Pacific Bell Telephone Co. D/B/A AT&T California v. linkLine Communications, Inc. (07-512)

Oral argument: Dec. 8, 2008

Appealed from: United States Court of Appeals, 9th Circuit (Sept. 11, 2007)

ANTITRUST LAW, SHERMAN ACT, COMPETITION, TELECOMMUNICATIONS, FCC

This case involves price squeeze claims and whether they are viable under Section 2 of the Sherman Act. In addition, the Court will likely determine if price squeeze claims must be pled and treated in the same way as traditional predatory pricing claims. This claim arose when linkLine, an internet service provider, sued its wholesale DSL supplier, AT&T, for engaging in anticompetitive practices in order to stifle competition in the California telecommunications market. The Ninth Circuit rejected AT&T’s argument that linkLine’s claim was not viable under antitrust jurisprudence, especially in light of the recent Supreme Court decision in Verizon v. Trinko. The Supreme Court’s ruling will determine the status of price squeeze claims in antitrust jurisprudence, and could also clarify how the costs of retail production of a vertically integrated company with a wholesale monopoly should be measured when considering retail predatory pricing claims. 

·        [Question(s) presented]

·        [Issue(s)]

·        [Facts]

·        [Discussion]

·        [Analysis]

Question presented

Whether a plaintiff states a claim under Section 2 of the Sherman Act by alleging that the defendant—a vertically integrated retail competitor with an alleged monopoly at the wholesale level but no antitrust duty to provide the wholesale input to competitors—engaged in a “price squeeze” by leaving insufficient margin between wholesale and retail prices to allow the plaintiff to compete.

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Issue

Is there a viable claim under Section 2 of the Sherman Act for price squeeze theories?

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Facts

AT&T and its affiliates (SBC at the time of filing) comprise a “vertically-integrated” monopoly in the California telecommunications market, owning both the local telephone network and the “last mile” lines that connect individual customers to the local network. See linkLine Communications, Inc. v. SBC California, 503 F.3d 876, 877–78 (9th Cir. 2007). Specifically, AT&T’s affiliates provide DSL transport services (one way of connecting to the internet using existing phone lines) to retail customers through the local telephone network infrastructure that AT&T already owns. See id. The 1934 Telecommunications Act, however, required AT&T to sell wholesale DSL transport services to unaffiliated companies on the same terms and conditions as it did to its affiliated companies. See id. at 879, n.6.

These unaffiliated companies are Internet Service Providers (“ISPs”) who buy DSL transport services at a wholesale price from AT&T, and in turn, sell DSL services to individual customers at a higher retail price. See linkLine, 503 F.3d at 877. This makes AT&T both a wholesale supplier and a retail competitor to ISPs. See id. at 878.

linkLine and three other ISPs who buy DSL transport services from AT&T filed a complaint against AT&T in the U.S. District Court for the Central District of California, alleging that AT&T engaged in unlawful “price-squeezing” in violation of § 2 of the Sherman Act. See linkLine, 503 F.3d at 879. In antitrust law, a price squeeze occurs when a vertically-integrated monopoly (here AT&T) charges its wholesale customers (here ISPs) so high a price that the wholesale customers cannot compete with the monopoly in providing services to its own retail customers. See id. at 880. linkLine alleged that AT&T, by charging unaffiliated ISPs high prices at the wholesale level and making retail prices for its own customers too low, made it impossible for those ISPs, like linkLine, to compete with AT&T at the retail level. See id. at 879. Ultimately, linkLine claims that AT&T engaged in such practices “to stifle, impede and exclude competition from independent ISPs such as [linkLine] that are both wholesale customers and retail rivals.” See id.

AT&T moved to dismiss for failure to state a claim under antitrust law. See linkLine, 503 F.3d at 880. Specifically, it contended that the recent Supreme Court decision Verizon v. Trinko, 540 U.S. 398 (2004), barred linkLine from bringing a price-squeeze claim against a vertically-integrated monopoly like AT&T when the monopoly had no antitrust duty to sell its services to the competitor absent a statutory duty. See id. at 879, n.6.

In Trinko, the Supreme Court emphasized that antitrust law generally does not require any private business to cooperate or deal with its competitors. See Trinko, 540 U.S. at 408. Such a duty to deal does not arise unless there was already an ongoing, voluntary, and “presumably profitable” relationship between the competitors. See id. at 409.Under those circumstances, one competitor’s unilateral refusal to deal would likely give rise to antitrust liability because its actions suggested “anticompetitive malice.” See id. Ultimately, the Supreme Court held that a refusal by a monopoly to deal with a competitor on certain terms when there was no such antitrust duty did not give rise to a claim under § 2 of the Sherman Act. See id. at 410. The Court emphasized that already extensive regulations in the telecommunications industry diminished the need for extra antitrust limitations. See id. at 412.

