monopolies are always better for consumers than any alternative antitrust can produce. [All business] is better left alone.” Robert H. Bork, The Antitrust Paradox 196 (1978) (emphasis added) (hereinafter Bork, The Antitrust Paradox). With similar enthusiasm, the court effectively declares the death of any meaningful right to object to predatory practices. Of all the many cases discussed today, not one involves a business that has prevailed in a claim against a predator under an exclusively cost based rule of the general type that the court now requires.3 Professing an awareness that the “environment” encountered by “small business is [already] tough enough,” the court offers a
peculiar cure: facilitate the elimination of small business. This approach is like a page from the Old West—“we had to shoot it, to get it out of its pain.”
In this tragic first interpretation of the Texas Free Enterprise and Antitrust Act,
I.
While seeking to limit the large combinations and monopolies plaguing Texas consumers and small businesses, the first state antitrust legislation, enacted in 1889, took a very narrow approach.6 It proscribed enumerated activities without regard to whether competition was actually being limited. The courts mechanically applied these per se prohibitions rather than considering the underlying purposes of the statute. See, e.g., Schnitzer v. Southwest Shoe Corp., 364 S.W.2d 373, 375 (Tex. 1963). Some monopolistic practices were not forbidden while other activities involving neither anticompetitive intent nor effect were condemned.7
With a steady decline in the relative size of the independent business sector, Texans were by the 1970‘s confronting far different economic realities than those with which their forebears had coped. Initial legislative attempts to update and strengthen state antitrust law enforcement encountered opposition from some of the largest economic enterprises in the nation. Only after attempts in five separate legislative sessions8 was it possible to gain final approval for a complete revision of the statutory scheme. Finally, in 1983, the legislature enacted what is conceded to be a “sweeping reform” designed to “afford courts broader powers of protection” than previously available. At 580. This legislative effort had the vigorous support of the state‘s chief law enforcement officer in two successive administrations, consumer groups, and some Texas businesses.9
A major thrust of the antitrust law revision was to eliminate the laundry list of per se violations. As one business representative noted, the reform “very substantially improves the posture of business and the
The true test of legality is whether the restraint [of trade] imposed is such as merely regulates and perhaps thereby promotes competition, or whether it is such as may suppress or even destroy competition. To determine that question the court must ordinarily consider the facts peculiar to the business....
Board of Trade of Chicago v. United States, 246 U.S. 231, 238 (1918); see also, e.g., Standard Oil Co. of New Jersey v. United States, 221 U.S. 1, 59-62 (1911).
In applying the Texas Free Enterprise and Antitrust Act, the rule of reason mandates a determination of whether an alleged violation has any actual anticompetitive purpose or effect.11 What must be considered is the totality of circumstances, not just an isolated course of business conduct. The jury must be allowed to examine the entire facts of the case and determine whether there was any anticompetitive behavior in contravention of the objectives of the legislature. The new law replaced the “largely mechanical” application of the prior law,12 and was designed “to in effect say don‘t look just at the form of the business relationship, look to see if it really has an anti-competitive effect....”13
II.
Henceforth what must be proven in order to establish predation in Texas is as follows:
(1) the seller has an objectively reasonable expectation of recouping its losses due to the alleged predatory pricing by charging higher prices later, that is, the predatory pricing is economically feasible; and (2)(a) the price charged is below average variable cost; or (b)(i) there are substantial barriers to market entry; (ii) the seller is charging a price below its short-run profit-maximizing price and its average total cost; and (iii) the benefits of the seller‘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.
At 588 (footnotes omitted). A mere reading of this language suggests how difficult it will be for judges to interpret and for juries to comprehend. Although aware that there has never been judicial adoption of such a strict cost-based test, at 587,14 the court imposes a standard which may be the most regressive in the nation.15 Vague and convoluted, this test depends upon unde-
As a predicate to this test, the court declares that the “subjective intent of the seller should not be a factor.” At 587. Excluding all such evidence of intent to undertake anticompetitive pricing schemes, this new standard is based solely on a checklist of figures on cost, price and profit.16 Companies pricing above the undefined level of “average variable cost” will never be accountable for predation, while firms charging below that arbitrary line usually will. This is nothing but a return to the mechanical pre-Act practice of “just [looking] at the form of the business relationship.”17 Removing all reason from this “rule of reason,” the court now stymies the legislative goal of realistic antitrust enforcement and entangles us once again in the impractical strictures of the per se rules. “[R]elentless application” of law and economics theory produces “new per se rules—that of per se legality.” 8 Texas Antitrust Bulletin, Oct. 1986, at 24 (emphasis in original).18
An examination of this court‘s economics-driven rule highlights both the difficulty and lack of predictability in its application. In the confusing economic feasibility part of its test, the court fails to explain how without intent evidence a victim can ever show that the predator “has an objectively reasonable expectation of recouping its losses,” at 582. Likewise, no guidance is provided regarding what type of evidence can establish this “objective” expectation.
