Solyndra Pursues the Chinese
By David H. Evans and Samuel Zimmerman
Solyndra, a now-defunct American manufacturer of photovoltaic solar panels, filed an antitrust suit against three Chinese companies — Suntech, Trina and Yingli — in October alleging the companies conspired to drive Solyndra, and about a dozen other solar panel manufacturers, out of business and thus monopolize the American market.
The case is an attempt to win private antitrust damages on the heels of the decision by the US government to impose import duties on Chinese solar cells.
Solyndra charges that the three Chinese companies sold solar panels in the United States for less than cost for a sufficient amount of time to drive the American manufacturer out of business, that they did so in concert through trade association meetings and other communications, and that they did so with extensive support of the Chinese government through its controlled banks.
It points to evidence that the parties priced in parallel and that they had the opportunity to conspire through their common membership in a trade association.
It says there were statements by the companies that they intended to price at “less than the cost of materials, assembly and shipping” for purposes of gaining market share.
And it alleges that Chinese banks extended below-cost loans to the companies — loans that were “frequently” rolled over with payment delayed indefinitely — that essentially financed the predatory scheme. Solyndra says the fact that the US International Trade Commission and US Department of Commerce found injury to US solar panel manufacturers and imposed stiff countervailing and anti-dumping duties lends support to its charges.
Predatory pricing can be illegal under US antitrust laws.
Generally, predatory pricing is “pricing below an appropriate measure of cost for the purpose of eliminating competition in the short run and reducing competition in the long run.”
Predatory pricing claims are hard to prove. The US Supreme Court has admonished that it is extremely important to
distinguish between precompetitive price cutting — where consumers benefit from lower prices — and anticompetitive behavior where consumers later have to pay higher prices because weaker competitors have been vanquished. Not only must a plaintiff show that the defendant priced below cost, but he must also show that the defendant had a “dangerous probability” of recouping its investment in the predatory scheme by jacking up prices later. Unless he can show recoupment, the plaintiff cannot win the case. The Supreme Court observed that, absent recoupment, “predatory pricing produces lower aggregate prices in the market, and consumer welfare is enhanced.” Most economists also believe that predatory pricing more often benefits customers than harms them because recoupment is so difficult as to be unlikely.
The Supreme Court requires that lower courts use a “cost-based” analysis of price to determine whether there has been predatory pricing. However, how the lower courts apply that standard varies greatly.
The 9th circuit court of appeals, where the Solyndra case was filed, has said that it is potentially predatory pricing when the prices charged are above average variable cost but below average total cost. However, in such cases, the plaintiff bears the burden of showing the prices were predatory. If the plaintiff can show that the prices are below average variable cost, then the plaintiff has made its case. The burden shifts to the defendant to show that the prices were “justified without regard to any anticipated destructive effect” they may have had. The 9th circuit court has also held that even prices above average total cost may be predatory if there is clear and convincing evidence of predatory intent.
There is also considerable judicial skepticism against “country-wide” predatory pricing conspiracies. In Matsushita Electric Industrial Co. v. Zenith Radio Corp., Zenith and several other American manufacturers of television sets sued a group of Japanese television manufactures alleging that they had illegally conspired to drive the Americans out of business by maintaining high prices in Japan and fixing and maintaining artificially low prices in the United States. The court held that the Americans failed to prove that the Japanese had entered into an illegal conspiracy to drive them out of business. In fact, the court concluded that “petitioners had no motive to enter into the alleged conspiracy. To the contrary, as presumably rational businesses, petitioners had every incentive not to engage in the conduct with which they are charged, for its likely effect would be to generate losses for petitioners with no corresponding gains.” It did not help that RCA and Zenith, two other American companies, continued to hold the largest share of the American retail market in color television sets. Finally, there was nothing to suggest that the Japanese companies profited from the alleged scheme. Most economists and legal scholars believe the court was wrong in its analysis and that the Japanese achieved in fact exactly what the Americans said they would do.
Case Against the Chinese
It is not enough to show that Chinese companies engaged in predatory pricing to build market share, Solyndra must also show that the Chinese companies will be able to recoup early losses while they were building market share by jacking up prices later after American manufacturers have been driven out of the market. Without this “recoupment,” American consumers are better off from the low prices.
The Chinese companies are almost certain to file a motion to dismiss the case. The motion can be expected to borrow heavily from the language of the Japanese television case finding such country-wide conspiracies implausible and draw on economic literature underscoring the hostility to predatory pricing claims. It can be expected also to challenge the notion that the banks somehow participated in the conspiracy absent specific claims about how the banks would recoup their losses from subsidizing the Chinese manufacturers. Solyndra’s case is bolstered by the successful trade actions, comments the defendants have made in the press and judicial hostility toward the decision in Matsushita.
A far more important issue is the fact that all of these companies, even though acting in concert, may be characterized as organs of the Chinese government. If the alleged conspiracy were directed by the Chinese government, then it is conceivable that the activity, even if predatory, would be immune from challenge under the political question or act-of-state doctrines. Several antitrust challenges to the OPEC oil price fixing cartel were dismissed on this basis.
If the Chinese companies lose their motion to dismiss, then they will face significant discovery into all manner of their operations. While some of the evidence resides in China and is perhaps out of reach of American courts, the prospect of being hauled through the American judicial system should give the companies pause. At that point, they may be interested in settling the case. The downside of settling is that other manufacturers affected by the alleged conspiracy might then file their own suits against the companies.