William Inglis & Sons Baking Co. v. Itt Continental Baking Company, Inc., William Inglis & Sons Baking Co. v. Itt Continental Baking Company, Inc.

William Inglis & Sons Baking Co. (Inglis) brought this private antitrust suit to recover treble damages against ITT Continental Baking Co. (Continental), American Bakeries Co. (American), and Campbell-Taggart, Inc., alleging violations of sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2, section 2(a) of the Clayton Act, as amended by the Robinson-Patman Act, 15 U.S.C. § 13(a), and the California Unfair Practices Act, Cal.Bus. & Prof.Code §§ 17000-17101. Inglis also charged that Continental had conspired with its parent corporation, International Telephone & Telegraph (ITT), and others in violation of sections 1 and 2 of the Sherman Act. Both Continental and American filed counterclaims against Inglis also alleging antitrust violations, although Continental dropped its counterclaim at trial. Before trial Campbell-Taggart settled with Inglis, and the district court granted summary judgment for Continental with respect to the alleged "vertical" conspiracy between Continental, ITT, and others. Later, Inglis voluntarily dropped its horizontal conspiracy claims under section 1 against the named defendants. Following a one month trial in 1978, the jury returned a verdict against Continental on all remaining claims and awarded damages of $5,048,000. The jury found that neither American nor Inglis were liable on the claims they filed against each other.

Continental then moved for judgment notwithstanding the verdict (JNOV) or, in the alternative, a new trial on all claims. The district court granted the motions for JNOV and, in the alternative, a new trial on the federal claims but refused to grant JNOV for Continental on the state claims. Instead, a new trial was ordered. William Inglis & Sons Baking Co. v. ITT Continental Baking Co., 461 F.Supp. 410 (N.D.Cal.1978). Inglis now appeals the district court's entry of JNOV and alternative order for a new trial on the federal claims, and Continental appeals the court's refusal to enter JNOV in its favor on the state claims, pursuant to 28 U.S.C. § 1292(b). We affirm in part, reverse in part, and remand this case for a new trial.

Inglis was a family-owned wholesale bakery with production facilities located in Stockton, California. It manufactured and distributed bread and rolls in northern California. Continental is one of the nation's largest wholesale bakeries, and was a competitor of Inglis in the northern California market, with production facilities in San Francisco, Oakland, and Sacramento. The primary products involved in this case were the one pound and one and one-half pound loaves of white pan bread. During the period covered by Inglis' complaint, both Continental and Inglis sold their bread under a "private" label and an "advertised" label. Private label bread is manufactured by the wholesaler on behalf of a particular retail customer and marketed under a label exclusively held by that customer. Advertised label bread generally is a national brand name available to all retail purchasers. Continental's advertised bread bears the "Wonder" label, while Inglis marketed "Sunbeam" bread. Labeling aside, the principal difference between private label and advertised bread was one of price. Wholesale bakeries typically sold private label bread at a lower price than advertised brands and, because the products were essentially the same, at a lower profit. Both types of bread generally were manufactured at the same production facilities and both could be found on the shelves of most large retailers.

Inglis' complaint, which was filed in 1971 and supplemented in 1977, was founded on charges that Continental sought to eliminate competition in the northern California market for wholesale bread by charging discriminatory and below-cost prices for its private label bread. Inglis claims that it was the principal victim of this predatory scheme, suffering losses since 1967 and eventually going out of business in April 1976, nearly five years after it filed its initial complaint. The theory on which Inglis structured its case was that the growth of private label bread, which began in northern California in 1967 or 1968, began to weaken Continental's market for Wonder bread. In response to this challenge Continental also began selling private label bread, but the price gap between private label and Wonder bread persisted. Inglis argues that Continental then decided to pursue a strategy of predatory pricing in its sales of private label bread, with the intent of eliminating independent wholesalers like Inglis who were financially less capable of withstanding a price war. The ultimate goal, Inglis asserts, was to acquire a large share of the private label market and then to use the enhanced market power to raise private label prices, which would diminish the competitive disadvantage of Wonder bread. Moreover, Inglis contends, the acquisition of private label accounts would enable Continental to "leverage" more shelf space for Wonder bread from those retailers who also purchased Continental's private label bread.

