William Royce Morgan and Kenneth H. Lipps, D/B/A Ozark Graphic and Merilyn Royce Morgan v. Chester L. Ponder and Dorothy K. Ponder, D/B/A the Prospect News Publishing Co.

Citations: 892 F.2d 1355; 17 Media L. Rep. (BNA) 1465; 1989 U.S. App. LEXIS 19570Docket: 89-1309

Court: Court of Appeals for the Eighth Circuit; December 28, 1989; Federal Appellate Court

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An appeal was made to the Eighth Circuit Court regarding a case where the owners of a local newspaper, Chester and Dorothy Ponder, were accused of monopolizing the local newspaper advertising market through predatory pricing, in violation of the Sherman Antitrust Act. The dispute originated in Doniphan, Missouri, where the Ponders had owned the Prospect-News for decades, generating modest profits. Competing with them were William Royce Morgan, Merilyn Royce Morgan, and Kenneth Lipps, who launched a free-distribution advertising shopper, the Ozark Graphic Weekly Shopper, in 1974, which heavily relied on advertising. In 1980, the Morgans introduced a paid-subscription newspaper, the Ozark Graphic, while the Ponders responded by launching their own free shopper, the Prospector. This led to intense competition, resulting in the Ozark Shopper's eventual failure in 1982. The Morgans then filed an antitrust lawsuit against the Ponders, which culminated in a jury verdict awarding the plaintiffs $60,000 (subject to trebling), $50,000 in attorney fees, and costs. However, the appellate court found insufficient evidence to support the jury’s verdict, reversed the decision, and directed the district court to enter judgment for the defendants.

Before 1980, the Prospect-News was the sole publication authorized to publish legal notices in the area, facing no competition. The emergence of the Ozark Graphic in 1980 changed this dynamic, as it also qualified to publish legal advertising. In response to this competition, Ripley County announced it would accept bids for legal advertising, leading the Ozark Graphic to bid 98 cents per column inch while the Prospect-News bid 48 cents, ultimately winning the contract after lowering its previous charge of $1.22. Evidence indicates that the Prospect-News also reduced rates for other legal advertisements, with estate settlement notice prices dropping significantly. A February 1980 letter from Chester Ponder indicated a willingness to lower rates if competitors underbid, suggesting potential predatory pricing.

Plaintiffs also allege predatory pricing in merchant advertising, citing a significantly lower bid from the Prospector to AG Market compared to its previous ad costs with the Ozark Shopper. After AG Market switched to the Prospector, other merchants followed, although there is no evidence of below-cost pricing for them. Testimonies indicated promises from the Ponders to undercut competitors to gain business.

Additionally, plaintiffs reference a concerning trend in pricing and profits, noting a drastic decrease in the Ponders' net income during heightened competition—falling from an average of $11,000 to $646 in 1980, and incurring a net loss of approximately $10,000 in 1981. This income increased significantly after the Ozark Graphic ceased operations. Plaintiffs argue this pattern demonstrates a strategy of predation, where the Ponders sacrificed short-term profits to eliminate competition and later increase prices.

To establish a violation of Section 2 of the Sherman Act, plaintiffs must demonstrate that the defendant had monopoly power in the market and engaged in anticompetitive conduct lacking legitimate business purpose aimed at eliminating competition.

Predatory pricing occurs when a dominant firm lowers prices to eliminate competitors or deter market entry, as outlined in *Matsushita Elec. Indus. Co. v. Zenith Radio Corp.* Distinguishing competitive pricing from predatory pricing is challenging, as price cuts can result from competition or market demand changes rather than intent to harm rivals. Mislabeling aggressive pricing as predatory can disadvantage consumers who benefit from lower prices.

Evidence of a defendant's alleged predatory intent, such as statements made by business leaders about not being underbid, can be misleading and does not fulfill the plaintiff's burden to demonstrate actual predatory conduct. Past cases indicate that competitive statements in a business context do not prove wrongdoing.

The typical pattern of predatory pricing—initial price cuts and reduced profits followed by price increases after competitors have exited—is also characteristic of successful competition in concentrated markets. Courts emphasize that vigorous competition can harm rivals but is not inherently unlawful under antitrust laws, which protect competition rather than individual competitors. Evidence of profit patterns in the absence of competition may suggest monopoly power but does not establish that such power was gained through predatory practices. Objective cost analysis is essential for proving predatory pricing in antitrust cases.