The California District Court denied AT&T’s motion to dismiss, but granted its motion to certify for interlocutory appeal of that decision. See linkLine, 503 F.3d at 880. The Ninth Circuit affirmed the District Court’s denial of AT&T’s motion. It noted that the existence of the regulatory scheme in the telecommunications industry did not immediately bar a § 2 claim, but was merely “one factor . . . in determining whether antitrust liability might also lie.” See id. at 883. Ultimately, the Ninth Circuit concluded, Trinko itself explained that claims that were part of traditional antitrust standards were still viable claims under § 2. Because price squeeze theories “formed part of the fabric of traditional antitrust law prior to Trinko,” the Court recognized linkLine’s claim as viable under § 2 of the Sherman Act. See id.

The U.S. Supreme Court granted certiorari to decide whether linkLine’s claim is indeed viable under § 2

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Discussion

linkLine’s claim implicates broad policies behind modern Sherman Antitrust Act jurisprudence. Both sides make much of the fact that the Supreme Court’s decision may or may not accomplish the original goal of antitrust law—to protect consumers. The U.S. Department of Justice argues that upholding the Ninth Circuit’s decision will be contrary to this goal because “a legal rule that requires a vertically-integrated [monopoly] to charge wholesale and retail prices that ensure its rivals . . . a ‘fair price’ or ‘living profit’ protects competitors, not competition or consumers.”Brief of United States as Amicus Curiae in support of Petitioner at 24. Should such a goal of protecting competitors rather than consumers be applied, professors and scholars in law and economics elaborate, maximizing consumer welfare will be secondary to advancing the interests of specific firms, leading to a sort of “managed competition.” See Brief of Professors and Scholars in Law and Economics as Amici Curiae in support of Petitioner at 5. The natural consequence of this, they continue, is that consumer harm would become irrelevant when imposing antitrust law. See id. at 9.

On the other hand, the Competitive Telecommunications Association (“COMPTEL”) argues that there is no basis in antitrust jurisprudence for the concern that recognizing a price squeeze theory as a viable claim under § 2 of the Sherman Act would contradict consumer protection. See Brief of COMPTEL as Amicus Curiae in support of Respondents at 2–3. COMPTEL argues that in over sixty years of federal courts recognizing price squeeze claims under § 2, no “parade of horribles” resulted, as AT&T and its amici contend. See id. at 3. In fact, it continues, price squeeze claims actually protect consumers by preventing anticompetitive harm. See id. at 11. Such protections include keeping retail prices at competitive levels and providing incentives for competitors to improve their services and products. See id. at 13, 15.

Another concern is whether the courts are even equipped to handle price-squeeze claims. Professors and scholars in law and economics argue that such cases are “highly technical” and “factually intensive,” making it more appropriate for a government agency experienced in regulating prices in the telecommunications industry (here, the Federal Communications Commission) to do so. See Brief of Professors and Scholars at 6. In essence, the professors and scholars argue that courts lack the competence to regulate through antitrust litigation. See id. at 6.  Moreover, by attempting to engage in such regulation, the courts will bear increased litigation that would waste judicial resources. See id. at 7–8.

COMPTEL counters this argument by first conceding that some price squeeze claims may be difficult for courts to adjudicate, but then arguing that there are situations where such claims are indeed viable under § 2. See Brief of COMPTEL at 15–16. According to COMPTEL, situations where wholesale prices are noticeably higher than retail prices and where statutory regulation itself is not robust are examples of viable claims where courts should adjudicate because these contexts are particularly anticompetitive and relatively easy to tackle. See id. at 16–21. Because of the existence of such situations, Comptel concludes, it would not make sense to issue a per se bar to price squeeze claims under § 2. See id. at 16.

One interesting aspect of this case is the fact that the United States took differing positions regarding linkLine’s claim. The U.S. Department of Justice (“DOJ”) and the Federal Trade Commission (“FTC”) are both federal agencies who regulate antitrust law, but the DOJ supported AT&T’s petition for certiorari, while the FTC opposed it. A major point of contention between the two agencies was whether price squeeze theories implicate federal antitrust laws, with the DOJ arguing that the Supreme Court should not recognize such theories, and the FTC arguing that the Court should recognize them. See Brief of United States at 10; Statement of the Federal Trade Commission at 3. The difference, some commentators argue, arises from the fact that the DOJ has historically been a more politically-sensitive agency, expressing the current administration’s more conservative views on antitrust enforcement. See linkLine Adds Twist to DOJ, FTC Rift Talk at 2, Competition Law 360, June 12, 2008; The FTC and DOJ, Mass Law Blog, November 4, 2008. By arguing for price squeeze claims under the Sherman Act, the FTC is pursuing a more aggressive antitrust policy than the DOJ. See linkLine Adds Twist at 2. The resolution of their disagreement through the Court’s decision will determine how aggressively the government can and will enforce federal anti-competition laws.     