To support its theory, Inglis introduced the following evidence.1 First, Inglis examined the movement in Continental's prices during the complaint period, focusing on the one pound loaves of bread. In September 1970 Continental reduced the price of its private label bread from 19 to 18 cents per loaf and maintained that price for nearly two years. In July 1972 Continental further reduced its price to 17.2 cents and maintained that price through the summer of 1973. Thereafter Continental gradually began to raise the price, allegedly because it then knew that Inglis was in its death throes as a competitor.2 Second, Inglis established that Continental suffered substantial losses from its northern california bakeries from 1971 through 1974, the period during which Continental's private label prices were at their lowest. Inglis also introduced expert testimony, based on a study of prices during brief periods in 1972 and 1973, tending to show that Continental's private label prices were below its average variable cost of production. Third, Inglis showed that Continental actively made competing offers to private label accounts held by Inglis. Although Inglis actually lost only one account to Continental, it nevertheless was forced to respond with lower prices of its own and suffer the resulting loss of revenue from sales. Finally, Inglis introduced documentary evidence designed to prove Continental's intent to drive Inglis from the market. This evidence principally consisted of a report prepared by independent consultants identifying strategies Continental might adopt to combat private label competition. One alternative involved maintaining prices "to hasten wholesaler exit." Inglis also introduced reports by Continental salesmen targeting Inglis private label accounts for enhanced competitive efforts.

Continental's explanation of events during the complaint period, of course, differed sharply from that of Inglis. First, Continental emphasized the intensely competitive nature of the wholesale bread market in northern California and its own lack of market power. Campbell-Taggart held the largest share of the market and, although some of the evidence is ambiguous, apparently initiated price reductions that other competitors, including Continental, were forced to follow. Second, during the complaint period the market was affected by the growth of so-called "captive" bakeries. Retail stores such as Safeway established their own bakeries, thereby reducing the demand for wholesale bread products. One result was that all of the wholesale bakeries experienced excess capacity during the relevant period. As striking evidence of this, Continental proved that during an eleven-week strike in December 1972 and January 1973, which closed the bakeries operated by Continental and Campbell-Taggart, American and Inglis were able to supply the entire market with their existing capacity. In addition to creating excess capacity, the captive bakeries also exerted pressure on other retailers to provide price-competitive private label products, pressure to which Continental and other wholesalers responded.

Finally, Continental emphasized that all of the bakeries were subject to federal price controls from the summer of 1971 until April 1974. Within this period the federal government also imposed a temporary price freeze during the summer months of 1973. According to Continental, the price controls contributed substantially to its inability to raise prices despite increasing costs during the period in which private label prices were at their lowest levels. Continental argues that the price increases which occurred in late 1973 and 1974 resulted not from Continental's anticipation of Inglis' demise, but from the expiration of government price constraints.3

From the evidence presented at trial, this much is plain: The price competition among wholesalers in northern California, all selling substantially similar products, was intense. As a result, at least in part, many bakeries failed to earn a profit and Inglis was forced to discontinue operations. The central question for the jury thus was whether Inglis was a casualty of vigorous, but honest, competition, or the victim of unfair and predatory tactics adopted by a company intent on monopolizing the market. Because there was no "smoking gun," the jury was asked to choose between the conflicting inferences drawn by Inglis and Continental and it found Inglis' explanation the more reasonable.

C. The Findings and Holdings of the District Court

As already indicated, the district court found a lack of competent evidence to support the jury's conclusion. First it held that Inglis' expert testimony concerning below-cost pricing by Continental was either insufficient as a matter of law to establish predatory pricing for purposes of section 2 of the Sherman Act, or completely unreliable. The court determined that on the facts of this case, Inglis was required to prove that Continental's prices were below its marginal cost of producing bread. Proof of pricing below average variable cost, which the court in any event found not to be controlling, was insufficient. With respect to Inglis' Robinson-Patman Act claim, the court held that Inglis' failure to show pricing below marginal cost also prevented it from establishing the injury to competition required by Robinson-Patman. The court ordered a new trial on the state claim because it found that the weight of the evidence supported Continental's defense of meeting competition. Finally, the court held that a new trial was warranted because the jury's damage award was excessive and unsupported by the weight of the evidence.