The second part of the test—which is sure to subsume the entirety—is that the price charged be below “average variable cost,” a term which the court leaves vaguely defined. In contrast with “fixed costs,” such as property taxes, which do not vary with changes in output, “variable costs” are those which do vary with production level, often including such items as labor and maintenance costs.19 However, the factors which go into calculating “average variable cost” can and do vary in every case.20 In each firm, there are unique considerations of what costs are variable.21
Additionally, there is no justification offered for the selection as the critical variable of “average variable cost” rather than “total fixed cost“. The latter term appears to be the intended indicator for federal antitrust purposes. See McGahee v. Northern Propane Gas Co., 858 F.2d 1487, 1499-1500 (11th Cir. 1988), cert. denied, 490 U.S. 1084 (1989) (Congress focused on the total cost to produce a product, including a “fair profit” margin).23
Neither of the two alleged exceptions to the average variable cost rule offered by the court are readily decipherable. Again the court uses terms without explanation—what constitutes a “substantial barrier to entry” is left to the imagination.24 Nor does such terminology account for the fact that predatory pricing “itself [may] operate as an effective hindrance to new entry even in situations where the conventional barriers to entry are weak or absent.” B.S. Yamey, Predatory Price Cutting: Notes and Comments, 15 J.L. and Econ. 129, 142 (1972) (hereinafter Yamey); see also Harry S. Gerla, The Psychology of Predatory Pricing: Why Predatory Pricing Pays,
The second exception to the average variable cost rule occurs when the predator prices below its “short-run profit-maximizing price” and its “average total cost.” At 586. Since “short-run profit-maximizing price” and “average total cost” may be mutually exclusive terms, it is difficult to comprehend what the court intends.25 For instance, what is a “short-run profit-maximizing price“? This phrase is so vague as to be meaningless when used in a legal test, for there is and can be no one predictably certain “profit maximizing price” throughout a market. Furthermore, it may be inappropriate to apply a “short-run” standard to predatory pricing, which is premised on long-term strategy. See F.M. Scherer, Predatory Pricing and the Sherman Act: A Comment,
Economic theory can be a useful tool, but only in skilled hands. “If courts are going to practice economics, they better do so correctly and with some understanding of what they are doing. In the context of antitrust law, economic theory can be a tool of factual analysis or it can be a type of formalistic, doctrinal constraint on relevant factual inquiry.” Peter C. Carstensen, Predatory Pricing in the Courts: Reflection on Two Decisions,
These economic assumptions have numerous shortcomings when applied to the real world and the context of antitrust laws: a cost-based test relying on average variable cost and based on broad economic theories is difficult to apply in specific fact patterns26; it is too short-term oriented27; it is based on terms so flexible as to be necessarily vague28; it ignores economic factors29; it relies on implausible, hypothetical scenarios30; it excessively favors large, multi-product firms31; it assumes a perfect market which simply does not exist in the real world32; and it uses economic terms which are inapplicable to actual business accounting standards33. As a result of these faults, such a cost-based test is simply too permissive of predatory activity.34 Of all the cases discussed by the court not one involves any plaintiff ever prevailing under a cost-oriented rule.35
The alleged justification for today‘s misdeed is “predictability,” at 581, to protect business from the “chilling effect” of “vague[ness].” At 581. The court‘s fascination with economic theory has resulted, however, in a predictable per se cost-based test made unpredictable. Because of the use of vague terminology, the rule will mechanically be applied, but the result will vary from case to case. Assume a product market in which there are only two competing firms, one of which enjoys highly modernized production facilities involving sub-
As a result of the court‘s new rule, large, multi-product firms will be generally ignored. Such an operation can price above its average variable cost, continue to make overall profits, yet drive a specific competitor out of business. This is accomplished by drastically cutting prices on one product while charging higher prices on other products for which there is high demand or which already enjoy market dominance in the relevant market. See Brodley & Hay,
III.
The Texas Free Enterprise and Antitrust Act provides that it will be construed so as to accomplish the purpose of maintaining and promoting competition and providing the benefits of that competition to consumers, and in harmony with federal law to the extent consistent with these purposes.