The court uses "average variable cost" and "average total cost" as benchmarks for assessing predatory pricing. Prices above average total cost are considered legal per se, while prices above average variable cost create a rebuttable presumption of legality, requiring plaintiffs to demonstrate anticompetitive factors. Conversely, if prices fall below average variable cost, the defendant must prove non-predation. The burden initially lies with plaintiffs to show prices are below these benchmarks.

In this case, defendants presented testimony from their expert, Austin Mitchell, indicating that the average total cost of advertising in the Prospector was 78.3 cents per column inch, with the charged rate of $269 (78.5 cents) being marginally above this figure. Plaintiffs did not produce their own cost analysis or expert testimony. Their reliance on Mr. Lipps' assertion that profitability was unattainable at this rate, alongside the argument that defendants' rates were significantly lower than their own, was insufficient to substantiate a claim of predatory pricing.

Even if plaintiffs could argue that the rate was below average total cost, they would still need to demonstrate that it also fell below average variable cost or counter the presumption of competitive pricing. The evidence suggested the average variable cost was lower than the rate charged, and plaintiffs failed to present any counter-evidence to dispute the competitive pricing presumption. Assertions of predatory intent and claims of defendants' monopolistic position did not provide the necessary support for the plaintiffs' case. The court concluded that there was no evidentiary basis to support the allegation that the rate charged to AG Market was predatory.

Plaintiffs allege predatory pricing related to Prospect-News' legal advertising, noting a county rate drop from $1.22 to 48 cents, which may have decreased gross revenue by $2,000 to $3,000. Dorothy Ponder indicated that without the bid, the newspaper would have gained nothing. Chester Ponder countered that he remained profitable at the 48-cent rate due to low incremental costs and the prestige associated with legal ads, asserting that it was a legitimate business decision to continue printing them. Plaintiffs reference expert testimony from Mr. Mitchell, arguing that the cost structure for both publications is similar, suggesting the 48-cent rate could be below average variable costs. However, the argument is deemed flawed, as plaintiffs fail to demonstrate that the defendants' overall pricing was predatory or that the low rate had significant anticompetitive effects. Courts have historically been cautious about establishing predatory pricing based solely on low prices for a single product or customer. The relevant analysis should consider the defendants' overall operations, not just isolated transactions, as established in several legal precedents. These precedents emphasize the necessity of showing that the pricing behavior poses a genuine threat to competition in the market.

The court references a prior ruling in Lomar Wholesale Grocery, Inc. v. Dieter's Gourmet Foods, Inc., where insufficient evidence was presented to establish below-cost pricing across a broader range of products based on only a few items. In the current case, plaintiffs claim that the Ponders monopolized the local newspaper advertising market but only provide evidence of below-cost pricing in two specific instances, which the court finds inadequate. The defendants argue that the production cost for legal advertising is low, and the plaintiffs failed to contest this assertion effectively. Evidence presented indicates that the Ozark Graphic's inability to secure legal advertising had a negligible impact on its competitiveness, and that legal advertising constituted a minor portion of overall advertising revenue. The plaintiffs did not challenge testimony indicating that the legal ads were not critical to the Ozark Graphic's viability. Despite hypothetically considering a higher bid for legal ads, the potential revenue increase would not have significantly impacted the Ozark Graphic's financial troubles, which were attributed to declining circulation and a loss of advertising support tied to their editorial stance. The court suggests that external factors, rather than predatory pricing, may have contributed to the plaintiffs' failure in the newspaper industry.

The plaintiffs in this Sherman Act case are not required to pinpoint the exact cause of the Ozark Graphic's failure or to eliminate all potential non-predatory causes. The focus is on whether the pricing for legal advertising charged to Ripley County by the defendants was anticompetitive or exclusionary, which necessitates that it could materially affect an equally efficient competitor's market viability. Legal precedents indicate that only conduct that permanently eliminates efficient competitors should be prohibited. The evidence overwhelmingly suggests that the defendants' pricing did not meet this threshold. Consequently, the court determines that there is insufficient evidence of predatory conduct to uphold the jury's verdict. The district court's denial of the defendants' motion for judgment notwithstanding the verdict (JNOV) is reversed, and the case is remanded for judgment in favor of the defendants. Additional context includes the lack of formal contracts for advertising rates, variations in rates charged by defendants, and testimony from advertisers regarding their advertising practices and decisions.