In passing on the district court's decision, we are mindful of the deference due the verdict of a jury. To determine whether an entry of JNOV is proper, we must apply the same standard applied by the district court. Alioto v. Cowles Communications, Inc., 519 F.2d 777, 780 (9th Cir.), cert. denied, 423 U.S. 930, 96 S.Ct. 280, 46 L.Ed.2d 259 (1975). That is, we must affirm the district court if, without accounting for the credibility of the witnesses, we find that the evidence and its inferences, considered as a whole and viewed in the light most favorable to the nonmoving party, can support only one reasonable conclusion-that the moving party is entitled to judgment notwithstanding the adverse verdict. Davison v. Pacific Inland Navigation Co., 569 F.2d 507, 509 (9th Cir. 1978); Maheu v. Hughes Tool Co., 569 F.2d 459, 464 (9th Cir. 1977); Fount-Wip, Inc. v. Reddi-Wip, Inc., 568 F.2d 1296, 1300 (9th Cir. 1978). Neither the district court nor this court is free to weigh the evidence or reach a result that it finds more reasonable as long as the jury's verdict is supported by substantial evidence. Marquis v. Chrysler Corp., 577 F.2d 624, 631 (9th Cir. 1978); Cockrum v. Whitney, 479 F.2d 84, 86 (9th Cir. 1973).

In contrast, a new trial may be ordered by the district court if, in its opinion, the jury's verdict was clearly contrary to the weight of the evidence. We may reverse such an order only if we find that the district court abused its discretion as to each ground upon which its decision was based. Traver v. Meshriy, 627 F.2d 934, 940-41 (9th Cir. 1980); Peacock v. Board of Regents, 597 F.2d 163, 165 (9th Cir. 1979); Fount-Wip, supra, 568 F.2d at 1302; Hanson v. Shell Oil Co., 541 F.2d 1352, 1359 (9th Cir. 1976), cert. denied, 429 U.S. 1074, 97 S.Ct. 813, 50 L.Ed.2d 792 (1977).

THE SECTION 2 ATTEMPT TO MONOPOLIZE CLAIM-PREDATORY PRICING

Bearing in mind these standards, we shall consider, first, the district court's entry of JNOV for Continental with respect to the jury's finding that Continental attempted to monopolize the wholesale bread market in northern California by predatorily pricing its products and, next, its alternative order requiring a new trial on the ground that Inglis failed to prove predatory conduct.

Although the law of this circuit on attempted monopolization has not been static, its current state recognizes three elements of an attempt claim under section 2 of the Sherman Act: (1) specific intent to control prices or destroy competition in some part of commerce; (2) predatory or anticompetitive conduct directed to accomplishing the unlawful purpose; and (3) a dangerous probability of success. E. g., California Computer Products, Inc. v. IBM Corp., 613 F.2d 727, 736 (9th Cir. 1979) (CalComp ). To state these elements, however, is merely to begin the process of understanding the legal standards of conduct under an attempt claim. Each element interacts with the others in significant and unexpected ways. Because the parties dispute the nature of their interdependence, we must discuss each in some detail. For reasons that will appear later, the third element will be discussed second rather than last.

The element of specific intent appears to have had its genesis in the distinctions-and similarities-between monopolization and attempted monopolization, both of which are proscribed in separate terms by section 2. See Cooper, Attempts and Monopolization: A Mildly Expansionary Answer to the Prophylactic Riddle of Section Two, 72 Mich.L.Rev. 375 (1974). Thus, section 2 embraces not only an uncertain collection of evils termed "monopolization," but also conduct falling short of that result. By analogy to the law of criminal attempt, the requirement of specific intent is used to confine the reach of an attempt claim to conduct threatening monopolization. See Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 626, 73 S.Ct. 872, 889, 97 L.Ed. 1277 (1953); United States v. Griffith, 334 U.S. 100, 105, 68 S.Ct. 941, 944, 92 L.Ed. 1236 (1948); Swift & Co. v. United States, 196 U.S. 375, 396, 25 S.Ct. 276, 279, 49 L.Ed. 518 (1905).