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Analysis

Section 2 of the Sherman Act prohibits monopolization and attempts to monopolize “trade or commerce.” The Act provides for damages against corporations, as well as damages and imprisonment against individuals who attempt to attain or maintain monopolies. However, not every case of monopoly power constitutes a violation of § 2.  Monopolies resulting from “growth or development as a consequence of a superior product, business acumen, or historic accident” are not unlawful without “the willful acquisition or maintenance” of monopoly power. See United States v. Grinnell Corp., 384 U.S. 563, 570–71 (1966). This case will address whether a plaintiff has a viable claim under § 2 by alleging that a competitor with a lawful monopoly over wholesale product inputs conducted a “price squeeze” by charging a competitor high wholesale prices, while charging low retail prices to consumers, thereby setting too narrow a margin between wholesale and retail prices for a rival to compete. See Question Presented.  

Does Trinko Bar a Price Squeeze Claim?

The biggest point of contention between the parties is whether Verizon Communications Inc. v. Law Offices of Curtis V. Trinko LLP bars linkLine’s price squeeze claim. 540 U.S. 398 (2004). In Trinko, the Supreme Court held that an alleged violation of the Telecommunications Act of 1996 for a failure to provide a competitor with adequate access to “interconnection” telephone services did not state a claim under § 2 of the Sherman Act. See id. at 399, 407. The Court held that while the Telecommunications Act imposed duties on Verizon to offer adequate access to competitors and potential market entrants, it did not create a new antitrust duty. See id. at 408–09. The claim in Trinko was barred because Verizon’s “alleged insufficient assistance in the provision of service to rivals” and refusal to deal with competitors did not violate “pre-existing antitrust standards.” See id. at 409–10. AT&T argues that it is the Federal Communications Commission regulation that obligates it to offer wholesale access to DSL infrastructure on the same terms it gives its affiliates, not an affirmative antitrust duty. See Brief for Petitioner Pacific Bell Telephone Company d/b/a AT&T California at 20. In addition, AT&T contends that there is no analytical difference between the claims of inadequate wholesale services in Trinko, and the claims in this case of high prices on adequate wholesale inputs. See id. AT&T argues that linkLine’s claim is precluded by Trinko because it rests on the assumption that wholesale prices are “too high,” and is therefore equivalent to the insufficient assistance claims in Trinko. See id. at 17–19.

linkLine contends that Trinko does not bar its price squeezing claim under § 2 of the Sherman Act because the claim incorporates the antitrust theory of predatory pricing. See Brief for Respondents linkLine Communications Inc. at 19. According to linkLine, the price squeeze claim in this case need only meet the principles of predatory pricing as recognized in Brooke Group Ltd. v. Brown and Williamson Tobacco Corp to be actionable. See id. Under Brooke Group, predatory pricing violates § 2 if a company with market power attempts to drive out competition from new market entrants by setting prices below its costs until the new competitor, who has not had an opportunity to build a large market share, is driven out of business. 509 U.S. 209, 224–26 (1993). After the competitor is out of the market, the predator company then “recoups” its losses and eventually gains extraordinary profits by charging a higher-than-competitive price. See id. Thus, a plaintiff alleging predatory pricing must show both that the defendant has priced below cost, and is likely to cause competitive injury in the form of higher prices down the road. See id. at 226. linkLine argues that decisions of the Courts of Appeals for the Eleventh and D.C. Circuits demonstrate that Trinko does not bar a price squeeze claim that meets the Brooke Group standards. See Brief for Respondents at 21–23. linkLine points out that even though Trinko bars certain antitrust claims relating to pricing and dealing at the “upstream” or wholesale level in which there is no affirmative antitrust duty to deal, allegations of price predation at the retail level constitute a pre-existing antitrust claim, and therefore are not barred by Trinko. See id. at 23–24.

Is Recognition of a Price Squeeze Claim Consistent with Existing Antitrust Precedent?