Disregarding our State‘s unique statute, the court looks to federal precedent much like a train traveler observes towns passing along the way—interesting so long as they don‘t slow reaching the ultimate destination. The court cites authority that does not support barring intent evidence,37 and disregards opinions in five additional federal circuits which specifically allow such evidence.38
The United States Supreme Court has also considered intent evidence to be vital in reaching a finding of predation. In the context of antitrust, “knowledge of actual intent is an aid in the interpretation of facts and prediction of consequences.” Utah Pie Co. v. Continental Baking Co., 386 U.S. 685, 696 n. 12, 87 S.Ct. 1326, 1333 n. 12, 18 L.Ed.2d 406 (1967), quoting Appalachian Coals, Inc. v. United States, 288 U.S. 344, 372, 53 S.Ct. 471, 478, 77 L.Ed. 825 (1933). That Court further recognized that “[c]ourts and commentators alike have noted that the existence of predatory intent might bear on the likelihood of injury to competition.” Id., 386 U.S. at 702, 87 S.Ct. at 1336. See also Aspen Skiing Co. v. Aspen Highlands Skiing, 472 U.S. 585, 602 & 610, 105 S.Ct. 2847, 2857 & 2861, 86 L.Ed.2d 467 (1985) (upholding a verdict against defendant because “the record in this case comfortably supports an inference that the monopolist made a deliberate effort to discourage its customers from doing business with its rival.“); White Motor Co. v. United States, 372 U.S. 253, 261-62, 83 S.Ct. 696, 700-01, 9 L.Ed.2d 738 (1963) (applying a rule of reason and hesitating to establish per se violations). Thus, by adopting a rule which purports to exclude all evidence of intent to violate the Texas Free Enterprise and Antitrust Act through predatory pricing, this court adopts a per se rule so extreme as to have little precedent in this century. The claim that Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) requires a showing of
The court‘s turn away from enforcement of the antitrust laws is derivative of the philosophy of Robert Bork, who questions the wisdom of antitrust laws altogether, labelling them a “paradox” that harms consumers by interfering with the “economic efficiency” of big business, including monopolies. Bork, The Antitrust Paradox, at 4, 101 & 196.41 Rejecting the antitrust jurisprudence of Oliver Wendell Holmes42 and Louis Brandeis43, this view prefers the approach of William Howard Taft, generally thought of as an apologist for the giant trusts that dominated America in his era.44 Though the court denies its lineage to Bork, his thinking pervades the opinion.45 That predatory conduct is of little concern represents one of the court‘s major unstated premises. This belief rests not on economic proof but on a generalization that predatory pricing is rare which is derived largely from Bork in Matsushita, 475 U.S. at 589-90, 106 S.Ct. at 1357 (citing Bork, The Antitrust Paradox, at 149-155), the case upon which the court explicitly “relies“. At 581-582.
Moreover, predatory pricing was a central concern in the passage of federal antitrust legislation.47 The House Report on section 2 of the
In the past it has been a most common practice of great and powerful combinations engaged in commerce—notably the Standard Oil Co., and the American Tobacco Co., and others of less notoriety, but of great influence—to lower prices of their commodities, oftentimes below the cost of production in certain communities and sections where they had competition, with the intent to destroy and make unprofitable the business of their competitors, and with the ultimate purpose in view of thereby acquiring a monopoly in the particular locality or section in which the discriminating price is made.
H.R.Rep. No. 2287, 74th Cong., 2d Sess. 8 (1914). The Senate Report added that:
Every concern that engages in this evil practice [discriminatory pricing] must of necessity recoup its losses in the particular communities where their commodities are sold by raising the price of the same class of commodities above their fair market value....
S.Rep. No. 698, 63d Cong., 2d Sess. 3 (1914).
Convinced that predatory pricing is not a significant concern, the court indulges in a self-fulfilling prophecy by adopting a test which will rarely if ever allow for a showing of predatory pricing. This proposition rests on a still weaker assumption that business decisionmaking is inevitably objective. In its conclusion that “unless predatory pricing is economically plausible, business has no motive to engage in that practice,” at 581, the court disregards the real world, where choices are made by human beings who undertake strategies dictated not only by economic reason, but by psychological and business tactics. Posner at 518; Gerla at 756-57; Brodley & Hay at 742 (citing the example of a dominant firm which eliminates one small rival as a “lesson” to other rivals); Oscar E. Williamson, Predatory Pricing: A Strategic and Welfare Analysis, 87 Yale L.J. 284, 287 (1970) (hereinafter Williamson). Unfortunately, the court today, like the law and economics enthusiasts whose unrealistic thinking it prefers, has forgotten that the average person is not “homo economicus”48 (“economic person“), but rather homo sapiens (“related to persons“).49 Take, for example, the company which instructed its salesmen to put a competitor out of business even if “it meant give [services] away.” Browning-Ferris Indus., Inc. v. Kelco Disposal, Inc., 492 U.S. 257, 260-61, 109 S.Ct. 2909, 2912, 106 L.Ed.2d 219 (1989). One purpose of a legal system is precisely to protect potential victims of offenses ranging from murder to securities violations against what is often the irrational behavior of other human beings.