Defendants contend that plaintiffs failed to provide evidence regarding their share of the relevant market, which they assert should encompass various advertising forms, including direct mail and radio, in addition to newspaper advertising. They further argue that low barriers to entry for starting competing newspapers negate their ability to sustain monopoly pricing. The court notes that it does not need to resolve these issues as the case is dismissed based on predatory conduct. One grocer testified that newspaper advertising was perceived as more effective than radio, and it is acknowledged that legal advertisements can only be placed in newspapers. The limited size of Ripley County suggests it could support a maximum of two newspapers, aligning with previous rulings on relevant product markets in small communities.

Average variable cost, calculated by dividing total variable costs by output, is consistently lower than average total cost, which includes both fixed and variable costs. Mr. Mitchell identified printing and materials as variable costs, while labor and postage are classified as semivariable, varying indirectly with output. His findings showed that average costs per column inch ranged from 75 cents in 1981 to 68 cents in 1983, with variable costs alone averaging 34 to 38 cents during those years. Plaintiffs did not present alternative variable cost figures.

Evidence indicates that defendants' pricing to AG Market was competitively based, with a price of $269 aligning with their charge to Whittom's Big Star Market, which included additional services. Plaintiffs did not counter this evidence. Chester Ponder testified that a full page of legal advertising at 48 cents would yield $82.56, while printing costs were only $34.56, with minimal layout required. Mr. Mitchell confirmed that the Prospect-News had lower printing costs than the Prospector. Although the 48 cent rate exceeded strictly variable costs, it appears to fall below the combined total of variable and semivariable costs. Plaintiffs indicated that defendants reduced prices for other legal advertising types but focused solely on the 48 cent county ad rate, providing no evidence that rates for estate settlement notices or other legal ads fell below average variable costs.

Plaintiffs struggle to identify variable costs specifically tied to the alleged predatory pricing of Ripley County legal advertising, which is distinct and less expensive to produce than news reporting or other advertising. The case differs from prior rulings, such as Marsann, as it involves distinct products rather than a single, undifferentiated good. Professors Areeda and Turner argue that when joint costs obscure the variable costs of specific products, plaintiffs must demonstrate predatory pricing across the board. Here, plaintiffs attempt to isolate a single product while failing to prove either that defendants’ overall prices are below cost or that the pricing of legal ads significantly harms competition. The bidding process is characterized as "winner-take-all," making it speculative to determine who would have won without alleged predation; however, it is reasonable to assume that plaintiffs would have won the county business at their 98 cent bid. Courts have generally been cautious regarding claims of predatory pricing based on low prices for single products or customers, emphasizing the need to evaluate the defendant’s operations holistically. Previous cases highlight that harm must be assessed in the context of full-line competitors rather than individual products, and the definition of the product for predation analysis must ensure that predatory pricing poses a real threat to competition.

In *Lomar Wholesale Grocery, Inc. v. Dieter's Gourmet Foods, Inc.*, the court determined that a food distributor's evidence of below-cost pricing on only four out of 180 items was insufficient to infer that the remaining items were also priced below cost. The plaintiff also failed to provide evidence showing that the difficulty in selling these items materially affected its competitiveness. In the current case, plaintiffs alleged that the Ponders monopolized the local newspaper advertising market but only demonstrated below-cost pricing in two instances: bids for legal ads and a grocery ad. The evidence for the grocery ad was inadequate, and the defendants argued that legal advertising was less costly to produce, a claim the plaintiffs did not effectively challenge. The jury was asked to rely on insufficient statements rather than concrete evidence. Furthermore, the plaintiffs could not show that the failure to secure Ripley County's legal advertising significantly impacted the Ozark Graphic's competitiveness, as it constituted a minor part of their overall advertising. Evidence indicated that the Ozark Graphic faced severe circulation issues from the outset, unrelated to the absence of county legal notices. Even if the Ozark Graphic had secured the legal ads at a higher bid, the revenue increase would have been minimal, unlikely to sustain the business. The court noted other potential reasons for the plaintiffs' business struggles, including their controversial editorial stance and the market's inability to support multiple newspapers. The exact cause of the Ozark Graphic's demise was deemed unnecessary to determine.