Whatever its origins, the existence of specific intent may be established not only by direct evidence of unlawful design, but by circumstantial evidence, principally of illegal conduct. E. g., CalComp, supra, 613 F.2d at 736; Sherman v. British Leyland Motors, Ltd., 601 F.2d 429, 453 n.47 (9th Cir. 1979); Gough v. Rossmoor Corp., 585 F.2d 381, 390 (9th Cir. 1978), cert. denied, 440 U.S. 936, 99 S.Ct. 1280, 59 L.Ed.2d 494 (1979); Janich Bros., Inc. v. American Distilling Co., 570 F.2d 848, 853-54 (9th Cir. 1977), cert. denied, 439 U.S. 829, 99 S.Ct. 103, 58 L.Ed.2d 122 (1978). Too heavy a reliance on circumstantial evidence incurs the risk of reducing almost to the point of extinction the existence of the requirement. The type of conduct that will support the inference, therefore, must be carefully defined. This court has made it clear that the nature of such conduct varies with the conditions of the market and the characteristics of the defendant.

Thus, we consistently have held that the inference may be drawn from conduct that serves as the basis for a substantial claim of restraint of trade.4 Several cases, for example, have explicitly equated such conduct with an unreasonable restraint of trade in violation of section 1 of the Sherman Act. CalComp, supra, 613 F.2d at 736; Sherman, supra, 601 F.2d at 453 n.47; Gough, supra, 585 F.2d at 390. Actions taken by a firm without market power may support the inference of intent if those actions are "of a kind clearly threatening to competition or clearly exclusionary." Janich Bros., supra, 570 F.2d at 854 n.4.5 Some opinions have taken this language to refer to per se violations of section 1. E. g., CalComp, supra, 613 F.2d at 737 & n.10; Gough, supra, 585 F.2d at 390.

On the other hand, direct evidence of intent alone, without corroborating evidence of conduct, cannot sustain a claim of attempted monopolization. See Hunt-Wesson Foods, Inc. v. Ragu Foods, Inc., 627 F.2d 919, 926 (9th Cir. 1980); Blair Foods, Inc. v. Ranchers Cotton Oil, 610 F.2d 665, 669 (9th Cir. 1980); Knutson v. Daily Review, Inc., 548 F.2d 795, 814 (9th Cir. 1976), cert. denied, 433 U.S. 910, 97 S.Ct. 2977, 53 L.Ed.2d 1094 (1977); Chisholm Brothers Farm Equipment Co. v. International Harvester Co., 498 F.2d 1137, 1144-45 (9th Cir.), cert. denied, 419 U.S. 1023, 95 S.Ct. 500, 42 L.Ed.2d 298 (1974); Hallmark Industry v. Reynolds Metals Co., 489 F.2d 8, 12 (9th Cir. 1973), cert. denied, 417 U.S. 932, 94 S.Ct. 2643, 41 L.Ed.2d 235 (1974). The necessity of corroborative conduct rests on the fact that direct evidence of intent alone can be ambiguous and misleading.6 The law of attempted monopolization must tread a narrow pathway between rules that would inhibit honest competition and those that would allow pernicious but subtle conduct to escape antitrust scrutiny. Direct evidence of intent to vanquish a rival in an honest competitive struggle cannot help to establish an antitrust violation.7 It also must be shown that the defendant sought victory through unfair or predatory means. Evidence of conduct is thus indispensable.

The language and purpose of section 2 reinforces this necessity. While the prohibition of attempts to monopolize clearly encompasses actions that fall short of their intended result, it is equally clear that actual steps toward interference with the competitive process, and not boardroom ruminations, is the evil against which section 2 is directed. As Justice Holmes taught us, there is a difference, even in antitrust law, between preparation and attempt. Swift & Co., supra, 196 U.S. at 402, 25 S.Ct. at 281.