A test better suited for an accurate determination of illegal pricing is one which considers evidence both mathematic and human. Professor Lawrence Sullivan explains in his antitrust law treatise that:
If we are going to rely on judges and jurors to discover predatory business conduct we cannot deprive them of all traces of the juices of the situation. A firm which seeks to drive out or exclude rivals by selling at unremunerative prices will leave human traces.... If there is one task that judges and juries, informed through the adversary system, may really be good at, it is identifying the pernicious in human affairs. To contend that the conventional formulation ... ought to be amended to one which looks solely to an effect validated by economic studies is to assume too much about the precision of applied economics and to assume too little about the value of more humanistic modes of inquiry.
Lawrence A. Sullivan, Antitrust § 43, at 110 (1977). Simply put, and as this court admits, “[a]lthough pricing below average total cost and above average variable cost is not inherently predatory, it does not follow, however, that such prices are never predatory.” William Inglis & Sons Baking Co. v. I.T.T. Continental Baking Co., Inc., 668 F.2d 1014, 1035 (9th Cir.1981), cert. denied, 459 U.S. 825, 103 S.Ct. 57, 74 L.Ed.2d 61 (1982); see also Yamey at 129-135. For this reason, numerous sources have advocated consideration of intent evidence in defining predatory pricing.50 To do otherwise by substituting cost rules for intent evidence will result in “economically unsound decisions.” Scherer at 890 (emphasis added).
The advantage of admitting intent evidence is that it offers “vital elements of flexibility.” Eugene M. Singer, Antitrust Economics and Legal Analysis 49 (1981). As the Eighth Circuit concludes, “‘rigid adherence to a particular cost-based rule’ can produce injustice....” Henry v. Chloride, Inc., 809 F.2d 1334, 1346 (8th Cir.1987) (quoting William Inglis & Sons, 668 F.2d at 1035). One economist has concluded that “there can be predatory intent in price cutting whether or not the aggressor sets its prices above or below its costs....” Yamey at 134.
The preferable approach, therefore, is to apply a rule of reason and to look at the totality of the circumstances, considering evidence both of economics and of motive, and not to create any cost-based exclusionary rule. Instructional Sys. Dev. Corp. v. Aetna Cas. & Sur. Co., 817 F.2d 639, 646 (10th Cir.1987); Henry, 809 F.2d at 1354 (Larson, J., concurring).51 Various other courts allow proof of intent, but shift the burden of proof depending on the cost evidence. William Inglis & Sons, 668 F.2d at 1033-39; Transamerica Computer Co., Inc. v. IBM Corp., 698 F.2d 1377, 1386-89 (9th Cir.), cert. denied, 464 U.S. 955, 104 S.Ct. 370, 78 L.Ed.2d 329 (1983); Henry, 809 F.2d at 1346; D.E. Rogers Assoc., Inc. v. Gardner-Denver Co., 718 F.2d 1431, 1437-38 (6th Cir.1983), cert. denied, 467 U.S. 1242, 104 S.Ct. 3513, 82 L.Ed.2d 822 (1984). Indeed, these approaches follow the traditional, or “conventional” rule, see Lawrence A. Sullivan, Economics and More Humanistic Disciplines: What Are the Sources of Wisdom for Antitrust?, 125 U.Pa.L.Rev. 1214, 1230-31 (1977); it is today‘s ruling that is the radical innovation.
A flexible rule of reason test would continue to allow analysis of cost and price and the existence of barriers to market entry, but would also consider the facts of the case: the nature of the market, including the number of competitors; the type of
That “predatory pricing is difficult to distinguish from vigorous price competition,” at 587, should not negate such a flexible approach; indeed, this is the very reason we allow triers of fact to make a determination only after considering all of the evidence, why we employ juries rather than computers to reach decisions in even the hardest of cases.53 Indeed, the only way to tell predatory pricing from healthy competition is by motive. Malcolm v. Marathon Oil Co., 642 F.2d 845, 853 (5th Cir. 1981).
The removal of critical matters from the hands of the jury is one of the greatest injuries inflicted by the court today. If numbers add up to a trial judge‘s satisfaction, the case will end without the jury ever being allowed to see crucial evidence of guilt or innocence. In the present case, the court completely disregards a jury‘s conclusion that the Texas antitrust laws have been wilfully violated.
V.