Plaintiffs are not required to eliminate all potential non-predatory causes to establish their claims. In a case under the Clayton Act, a plaintiff only needs to demonstrate some causal injury. The focus of this Sherman Act case is on whether evidence shows that the price charged for legal advertising in Ripley County was anticompetitive or exclusionary. For pricing to be deemed anticompetitive, it must significantly impact the viability of an equally efficient competitor. The relevant case law indicates that only conduct that permanently eliminates efficient competitors is prohibited, and exclusionary conduct is defined as that which can contribute to maintaining monopoly power.

The evidence overwhelmingly indicates that the defendants’ conduct was not capable of such impact. Consequently, the court concludes that there is insufficient evidence of predatory conduct to uphold the jury's verdict. The district court's denial of the defendants' motion for judgment notwithstanding the verdict (JNOV) is reversed, and the case is remanded for judgment in favor of the defendants. Additional details include that no formal contract existed for the advertising rates, which had varied over time, and testimony revealed that some advertising decisions were made informally, without binding agreements.

Long testified that he paid a rate nearly equivalent to what he had previously paid to the Prospector after switching arrangements. The case references Henry, which, despite being a price discrimination case under the Robinson-Patman Act, shares principles applicable to Sherman Act section 2 cases. Defendants contend that plaintiffs failed to provide evidence of their market share, which should encompass various advertising types beyond just newspaper ads, including direct mail and radio. They also argue that low barriers to entry for new newspapers in the area diminish their monopoly power. Although these arguments are noted, the case is resolved on predatory conduct grounds, making further discussion unnecessary.

One grocer indicated that he found newspaper advertising more effective than radio, and it is emphasized that legal advertising is restricted to newspapers. The small community size and limited advertisers suggest that Ripley County could sustain at most two newspapers, as supported by the case People's Press, Inc. v. Yazoo Publishing Co. 

Regarding costs, average variable cost is calculated by dividing total variable costs by output, while average total cost, which includes fixed costs, is always higher. Mr. Mitchell identified printing and materials as variable costs, with labor and postage classified as semivariable. His analysis revealed that from 1981 to 1983, average costs per column inch ranged from 75 to 68 cents, with variable costs alone averaging 34 to 38 cents. Plaintiffs did not present alternative cost evidence. Additionally, evidence indicated that defendants' pricing for AG Market was competitive, aligning with rates charged to other advertisers. Plaintiffs acknowledged that their knowledge of the Ozark Shopper's prior rates was based solely on a rate sheet, with no evidence produced to counter the claim that defendants offered a lower price to AG Market. Chester Ponder's testimony highlighted that advertising at 48 cents per page would yield a revenue of $82.56, while the printing cost was $34.56.

Mr. Mitchell indicated that the layout and composition for the advertisements were minimal due to pre-printed notices, and since ads often ran for two consecutive weeks, no additional layout was needed for the second week. He acknowledged that the Prospect-News had lower per-page printing costs compared to the Prospector. Although Mr. Mitchell's submitted figures showed that the 48 cent ad rate exceeded strictly variable costs, it was below the combined total of variable and semi-variable costs. Plaintiffs claimed defendants reduced prices on various legal ads but concentrated on the 48 cent county ad rate, presenting no evidence that the estate settlement notice rate or any other legal ad rate was below average variable costs. The plaintiffs face challenges in isolating variable costs specific to the allegedly predatorily priced product, as established in Marsann. However, this case is distinct because legal advertising is recognized as less costly than news reporting and other advertising types. Professors Areeda and Turner argue that when isolating variable costs is problematic due to shared costs, plaintiffs must prove overall predatory pricing. Here, plaintiffs attempt to isolate Ripley County legal advertising while only demonstrating overall operational variable costs. They must either show that defendants' overall pricing is below cost or isolate costs specific to legal ads to prove significant anticompetitive effects, which they have not done. The bidding process for a single customer is winner-take-all, making it speculative to determine outcomes without alleged predation. Nonetheless, it is assumed that plaintiffs would have won the county business at their 98 cent bid. Additionally, the possibility that Ripley County could support only one newspaper was acknowledged by plaintiffs' counsel during oral arguments.