SCOTUSwiki Preview: Pacific Bell Telephone Co.,dba AT&T California v. linkLine Communications

Below, Kevin Russell of Howe & Russell previews next term’s Pacific Bell Telephone Co.,dba AT&T California v. linkLine Communications (07-512). Please note that the SCOTUSwiki for linkLine, here, will continue to be updated throughout the upcoming term.

Background

1.  AT&T and its affiliates dominate the California market for wholesale DSL services.  It also sells retail DSL services directly to customers.  It is thus “vertically integrated” in the lingo of antitrust.  That being so, one might imagine that AT&T would be the only provider of DSL services to customers in California, since it controls the infrastructure for providing DSL services at the wholesale level and presumably would have no interest in selling DSL wholesale to others who wished to compete with AT&T in the retail market.

However, under the Telecommunications Act of 1996, AT&T is required by law to sell wholesale DSL to other companies that, in turn, sell retail DSL to customers.  These are the ubiquitous “internet service providers” (ISPs), like EarthLink and, important to this case, a company called linkLine.   These smaller companies buy DSL from AT&T at wholesale prices and then turn around and sell internet access to households and businesses at retail for a higher price, the difference covering their operating costs and profit.  AT&T does the same thing with its retail DSL sales.  That makes it both the supplier (at the wholesale level) and competitor (at the retail level) of ISPs like linkLine.

This case arises from linkLine’s antitrust complaints about the prices AT&T charged ISPs at the wholesale level and the price it charged its own retail customers for DSL access.  In particular, linkLine accused AT&T of putting a “price squeeze” on its wholesale customers/retail competitors by charging relatively high prices at wholesale and relatively low prices at retail, thereby making it impossible for anyone other than AT&T to sell retail DSL services at a profit.  (Using completely made-up numbers, consider this sort of example: AT&T might charge $100 per unit for wholesale DSL and then $105 for the same unit at retail.  Unless the independent ISPs’ costs are less than $5 per unit, they will not be able to compete.)

AT&T moved to dismiss the complaint as failing to state an antitrust violation.  In particular, AT&T argued that under the Supreme Court’s 2004 decision in Verizon v. Trinko, there can be no price squeeze claim when the vertically integrated wholesaler/retailer has no antitrust duty to sell its product or services to its retail competitors in the first place.  (The key phrase is “antitrust duty,” since AT&T clearly had a statutory duty under the Telecommunications Act to sell to linkLine.)

2.  In Trinko, the defendant was Verizon, which controlled phone service in New York.  Under the Telecommunications Act, it was required to open its phone network to competitors.  Some of the competitors (including AT&T) alleged that Verizon was not living up to its legal obligations under the Act and its regulations, dragging its feet in providing access to its “operations support system” – which is used to provide services to customers and ensure quality – thereby resulting in poor service for the customers of its competitors.  One of those customers, Trinko, sued Verizon, alleging that the poor service was part of a scheme to discourage customers from signing on, or remaining, with its rivals.   The Supreme Court held that the complaint failed to state an antitrust violation.

The Court began by emphasizing that as a general matter, the mere possession of monopoly power in a wholesale market does not violate antitrust law.  It is only when a monopolist misuses its market dominance to thwart competition that antitrust law is implicated.  As a result, the Court explained, in general antitrust law does not require anyone, including monopolists, to cooperate or sell to its competitors.  But that rule is not absolute.  Citing its prior decision in Aspen Skiing Co. v. Aspen Highlands Skiing Corp. (1985), the Court noted that under “certain circumstances, a refusal to cooperate with rivals can constitute anticompetitive conduct.”  In Aspen Skiing, the dominant ski resort company (which owned most of the resorts in Aspen) had long had a deal with its competitor to jointly sell multi-day ski passes, good at both its own, and its competitor’s, resorts.  When the dominant resort cancelled the arrangement, and started selling passes that covered only its resorts, its competitor sued.  The Supreme Court upheld a jury verdict in favor of the plaintiff, concluding that the jury could have concluded that the defendant elected to forgo “short-run benefits because it was more interested in reducing competition . . . over the long run by harming its smaller competitor.”

