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SOUTHERN PAC. COMMUNS. CO. v. AT&T

December 21, 1982

SOUTHERN PACIFIC COMMUNICATIONS COMPANY, et al., Plaintiffs,
v.
AMERICAN TELEPHONE AND TELEGRAPH COMPANY, et al., Defendants



[EDITOR'S NOTE: PART 2 OF 4. THIS DOCUMENT HAS BEEN SPLIT INTO MULTIPLE PARTS ON LEXIS TO ACCOMODATE ITS LARGE SIZE. EACH PART CONTAINS THE SAME LEXIS CITE.]

MEMORANDUM OPINION

UNITED STATES DISTRICT JUDGE CHARLES R. RICHEY

THE APPLICABLE LEGAL STANDARD FOR PREDATORY PRICING CLAIMS

 Before turning to the evidence introduced at trial with respect to plaintiffs' pricing claims, the Court believes it appropriate to address the legal standards which properly govern its consideration of those claims. Prior to trial, the parties submitted extensive briefs on the applicable legal standard for predatory pricing, and the Court has considered those in reaching its decision here. In summary, the Court concludes that a cost-based standard must be adopted to judge plaintiffs' predatory pricing claims and that a standard based on marginal or incremental cost is the most consistent with the pro-competitive thrust of the antitrust laws. The Court recognizes that the Courts of Appeals have not taken a uniform position with respect to the extent to which prices above marginal cost may be considered predatory, but the Court's analysis of the evidence in this case convinces it that a marginal or incremental cost standard is appropriate here. In any event, the Court finds no authority for a non-cost standard such as plaintiffs propose, and does not see how such a standard could be adopted without the risk of penalizing the very kind of price competition the antitrust laws are intended to foster. *fn100"

 From the Court's review of the authorities, it appears that a showing of below-cost pricing has consistently been held to be an essential element of a plaintiff's prima facie case. For example, in Broadway Delivery Corp. v. United Parcel Service, Inc., 651 F.2d 122, 131 (2d Cir.), cert. denied, 454 U.S. 968, 70 L. Ed. 2d 384, 102 S. Ct. 512 (1981), the Second Circuit held:

 
"The plaintiffs' evidence of predatory pricing was in itself seriously deficient. Whether or not one agrees that proof of pricing below marginal or average variable cost is essential to a predatory pricing claim, the plaintiffs could not demonstrate price predation by the defendants without proof permitting a careful assessment of the relationship between the defendants' prices and costs. See generally 3 P. Areeda & D. Turner, supra, PP 710-11. The plaintiffs' proof did not permit a reasonable fact-finder to make this assessment." (Emphasis supplied.)

 The Ninth Circuit in Hanson v. Shell Oil Co., 541 F.2d 1352, 1359 (9th Cir. 1976), cert. denied, 429 U.S. 1074, 50 L. Ed. 2d 792, 97 S. Ct. 813 (1977) held, that:

 
"Hanson's failure to show that Shell's prices were below its marginal on average variable costs was a failure as a matter of law to present a prima facie case under ยง 2." (footnote omitted).

 Similarly, where the plaintiff has failed to show that the defendant intentionally priced below cost, directed verdicts have often been granted. See, e.g., Chillicothe Sand & Gravel Co. v. Martin Marietta Corp., 615 F.2d 427, 432-33 (7th Cir. 1980); International Air Industries, Inc. v. American Excelsior Co., 517 F.2d 714, 724 (5th Cir. 1975), cert. denied, 424 U.S. 943, 47 L. Ed. 2d 349, 96 S. Ct. 1411 (1976); California Computer Products, Inc. v. IBM Corp., 613 F.2d 727 (9th Cir. 1979).

 As the Ninth Circuit stated:

 
"While proof of pricing below marginal or average variable cost is prerequisite to a prima facie showing of an attempt to monopolize, such a showing if made, would not show a per se violation. There may be nonpredatory and acceptable business reasons for a firm engaging in such pricing. Plaintiff's showing of below-cost pricing merely clears the first hurdle and raises the question of justification."

 Hanson v. Shell Oil Co., supra 541 F.2d at 1359 n.6.

 This uniform insistence on proof of below-cost pricing is rooted in the central pro-competitive purposes of the Sherman Act, which seeks to promote price competition. As the Supreme Court emphasized in Schine Chain Theatres, Inc. v. United States, 334 U.S. 110, 120, 92 L. Ed. 1245, 68 S. Ct. 947 (1948), "price cutting without more is not a violation of the Sherman Act" but "is indeed a competitive practice." Any rule which unduly restricts vigorous price competition, therefore, would penalize firms from taking the very action which is expected and encouraged of them and would lead to a situation in which "the antitrust laws would thus compel the very sloth they were intended to prevent." Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263, 273 (2d Cir. 1979), cert. denied, 444 U.S. 1093, 62 L. Ed. 2d 783, 100 S. Ct. 1061 (1980).

 It is also clear to the Court that the principles encouraging price competition on the merits are fully applicable to firms with a "dominant" share of the market. As the Ninth Circuit explained in California Computer Products, supra, 613 F.2d at 742:

 
"Where the opportunity exists to increase or protect market share profitably by offering equivalent or superior performance at a lower price, ...

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