By rejecting a rule of reason for a per se mathematic analysis, the majority invites disastrous results. Monopolists will be free to price at will so long as they can justify their prices as greater than some “profit maximizing price,” or are the slightest bit above “average variable cost.” Taking advantage of their dominance over the market, and their resulting ability to produce at costs far lower than any new market participant, they can set prices at levels designed to destroy competitors. Having utilized this method to guarantee a monopoly in the relevant market, they can then recoup their losses with unimpeded price increases. Even with compelling and direct evidence of a predatory intent, there can be no liability. This result clearly undermines the effectiveness of the Texas Antitrust Act.
To escape liability in Texas a monopoly need only have an accountant maintain records which demonstrate pricing at least one penny above its self-determined average variable cost or short-term profit figure. The absence of intent evidence invites abuse of this process: “[i]f you really wanted to know what caused the unsavory flavor of the monopoly broth, you would not just audit the chef‘s books of account; you would also take a look at his recipe.” MCI Communications Corp. v. American Tel. & Tel. Co., 708 F.2d 1081, 1177 (7th Cir.1983) (Wood, J., concurring in part and dissenting in part), cert. denied, 464 U.S. 891, 104 S.Ct. 234, 78 L.Ed.2d 226 (1983). Accountants have great leeway in deciding which costs are included as “variables,” and the business can set for itself what its ideal profit figure might be.54 The court‘s opinion is tantamount to an instruction to cook the books, for the accountant to massage the numbers in order to cover any malice, because any real evidence of intent will be ignored.
This flawed test handcuffs district attorneys throughout Texas as well as the attorney general in public enforcement of the antitrust laws. By today‘s action criminal provisions of the Texas Free Enterprise and Antitrust Act,
For any litigant somehow surviving the wreckage that remains in Texas antitrust law after this decision, the court has eliminated any ability to recover the treble damages mandated for “willful or flagrant” conduct.
While the immense damage inflicted today is concentrated in permissiveness toward predators, the court presents at least a theoretical problem for some who engage in justifiably substantial price cutting. The court‘s arbitrary rule of illegality for pricing below average variable cost denigrates any legitimate reason to price below that cost in the short run, such as promotions, shifts in demand, or economies of scale. See Sullivan, Antitrust § 43, at 111; Wesley J. Liebler, Whither Predatory Pricing? From Areeda and Turner to Matsushita, 61 Notre Dame L.Rev. 1052, 1073 (1986); Posner at 519. A test of the type adopted today, which is based on “short-term profit-maximizing price,” has been rejected in perhaps the most extensive discussion of economics and antitrust law ever undertaken by a federal court exactly because: “A rule of predation based on the failure to maximize profits would rob consumers of the benefits of any price reductions by dominant firms facing new competition.” MCI Communications, 708 F.2d at 1114.
An overly rigid test for predatory pricing could affect large cost-cutting retail chains intending only to make a profit by selling more for less. Moving into a new market, such a corporation may well price below its average variable cost as a means of entry. Though anticipating long-run profits from increased sales, the chain may lose money in the short-run. The court‘s test would find such a chain liable every time it attempted to expand. As one economist summarizes, “unless the courts were willing to explore the ... monopolist‘s behavior, it would lead to the condemnation of firms whose worst sin was to maintain a low-price, high-output ... strategy....” Scherer at 883.55
A test based on the rule of reason would preclude blind reliance on economic theory without exploration of the facts and circumstances of the parties involved. This court should have considered the facts of this case, including the unique nature of the newspaper industry markets. See S. Chester Oppenheim and Carrington Shields, Newspapers and the Antitrust Laws 1-15 (1981). The court conveniently ignores the practice of the Caller-Times in offering reductions solely to advertisers already doing business with Wheels and Keels; other advertisers received no discounts. See 791 S.W.2d at 166. As a valid indicator of predatory intent, see Sullivan, § 43, at 112, such targeted pricing reductions could be absorbed by a large newspaper without its having to price below average variable cost throughout its market.56 Likewise, the court concludes without explanation that “Triad elected not to present any evidence on the price-cost relationship,” at 580, when there was testimony both as to the profit margin and costs of the newspaper.57 But, under the court‘s formulation, the facts have little or nothing to do with the legality of the conduct.
Disregarding the particular circumstances of this case is nowhere so apparent as with the court‘s conclusion that it is unnecessary to remand the antitrust issue, despite the fact that “this is a question of first impression” in Texas. At 578. Failure to remand in this instance is not excused by the court‘s claim that adoption of this test was “predictable.” Triad had no way of knowing that this court would bar all intent evidence when most federal courts allow it. Because today‘s decision is the first clue in Texas that evidence of cost was required, and because Triad had no reason to believe that intent evidence would be insufficient, there should at least be a remand of the antitrust issue in the interest of justice.