AT &T contends that recognition of a price squeeze claim under § 2 of the Sherman Act “cannot be reconciled” with antitrust precedent because “[w]hen the defendant has no antitrust duty to deal, price-squeeze allegations … are based solely on the margin between an integrated defendant’s wholesale and retail prices.”Brief for Petitioner at 21. AT&T argues that prices squeezes do not “support inference of harm to competition” at the retail level even when competitors are unable to compete with a dominant wholesale firm at the retail level. See id. at 22–23.  Pointing to the language of the Supreme Court in Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., AT&T argues that antitrust law exists for the “protection of competition not competitors.” See id. at 23 (quoting 429 U.S. 477, 488 (1977).  AT&T contends that in a case like this, where the retail product depends on inputs from a monopoly wholesaler in a “fixed proportion,” the wholesaler gains nothing from driving its retail competitors out of business because it could already capture a retail competitor’s profits by raising wholesale price. See id. at 24. AT&T also argues a price squeeze is not indicative of competitive harm because a retail rival’s “inability to compete is the result of desirable efficiencies from which consumers benefit.” Id. at 25. AT&T suggests that a vertically integrated company – in this case, a company that produces both DSL infrastructure and retail DSL service through subsidiaries – can avoid certain transactional costs of producing a retail product, and may prevent non-integrated retail competitors from charging higher than competitive prices to consumers. See id. at 25–26

Since linkLine views the price squeeze at issue as a form of predatory pricing, it argues that “nothing in Trinko or Brooke Group suggests that . . . a predatory pricing claim is barred unless the monopolist had an antitrust duty to deal with the predatory pricing victim.” Brief for Respondent at 24. In addition, linkLine claims that because AT&T has an FCC-imposed duty to supply DSL access to competitors, it is not insulated from claims against anticompetitive behavior at the retail level simply because it has no antitrust duty to deal at the wholesale level. See id. linkLine urges that because AT&T is not free to lawfully refuse to sell DSL access to its competitors, a price squeeze that meets the Brooke Group definition of price predation must be anticompetitive. See id. at 23–24. By driving out competition at the retail level, AT&T’s affiliates could harm consumer welfare “in the form of higher prices, reduced choice and loss of efficiency and superior services.” See id. at 24. linkLine urges that even though AT&T could lawfully refuse to deal with competitors in the absence of FCC regulation, it does not have immunity from claims of retail level anticompetitive pricing simply because antitrust law imposes no duty to deal at the wholesale level. See id. at 24–25.

Does linkLine’s claim fit properly into a predatory pricing claim?

AT&T points out that linkLine’s complaint does not expressly allege predatory pricing and argues that price squeeze can occur without below-cost pricing. See Brief for Petitioner at 28 n.17. AT&T argues that “there is no basis in antitrust law for requiring a vertically integrated producer to treat the price charged to others for a wholesale input as the cost of the input to itself.” Id. at 32 (emphasis in original). Notwithstanding FCC regulations, AT&T argues that as a legitimate wholesale monopolist, it can charge a high wholesale price to its competitors, but at the same time, can ignore that price and look to its internal costs of production when setting its own retail price without violating antitrust principles. See id. AT&T also urges that using existing legitimate monopoly power to gain an advantage in a second market is not unlawful unless there is independent anticompetitive conduct. See id. at 25.AT&T points to language in Brooke Group to analogize linkLine’s price squeeze claim to the kind of above-cost predatory pricing claims that Brooke Group precludes: “the exclusionary effect [here, of price squeeze] . . . reflects the lower cost structure of the alleged predator, and so represents competition on the merits.” See id. at 29 (quoting 509 U.S. at 223).

linkLine argues that because its price squeeze claim is consistent with a predatory pricing claim, it would not require AT&T and its affiliates to “prop up” rivals, but rather, would simply “preserve competition from equally efficient competitors” and prevent a scheme of unfair pricing from allowing firms with legitimate monopoly power in an input market to extend monopoly power to a distinct retail market. See BriefforRespondentat 27. linkLine urges that because it alleged that AT&T charged a higher wholesale price to its own affiliate and linkLine than the retail price charged by AT&T’s retail affiliate, there is a “plausible basis to suggest” that AT&T was pricing below cost as contemplated by Brooke Group. See Brief for Respondent at 35.  According to linkLine, the DSL wholesale transport price is a relevant “frame of reference for assessing ‘an appropriate measure of cost’ . . . at the pleading stage.” See id. at 35 n.16. Further, linkLine contends that the Court should not consider whether its complaint specifically meets the pleading standards for stating a predatory pricing claim, but rather should remand the case to the Ninth Circuit and allow linkLine to amend its complaint if it finds that the price squeeze alleged could meet the Brooke Group test. See id. at 33–35.  

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Conclusion

This case will determine whether the Supreme Court’s holding in Trinko bars price squeeze claims under § 2 of the Sherman Act. In addition, the Court will likely determine if price squeeze claims must be plead and treated in the same way as traditional predatory pricing claims a recognized in Brooke Group. In so doing, the Court could clarify how the costs of retail production of a vertically integrated company with a wholesale monopoly should be measured when considering retail predatory pricing claims. 

Authors

Prepared by: Sun Kim and Joe Rancour

Edited by: Carrie Evans

Additional Sources

·       WEX: Antitrust Law

·       Antitrust & Competition Policy Blog

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Written by: 
Edited by: