U.S. Supreme Court Puts the Squeeze on “Price-Squeeze” Antitrust Claims
On Feb. 25, 2009, the U.S. Supreme Court released its opinion in an important and closely followed case that impacts both antitrust law and communications law, Pacific Bell Telephone Co., d/b/a AT&T California v. LinkLine Communications, Inc. (“LinkLine”). In LinkLine, the Court substantially foreclosed price-squeeze claims under U.S. antitrust law where a vertically integrated defendant has no clear antitrust duty to deal with its retail competitors at wholesale. LinkLine represents an extension of a recent line of Supreme Court opinions that have taken a narrow view of liability under Section 2 of the Sherman Act.
Wholesale providers and resellers of telecommunications, broadband, wireless and Internet services should take note of this opinion and its implications for future antitrust remedies and regulatory oversight. Although it appears that antitrust exposure is lessened for wholesale providers and that antitrust relief will be substantially unavailable to resellers in price-squeeze circumstances, it is possible that the Federal Communications Commission (FCC) may move to address resale competition between wholesalers and retailers more aggressively than it has in the recent past. This advisory provides background on LinkLine, summarizes the Court’s opinion, and offers an analysis of its potential impact.
The case was brought by LinkLine Communications, an Internet service provider (ISP) in California, and three other ISPs that resold wholesale digital subscriber line (DSL) services provided by AT&T, an incumbent local exchange carrier (ILEC).
Pursuant to a 2005 order of the FCC, ILECs are no longer required to sell DSL transmission services to independent ISPs and DSL providers. However, as a condition of the 2007 FCC order approving its merger with BellSouth, AT&T remains bound to provide DSL transport service to independent firms such as LinkLine at a price no greater than the retail price of AT&T's retail DSL service. AT&T thus participates in the DSL market at both the wholesale and retail levels by providing ISPs with wholesale DSL transport service and by selling DSL service directly to consumers at retail.
In 2003, LinkLine brought suit in federal court alleging that AT&T violated Section 2 of the Sherman Act, 15 U.S.C. § 2, by monopolizing the DSL market in California. The key allegation was that AT&T engaged in a price squeeze to minimize LinkLine's profit margins by setting a high wholesale price for DSL transport and a low retail price for retail DSL service in order to prevent rival firms from competing in the retail market.
In the district court, AT&T moved to dismiss the case on the ground that LinkLine's claims were foreclosed by Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004) (“Trinko”), in which the Supreme Court held that a firm with no antitrust duty to deal with its rivals has no obligation to provide those rivals with a “sufficient” level of service. The court denied the motion, holding that Trinko did not address price-squeeze claims.
On appeal, the U.S. Circuit Court of Appeals for the 9th Circuit affirmed (in a 2–1 decision), agreeing with the district court that Trinko did not address the viability of price-squeeze claims. The Supreme Court granted certiorari in order to address whether a price-squeeze claim may be brought under Section 2 of the Sherman Act when a defendant is under no antitrust obligation to sell transport service to the plaintiff.
The Supreme Court's opinion was authored by Chief Justice John Roberts and joined by Justices Scalia, Thomas, Kennedy and Alito. Justices Breyer, Ginsburg, Stevens and Souter concurred only with the judgment. The opinion contains two key holdings.
LinkLine's tactical maneuver fails
Initially, the Court addressed, and rejected, the assertion that the case was moot. Following the Court's grant of certiorari, LinkLine—perhaps sensing an unwinnable battle before the high court —took an unconventional approach by asking the Court to vacate the 9th Circuit Court of Appeals' decision (which held in its favor) and for permission to amend its complaint in order to assert a claim of “predatory pricing” apart from its price-squeeze theory claim.
In Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993) (“Brooke Group”), the Supreme Court established two requirements for a predatory pricing claim: (1) below-cost retail pricing and (2) a “dangerous probability” that the defendant will recoup any lost profits. Before the Supreme Court, LinkLine took the position that its claims must meet the Brooke Group test.
However, the Court refused LinkLine's request to vacate the 9th Circuit's decision, and rejected several amici's assertion that the case had become moot, because the parties continued to seek different relief (AT&T was seeking reversal of the 9th Circuit's decision) and because it was not clear that LinkLine had unequivocally abandoned its price-squeeze claim.
No price squeeze under Sherman Act
Turning to the merits, the Supreme Court held that a price-squeeze claim may not be maintained under Section 2 of the Sherman Act when a defendant has no antitrust duty to deal with the plaintiff at wholesale. Under long-standing principles of antitrust law, businesses generally are free to choose the parties with whom they will deal, as well as the prices, terms and conditions of that dealing. But there are rare circumstances in which a dominant firm may incur antitrust liability for purely unilateral conduct—for example, where a dominant firm engages in predatory pricing.
A price-squeeze claim requires a different kind of unilateral conduct and requires that the defendant operate in two markets: a wholesale (“upstream”) market and a retail (“downstream”) market. A firm with market power in the upstream market can squeeze its downstream competitors by simultaneously raising the wholesale price of service while cutting its own retail prices. Price-squeeze plaintiffs assert that a defendant must leave them a “fair” or “adequate” margin between the wholesale and retail price.
In both LinkLine and Trinko, the defendant was under a statutory or regulatory obligation to deal with competitors, but not an independent antitrust duty to deal.
In Trinko, Verizon was required by the federal Communications Act to lease its network elements to competing firms at wholesale rates. The Trinko plaintiffs asserted that Verizon denied its competitors access to its interconnection support services, making it difficult for its competitors to fill their customers' orders. The Supreme Court's decision in Trinko held that the because Verizon had no antitrust duty to deal at wholesale with its rivals at all, claims of a denial of access to interconnection support services under terms and conditions that the rivals find commercially advantageous were not actionable under Section 2 of the Sherman Act.
In LinkLine, the Court reasoned that a “straightforward application” of its decision in Trinko foreclosed any challenge to AT&T's wholesale prices, where AT&T had no antitrust (as opposed to regulatory) duty to deal with its competitors at wholesale.
Seeing no difference between the “insufficient assistance” claims rejected in Trinko and the LinkLine plaintiffs' price-squeeze claim, the Court opined that “for antitrust purposes, there is no reason to distinguish between price and nonprice components of the transaction.” As AT&T had no antitrust duty to provide service to the plaintiffs at all, it therefore had no duty to provide service at the wholesale prices that the plaintiffs would have preferred.
No predatory pricing
The Court next stated that the other component of a price-squeeze claim is the assertion that the defendant's retail prices are too low. But in order to avoid chilling aggressive price competition, which benefits consumers, the Court has carefully limited the circumstances under which plaintiffs can state a violation of the antitrust laws by alleging that the defendant's prices are too low—most notably, the stringent predatory pricing test set forth in Brooke Group.
LinkLine's complaint contained no allegation that AT&T's conduct met the Brooke Group test. In this regard, the Court announced its core holding that “[i]f there is no duty to deal at the wholesale level and no predatory pricing at the retail level, then a firm is certainly not required to price both of these services in a manner that preserves its rivals' profit margins.” The Court further reasoned that institutional concerns counsel against recognizing price-squeeze claims. For example, courts would be required to simultaneously police both the wholesale and retail prices of a firm, and then determine what constitutes a “fair” or “adequate” margin between wholesale and retail prices.
The Supreme Court remanded the case to the district court with instructions to consider whether an amended complaint filed by LinkLine properly states a claim under the heightened pleading standard articulated by the Court in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007). LinkLine's complaint was filed several years prior to the Court's Twombly opinion, which established a new, higher pleading standard for antitrust claims—specifically, that a well-pleaded complaint must show that relief is “plausible,” and have enough “heft” to show that the plaintiff is entitled to relief.
Although the case has not been dismissed, the plaintiffs clearly face a difficult hurdle in demonstrating that AT&T engaged in predatory pricing under the Brooke Group test analyzed through the prism of Twombly's higher pleading standard.
Analysis and potential impact of the decision
As a matter of antitrust jurisprudence, LinkLine delivers a substantial blow to price-squeeze claims under the federal antitrust laws. The only exception is those situations in which a firm is required by antitrust law to deal with competitors on a wholesale basis, although the Supreme Court did not elaborate on what constitutes a duty to deal.
For telecommunications companies seeking to resell the services of a dominant firm, all may not be totally lost. With antitrust remedies available to telecommunications resellers now substantially limited, the FCC may be inclined to take a more proactive approach to promoting resale competition; and the same may be true in some other regulated industries with similar wholesale/resale market constructs.
However, with the recent nomination of a new FCC chairman by President Obama, it remains to be seen whether the new Commission will adopt more aggressive policies like those of the FCC of the mid- and late-1990s or continue the more deregulatory approach to telecommunications resale regulation followed by the Commission in recent years.
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