VIII.
Under the court‘s ruling, not only do consumers lose their protection under the Act, but small entrepreneurs, who have traditionally provided so much vital innovation, are endangered. Not surprisingly, in virtually all predatory pricing cases, the plaintiff is a business significantly smaller than the defendant. Joel B. Dirlam, Marginal Cost Pricing Tests for Predation: Naive Welfare Economics and Public Policy, 26 Antitrust Bull. 769, 774 (1981). When a purely economic test for antitrust violations is put into effect, the “likely result will be an economy ... dominated by a few corporate giants.” Robert Pitofsky, The Political Content of Antitrust, 127 U.Pa.L.Rev. 1051, 1051 (1979). Contrary to the court‘s position, the Texas Free Enterprise and Antitrust Act has a dual “purpose ... to maintain and promote economic competition ... and to provide the benefits of that competition to consumers....”
The words of an economist, John Maynard Keynes, are an apt explanation of today‘s otherwise incomprehensible decision:
Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. [Those] in authority, who hear voices in the air, are
distilling their frenzy from some academic scribbler of a few years back.
John Maynard Keynes, The General Theory of Employment Interest and Money 383 (1935). By disregarding the purposes underlying the Texas Free Enterprise and Antitrust Act and returning to the injustice of per se rules, the court has undermined a statute designed to protect consumers and to encourage independent businesses. Abandoning the rule of reason, the court paints a new landscape of corporate giants with the broad brush of economic theory. This preference for hollow theory over law takes the slingshot from David‘s hand and puts it firmly into Goliath‘s.
MAUZY, J., joins in this dissent.
DISSENT ON MOTION FOR REHEARING1
February 26, 1992
DOGGETT, Justice.
I.
“We are going to run you out of business. Your days are numbered.”2 In prohibiting juries ever to hear such evidence, the court endeavors to put The Texas Free Enterprise and Antitrust Act out of business; the days of its meaningful enforcement are numbered. This important legislation was designed for enforcement through the actions of both private attorneys general and the Attorney General of Texas. On motion for rehearing, forcefully written pleas for reconsideration from both are rejected. Accordingly, I supplement my previous dissent.
Seven members of this court ignore the substance of Respondent‘s motion for rehearing.3 Their action confirms their objective of undermining the Texas Free Enterprise and Antitrust Act, thereby strengthening monopolies at the expense of small businesses and consumers. As the Attorney General concludes, the court‘s endorsement of this one large newspaper “will make it difficult, if not impossible, to punish ... anticompetitive behavior by [any] monopolist.”4
Most significantly, barring all intent evidence makes demonstrating a violation of the Act highly improbable. The court‘s test “establishes an inflexible, unworkable standard” which is “virtually impossible to meet.” State of Texas Br. at 2, 6.5 Because as an economic reality small businesses can rarely afford to set prices at a predatory level, it is monopolists, not small businesses, who benefit from the new rule. Id. at 5-6.6 The court expresses only disinterest for the ease with which mono-
The confusing nature of the test will, by itself, pose a continuing barrier to invoking the Act. While the court claims that its goal is certainty, op. at 582, “[t]he only certainty created by the Court‘s test is the certainty that businesses with monopoly power can engage in anticompetitive pricing practices in Texas without fear of liability for their wrongdoing.” State of Texas Br. at 6. Additional uncertainty stems from the unanswered question of how evidence of intent can be introduced in order to meet the statutory treble damage requirement of showing willful or flagrant behavior by the wrongdoer.
Confusion will certainly make itself known in jury instructions.9 For instance, the court appears to contemplate that a jury will be asked whether a business acted with rational economic motive, yet instructed that it is irrelevant whether the seller acted irrationally. Op. at 581 n. 6. (“The fact finder can determine whether there was an objective rational economic motive even if the seller acted irrationally.“). The extreme difficulty in framing such questions in an intelligible fashion is designed to discourage those seeking vindication of their rights under the Texas Free Enterprise and Antitrust Act.