The third element, dangerous probability of success, like the first, also is rooted in the relationship between the separate offenses of monopolization and attempt to monopolize. See, e. g., Swift & Co., supra, 196 U.S. at 396, 25 S.Ct. at 279.8 Although this element is generally treated as separate and independent, it can be inferred from evidence indicating the existence of the other two. E.g., CalComp, supra, 613 F.2d at 737. However, the proper significance of this third element "has been controversial, even within this circuit." Hunt-Wesson Foods, supra, 627 F.2d at 925.

Part of the uncertainty results, as already indicated, from the tendency to treat the element of dangerous probability of success and proof of market power as equivalent. Although related, they are not equivalent. Another source of uncertainty, also previously suggested, is that a dangerous probability of success has been treated as evidence of specific intent and vice versa. See Lessig v. Tidewater Oil Co., 327 F.2d 459, 474 (9th Cir.), cert. denied, 377 U.S. 993, 84 S.Ct. 1920, 12 L.Ed.2d 1046 (1964).9 However, our more recent decisions make plain that the permissibility of inferring dangerous probability from proof of specific intent is conditional. That is, a dangerous probability of success may be inferred either (1) from direct evidence of specific intent plus proof of conduct directed to accomplishing the unlawful design,10 or (2) from evidence of conduct alone, provided the conduct is also the sort from which specific intent can be inferred.11

These more recent decisions also establish that the dangerous probability of success requirement is not designed as a means of screening out cases of minimal concern to antitrust policy but is instead a way of gauging more accurately the purpose of a defendant's actions. Accordingly, the level of the probability of success appropriately may be raised by the defendant, as did Continental in this case, even if the plaintiff has made his case without direct proof of dangerous probability. Thus, if market conditions are such that a course of conduct described by the plaintiff would be unlikely to succeed in monopolizing the market, it is less likely that the defendant actually attempted to monopolize the market.12 Conversely, a firm with substantial market power may find it more rational to engage in a monopolistic course of conduct than would a smaller firm in a less concentrated market.13

In sum, the dangerous probability of success element is always relevant in analyzing an attempt claim. The nature of its relevance, however, is a function of the state of the evidence offered in support of the other two elements necessary to proof of the claim.

The conduct element of the attempt claim also is closely related to the other two elements. Thus, the first element, specific intent to control prices or exclude competition, may be inferred from certain types of conduct. The third element, dangerous probability of success, also is often dependent on proof of conduct. Finally, evidence of conduct is indispensable even when there is direct evidence of unlawful specific intent.

This interrelationship extends to the type and strength of proof required to establish each element. In the absence of direct and probative evidence of specific intent to monopolize, for example, a plaintiff must introduce evidence of conduct amounting to a substantial claim of restraint of trade or conduct clearly threatening to competition or clearly exclusionary.14 Direct evidence of intent, on the other hand, may permit reliance on a broader range of conduct, simply because the purpose of ambiguous conduct may be more clearly understood.15 But, in general, conduct that will support a claim of attempted monopolization must be such that its anticipated benefits were dependent upon its tendency to discipline or eliminate competition and thereby enhance the firm's long-term ability to reap the benefits of monopoly power. Such conduct is not true competition; it makes sense only because it eliminates competition. It does not enhance the quality or attractiveness of the product, reduce its cost, or alter the demand function that all competitors confront. Its purpose is to create a monopoly by means other than fair competition.16

We now turn to the specific facts and arguments of the case at bar.

Inglis alleged in support of its section 2 claim that Continental set predatory prices for its private label bread with the purpose of eliminating weaker bread wholesalers. In support Inglis presented to the jury testimony and documentary evidence relating to Continental's intent as well as expert testimony demonstrating the relationship between Continental's prices and various categories of costs. In granting Continental's motion for JNOV, the district court determined that Inglis had failed to present competent evidence of predatory conduct according to legal standards which Inglis now challenges on appeal. In granting Continental's alternative motion for a new trial, the court found that Inglis' expert testimony was unreliable,17 and apparently discounted Inglis' direct evidence of intent on the ground that such evidence was insufficient as a matter of law, absent evidence of predatory conduct. 461 F.Supp. at 422 n.11.