In Trinko, the Court described that decision as “at or near the outer boundary” of antitrust liability.  It also stated that it had been very cautious in recognizing exceptions to the “right to refuse to deal,” in light of the “uncertain virtue of forced sharing and the difficulty of identifying and remedying anticompetitive conduct by a single firm.”  The Court further held that the case before it did not fall within the strict holding of Aspen Skiing.  Among other things, Verizon had not “voluntarily engaged in a course of dealing with its rivals, or would have ever done so absent statutory compulsion.”  The Court also noted that in “Aspen Skiing, what the defendant refused to provide to its competitor was a product that it already sold at retail” while the “operations support system” services Verizon was compelled to sell to its competitors were “not otherwise marketed or available to the public.”

The Court further declined to recognize what it deemed to be a new exception to the right to “refuse to deal” in the circumstances of the case before it.  Of particular importance to the Court was the existence of an extensive regulatory scheme for telecommunications services which, the Court believed, diminished the need for (and benefit of) additional antitrust regulation.  At the same time, the Court perceived a downside risk of antitrust courts inadvertently mistaking mere failures of incumbent carriers like Verizon to implement all of their statutory duties “with alacrity,” which “might have nothing to do with” an intent to exclude competition.  Moreover, the Court believed, involving antitrust courts in such matters could lead to extensive judicial supervision of a highly complex industry, a task for which judges are ill-equipped.

LinkLine Communications, Inc. v. SBC California, Inc. 503 F.3d 876 C.A.9 (Cal.),2007.

3.  The Ninth Circuit eventually rejected AT&T’s reliance on Trinko.  For one thing, the court explained, there was no need to recognize a new kind of liability in this case because “price squeeze” claims against monopolists have an established pedigree in antitrust law.  The Ninth Circuit did not read Trinko as treating this established theory as a species of the disfavored “refusal to deal” category of claims.  The court further concluded that the existence of a regulatory regime was not enough to preclude all antitrust liability, but rather simply “one factor” to consider in deciding whether to recognize a new kind of antitrust claim.  In this case, while there was extensive regulation of AT&T’s wholesale business, the company’s retail business was relatively unregulated.  And, the Ninth Circuit concluded, “since linkLine could prove facts, consistent with its complaint, that involve only unregulated behavior at the retail level, its action or lawsuit survives a motion for judgment on the pleadings.”Judge Gould, in dissent, argued that if all the complaint boiled down to was a charge of predatory pricing in the retail market, linkLine should have to satisfy the traditional requirements of a predatory pricing claim – including proof that AT&T’s retail prices were below cost and charged with the intent, and realistic prospect, of recouping the losses after its competitors had been driven out of business.  Since the complaint made no such allegation, Judge Gould would have ordered its dismissal.

Petition for Certiorari

1.  AT&T petitioned for certiorari, arguing that the Ninth Circuit’s decision created a circuit split with the D.C. Circuit’s 2005 decision in Covad v. Bell Atlantic and was in conflict with the Court’s decision in Trinko.

On the merits, AT&T argued that there is no reasonable basis for different results in Trinko and this case.  If a competitor has no antitrust right to adequate access to an incumbent carrier’s network, petitioner argued, it makes little sense to say that it nonetheless has a right against “too-costly” access to the same network.  Moreover, such claims, AT&T argued, “entail the same ills underlying the Court’s antitrust analysis in Trinko.”  They would deprive “a legitimate monopolist’s ‘opportunity to charge monopoly prices,'” thereby undermining incentives to engage in the massive investments necessary to create such networks.  Furthermore, it would be difficult for courts to “distinguish a price squeeze resulting from the defendant’s superior efficiency from a price squeeze that reflects ‘too high’ wholesale prices.”  And such claims would involve courts in complex regulation of telecommunications market, a task for which they are not suited.  Finally, as in Trinko, AT&T argued, the existence of a complex regulatory scheme undermines the need for antitrust regulation.  The fact that regulators have chosen not to regulate retail prices of internet access, AT&T argued, does nothing to diminish the fact that the entire field is subject to expert oversight by agencies better equipped than courts to monitor the industry and protect consumers.