Another obstacle to justice erected by the majority‘s opinion is the increased difficulty of obtaining informed legal counsel. Despite the court‘s assertion of predictability, an attorney will be unable to advise a party claiming injury from predatory pricing concerning the validity of its potential claim. With the necessary cost data available only from the prospective defendant, counsel must follow a strategy of sue first, determine the legal merits later. What attorney will accept the unknowable case when the gamble of discovering later that the numbers do not justify a predatory pricing action risks exposure to being improperly sanctioned by an over-zealous judge for filing a purportedly frivolous suit? See
For the many reasons stated above, “[t]his Court‘s decision will undoubtedly have a chilling effect on the willingness of small business to bring antitrust lawsuits against large monopolists and near monopolists, contrary to legislative intent and sound public policy.” State of Texas Br. at 12. Triad, one small business which, now closed down, will never again initiate an antitrust action, asks “[d]oes the Court realize that its opinion will eliminate almost all private enforcement of the monopolization/attempted monopolization provisions of the Act ...?” Triad Br. at 3. The sad answer, evidenced by the court‘s lack of concern on the motion for rehearing, is apparently “sure, why not?”
Of the many dangers inherent in the court‘s decision, the Attorney General has particular expertise in addressing my concern that the opinion will thwart public law enforcement efforts. Op. at 589. The Attorney General warns that the court‘s decision:
will clearly hamper enforcement by the Attorney General of predatory pricing and monopolization cases and, because
Will evidence of intent be admitted or not? If not, how can an antitrust plaintiff ever prove ... treble damages ...? Will the evidence come in under a limiting instruction? Does the Court really expect Texas trial judges to instruct their juries that “this evidence about intent that you will hear may be confusing to you, so you should disregard it in answering the basic liability issues, but you may consider it in deciding whether the defendant‘s conduct was ‘willful or flagrant‘?”
the opinion calls into question Texas’ commitment to antitrust law in general, may have an adverse effect on all antitrust enforcement.
State of Texas Br. at 13. The court‘s continuing disinterest in the ability to administer the Act underlies its disdain for the objectives of antitrust law.
Certainly there can no longer be any suit for attempted monopoly, for “attempt” cannot be found absent intent evidence.10 As the State concluded, this “dangerous precedent ... tilts the state‘s antitrust laws in favor of monopolists and big business to the detriment of small businesses and consumers.” State of Texas Br. at 2.11 In the end, “[t]he real loser is the consumer, who does not reap the benefits of competition and is forced to pay monopoly prices.” Id. at 6. In a case to which it is not a party, the State has rarely expressed such direct and intense disagreement with an opinion of this court. Like Robert Bork,12 the court has taken up the banner of no antitrust laws, but unlike Bork, this court lacks the candor to admit the extreme nature of its position.13
II.
My prior complaint that the court inexcusably refused to afford a new trial initially fell on deaf ears. Only after my dissent in Carrollton-Farmer‘s Branch Indep. Sch. Dist. v. Edgewood Indep. Sch. Dist., 826 S.W.2d 489 (Tex.1992) (Edgewood III), pointed out the irreconcilability of the court‘s decision in these two cases did the court decide to confront this error. See id. at 537 (Doggett, J., dissenting). In Edgewood III, the majority announced that an issue of alleged first impression requires prospective rather than retroactive application. Id. at 515 (applying the ruling prospectively in order to refuse a refund of a tax held unconstitutional). Following this rule here, in another case admitted to be of first impression, would mandate a remand. Rather than following its own precedent from Caller-Times a few months later in Edgewood III, however, the court instead applied a new rule. Now Caller-Times is changed to conform with Edgewood III, and a remand is grudgingly allowed. This remand will be of no solace to Triad, which is left to relitigate under a convoluted and unworkable test.
In attempting to resolve one contradiction, however, the court exposes another. What in the original opinion was allegedly well-settled antitrust law has on rehearing been magically transformed, without any explanation, into unsettled law. At the same time, however, the court continues to ignore the sources cited by the dissent, adhering to its prior position that the law of predatory pricing is well-settled and only susceptible to one interpretation. In
At the same time, however, the court repeatedly identifies this as a case of “first impression,” id. at 578 & 580, admitting that the United States “Supreme Court has not developed a test for predatory pricing, and the federal circuit courts take different approaches.” Id. at 581 (emphasis added). The court is forced to “draw on the interpretations of several circuits,” id. at 581, while explicitly rejecting that of the Ninth Circuit. Id. at 585. Thus, even though its entire opinion is based on the premise that federal law is settled and uncontroversial, the court must remand because law is “sufficiently unsettled.” Id. at 589.
In fact, the debate over predatory pricing and the role of intent evidence in the feder-
III.
There are additionally several matters in my prior dissent which are deserving of expansion and clarification. First, I concluded that the court‘s reliance on Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986), was unjustified. This was in part because “the Supreme Court was concerned only with the context of summary judgment, which is not at issue in the current case.” Op. at 597 n. 40. The Attorney General appropriately emphasizes this concern, concluding that the instant case:
was filed in a Texas court under the Texas Antitrust Act. The [majority] nonetheless relied on Matsushita, a federal case construing federal procedural law. By so doing, the Court inappropriately engrafted federal procedural law onto the Texas Act.... The Act does not ... authorize adoption of federal procedural rules....