1. When Is a Price Predatory?

Much of the dispute on appeal concerns the proper relationship between direct evidence of intent and evidence concerning the relationship between the cost and price of Continental's products. As already indicated, a distinction must be maintained between a "predatory" price and a "competitive" one. Constraints must be developed that will deter the former, but not the latter. See Joskow & Klevorick, A Framework for Analyzing Predatory Pricing Policy, 89 Yale L.J. 213, 220-22 (1979).18

Price reductions that constitute a legitimate, competitive response to market conditions are entirely proper. "Pricing is predatory only where the firm foregoes short-term profits in order to develop a market position such that the firm can later raise prices and recoup lost profits ...." Janich Bros., supra, 570 F.2d at 856; Hanson v. Shell Oil Co., 541 F.2d 1352, 1358 (9th Cir. 1976), cert. denied, 429 U.S. 1074, 97 S.Ct. 813, 50 L.Ed.2d 792 (1977).19 Although this standard captures the distinction between competitive and anticompetitive price reductions, many authorities have offered more specific economic tests to define the difference.20

One such economic test that has found favor in this and other circuits was developed by Professors Areeda and Turner. See Areeda & Turner, Predatory Pricing and Related Practices Under Section 2 of the Sherman Act, 88 Harv.L.Rev. 697 (1975). In their view a price should not be considered predatory if it equals or exceeds the marginal cost of producing the product. When a firm prices at marginal cost, they argue, only less efficient firms will suffer larger losses per unit of output at that price. Moreover, such pricing enables resources to be properly allocated because the price accurately "signals" to the consumer the true social cost of the product. Therefore, "pricing at marginal cost is the competitive and socially optimal result." Id. at 711. In contrast, pricing below marginal cost should be conclusively presumed illegal.21 Recognizing that business records rarely reflect marginal costs of production, Areeda and Turner suggest the use of average variable cost as an evidentiary surrogate.22

This test has had its critics23 to whom the creators have responded24 and even revised some portions of their theory.25 Courts that have adopted the Areeda-Turner test have not done so unqualifiedly. We are no exception.

Our first discussion of the test appears in Hanson v. Shell Oil Co., 541 F.2d 1352 (9th Cir. 1976), cert. denied, 429 U.S. 1074, 97 S.Ct. 813, 50 L.Ed.2d 792 (1977). There we affirmed a directed verdict for the defendant on a section 2 attempt claim. The plaintiffs failed to introduce direct evidence of specific intent and also were unable to demonstrate that the defendant's prices were below its marginal or average variable cost. The opinion, however, suggested two departures from the Areeda-Turner rule. First, it was recognized that a defendant may be allowed to prove "nonpredatory and acceptable business reasons" for prices that are below even marginal or average variable cost. Id. at 1359 n.6. Second, the possibility was raised that a plaintiff could make a case of predatory pricing if defendant's prices, although above marginal or average variable cost, were below its short-run profit-maximizing price and if barriers to entry were great enough to prevent entry long enough to permit the predator to reap the benefits of its enhanced market position. Id. at 1358 n.5.26

The Areeda-Turner test also was discussed in Janich Bros., Inc. v. American Distilling Co., 570 F.2d 848 (9th Cir. 1977), cert. denied, 439 U.S. 829, 99 S.Ct. 103, 58 L.Ed.2d 122 (1978). There we again affirmed the district court's directed verdict in favor of the defendant. We stated that "an across-the-board price set at or above marginal cost should not ordinarily form the basis for an antitrust violation," id. at 857 (emphasis added), and that, on the facts of that case, the plaintiff's failure to present evidence of price below average variable cost justified a directed verdict, id. at 857-58. As in Hanson, no direct evidence of intent was admitted at trial. Id. at 859.

Finally, we again upheld a directed verdict in favor of the defendant in California Computer Products, Inc. v. IBM Corp., 613 F.2d 727 (9th Cir. 1979). Our view of the evidence was that the defendant's price reductions were still "substantially profitable" and were made in response to lower-priced competition. The plaintiff had failed to prove pricing below marginal or average variable cost, "which ordinarily is required to show predatory pricing." Id. at 740 n.19. However, we also recognized "that refinement of the