2.  Respondent linkLine opposed the petition, arguing that the asserted conflict with the D.C. Circuit was not real and that the Ninth Circuit correctly construed the Court’s decision in Trinko.

Respondent argued that this case more closely resembled Aspen Skiing than Trinko, in that “this challenged price squeezing conduct is akin to, and reveals the same ‘distinctly anticompetitive bent’ as, the refusals to sell to competitors at retail prices for services ‘otherwise marketed or available to the public.”  The complaint alleges, respondent said, “an upstream monopolist engaging in exclusionary conduct aimed at dominating an unregulated retail market with the expectation that ‘its future monopoly retail prices would be higher.'”  Thus, linkLine argued, its claims fall within traditional antitrust doctrine which, it argued, has long recognized the price squeeze theory.

Respondent rejected AT&T’s assertion that recognizing liability here would lead to difficulties in administration, asserting that courts would need do nothing more than they already do in cases of predatory retail pricing.  It likewise rejected the suggestion that the regulatory framework of the telecommunications industry relieved any need for antitrust liability.  It argued that nothing in Trinko supports the notion that the existence of regulation, in itself, is sufficient to bar antitrust liability and emphasized the lack of any present regulation of retail DSL pricing to protect against predatory conduct by incumbent carriers.

The Various Views of the United States

After reviewing the petition and opposition, the Court invited the Solicitor General to file a brief expressing the views of the United States.  In this case, that request turned out to be a tall order as the Federal Trade Commission (FTC) and Department of Justice (both of which administer federal antitrust law) took opposing views on the merits of the case.

In the end, the Solicitor General filed a brief siding with the Justice Department, which agreed with AT&T that the complaint failed to state a claim.  Taking an even more aggressive position than petitioner, the SG argued that although many lower courts have long recognized antitrust “price squeeze” claims as a general matter, the Supreme Court should not.  Price squeezes, the Government argued, do not “necessarily, or even ordinarily, entail anticompetitive conduct within the meaning of the antitrust laws.”  When a defendant has no antitrust duty to do business with the plaintiff, the SG argued, it “necessarily follows that there can be no valid price-squeeze claim based merely on [the defendant’s] conduct in charging ‘wholesale prices that were too high in relation to what [it was] charging [its] retail” customers.  That is, if the defendant has a right to refuse to deal with the plaintiff at all, it should necessarily have the right to deal with the plaintiff on price terms that are disadvantageous to the plaintiff-competitor.

Antitrust law is only implicated, the SG argued, if the defendant charges a predatory price (that is, one below cost, with the intent of driving competitors out of business and then later recouping the losses through supracompetitive retail prices).  But that is a predatory pricing, not a price squeeze claim.

FTC Press Release Opposing Solicitor General’s Brief in Pacific Bell Telephone Co.,dba AT&T California v. linkLine Communications (07-512)
In an unusual move, the FTC issued a press release expressing its disagreement with the SG’s position.  And “in the interest of transparency,” the Commission set forth its reasons in detail (and in the form of what could easily be mistaken for the brief it would have filed if it had the legal authority to file briefs in the Supreme Court without the SG’s permission).  The Commission stressed that price squeezing has a long pedigree of antitrust recognition in the lower courts, going back to a decision from Judge Learned Hand in 1945.  It argued that price squeezing risks competitive harms by deterring competition at the wholesale level – because any new entrant not only faces the basic barriers to entry that led to the monopoly in the first place, but also the prospect that the price squeezing has driven away most of its potential customers – and at the retail level – by driving out retail competition that would put pressure on the monopolist to improve not only price, but quality of service.  The FTC also agreed with linkLine that the absence of regulation of retail pricing importantly distinguished this case from Trinko.

Merits Briefing

After receiving the brief of the United States, the Court granted certiorari on June 23, 2008.  Petitioner’s brief is due August 28, 2008.