State of Texas Br. at 7. As this court has recently written, the role of summary judgment is quite different in the federal system than in Texas, where it is fortunately disfavored. Casso v. Brand, 776 S.W.2d 551, 555-56 (Tex.1989). Thus, not only did the court apply a summary judgment standard to a case not involving summary judgment, it applied a summary judgment standard not a part of Texas law.17
Second, my previous characterization of the Texas Free Enterprise and Antitrust Act as turning towards a rule of reason, does not represent a disavowance of all per se rules, but rather a rejection of per se legality of the type established by the court‘s test. There remain a number of acts which are per se illegal. See Red Wing Shoe Co. v. Shearer‘s, Inc., 769 S.W.2d 339, 341-42 (Tex.App.—Houston [1st Dist.] 1989, no writ) (noting turn towards a federal rule of reason but continued existence of per se illegality). Indeed, the Texas Antitrust Act explicitly mentions “price fixing, or other per se violations.”
Finally, much of my prior disagreement centered on the court‘s economic model, or lack thereof. Now the Attorney General of Texas and yet another legal scholar urge that “antitrust was not meant to be solely an economic discipline, and predatory pricing is not solely an economic problem.” Judicial Standard at 1779. To the extent that the field of economics is relevant, the court‘s theory remains deeply flawed. Predatory pricing is both an economic reality and a serious problem, id. at 1775-76, unresolved by the type of test announced here because that approach is “not economically sound in terms of either its specific application or its theoretical economic underpinnings.” Id. at 1770.19 A “broad and flexible” test applying a rule of reason and considering many factors, including both cost and intent evidence, is the preferable approach. Id. at 1789-91.
Unfortunately during the Reagan/Bush administrations, “all branches of [the federal] government have become more lenient toward antitrust violations.” Steven W. Heller, Heads I Win, Tails You Lose: A Study of Antitrust Jurisprudence in the Federal Circuit, 1 Fordham Ent.Media & Intell.Prop.L.F. 231 (1991). Now Texas is forced to join in this parade of permissiveness. Despite the best efforts of the Legislature, the Attorney General, the court of appeals, and a Corpus Christi judge and jury, this court is determined to convert a monopoly prevention act into a monopoly protection act. The impact of today‘s opinion will be felt far into the future—monopolies have been strengthened, small businesses threatened, and in the end, the consumers pay for it all.
MAUZY, J., joins in this opinion.
Notes
Average variable cost must be determined for the relevant product market. Analysis of a monopoly claim begins with consideration of what is the relevant market. See, e.g., Kintner, 2 Federal Antitrust Law § 12.2 (1980); Areeda & Turner, 2 Antitrust Law ¶ 525 (1978); Kaiser Aluminum & Chemical Corp. v. FTC, 652 F.2d 1324 (7th Cir. 1981). The relevant market consists of both the geographic market area as well as the product market. See e.g., Kintner, supra; 2 Antitrust Law ¶ 525; Oahu Gas Service, Inc. v. Pacific Resources, Inc., 838 F.2d 360 (9th Cir.), cert. denied, 488 U.S. 870 (1988); C.E. Services, Inc. v. Control Data Corp., 759 F.2d 1241 (5th Cir.), cert. denied, 474 U.S. 1037 (1985). Products are generally in the same market if they are reasonably interchangeable. See, e.g., United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377 (1956); Kintner, supra, at § 12.3. Antitrust Act: Hearing on Tex. S.B. 397 before the Senate Jurisprudence Committee, 68th Leg., R.S. (February 15, 1983) (testimony of Attorney General Jim Mattox), Monograph at 10. Texas commentators have concluded that an action for predation under the Texas act does involve consideration of intent. See Baron, A New Era, at 18; Selinger, Sherman Marches on Austin: Some Comments about the New Texas Act,[t]he characterization of legitimately disputed costs is a question of fact for the jury. Adjusters Replace-A-Car, Inc. v. Agency Rent-A-Car, Inc., 735 F.2d 884, 891 n. 6 (5th Cir. 1984), cert. denied, 469 U.S. 1160 (1985); see William Inglis & Sons Baking Co. v. ITT Continental Baking Co., 668 F.2d 1014, 1036-38 (9th Cir. 1981), cert. denied, 459 U.S. 825 (1982). The jury may consider, but obviously cannot be bound by, a party‘s characterization of its own costs. Kelco Disposal v. Browning-Ferris Industries, 845 F.2d 404, 408 (2nd Cir. 1988), aff‘d on other grounds, 492 U.S. 257 (1989).