On February 25, 2009, the Supreme Court decided Pacific Bell Telephone Co. v. linkLine Communications, Inc., which addresses whether a business firm violates Section 2 of the Sherman Act by engaging in a “price squeeze.” In its classic formulation, a “price squeeze” exists when a vertically integrated firm that controls a necessary input at the wholesale level sells the input at a price that makes it difficult or impossible for its downstream competitors to compete. If the firm has market power in the upstream input, it can charge a wholesale price that is sufficiently high and a retail price that is sufficiently low to ensure that its downstream competitors that compete only at the retail level cannot match the dominant firm’s retail price and operate profitably. This effect of “squeezing” the profit margins of competitors, if done by a firm with monopoly or near-monopoly power in the input market, has long been thought to be a Sherman Act violation and was first declared unlawful more than 60 years ago in Judge Learned Hand’s famous opinion in United States v. Aluminum Co. of America. linkLine effectively jettisons “price squeeze” claims and continues the Court’s trend of narrowing antitrust liability or abandoning antitrust rules that appear questionable in light of modern economic analysis.
linkLine Communications and the three other plaintiffs in the case (for convenience, we refer to all plaintiffs as linkLine) are independent Internet service providers (ISPs) that compete with defendant AT&T (named defendant Pacific Bell is now part of AT&T) to provide digital subscriber lines (DSLs) – high-speed Internet connections over telephone lines – to retail customers in California. Like many ISPs, linkLine does not own the lines that connect specific homes and businesses – often referred to in the industry as “the last mile” – to the telephone network. To provide its DSL service, it must use AT&T’s facilities. Under a regulatory order from the Federal Communications Commission, AT&T must sell DSL transmission service to independent firms at a wholesale price “no greater than the retail price of AT&T’s DSL service.” Thus, AT&T competes in the DSL business at two levels. First, it sells DSL transmission services to independent companies such as linkLine. Second, it sells DSL service to customers at the retail level.
In 2003, linkLine sued, alleging that AT&T had engaged in an unlawful “price squeeze” by setting its prices for wholesale transmission services at a high level while charging retail DSL customers a low price. According to linkLine, this “squeeze” of the margin left no room for it to be profitable, and thus unreasonably excluded it from the DSL market and permitted AT&T to preserve an alleged monopoly for DSL access to the Internet. Shortly after linkLine filed suit, the Supreme Court decided Verizon Communications v. Law Offices of Curtis V. Trinko, holding that a telephone company’s alleged refusal to provide local exchange service to a competitor purportedly in violation of the requirements of the Telecommunication Act of 1996 did not constitute a violation of Section 2 of the Sherman Act. Shortly thereafter, AT&T sought judgment on the pleadings, contending that Trinko effectively barred linkLine’s “price squeeze” claim. While accepting AT&T’s contention that it had no duty under the Sherman Act to deal with linkLine, the trial court nonetheless denied AT&T’s motion but certified the question for immediate review by the appellate courts. The Ninth Circuit affirmed, holding that Trinko had not upset existing law on “price squeezes.” The Supreme Court then granted review.
The Court’s Opinion
The Court’s opinion reversed the Ninth Circuit, concluding that linkLine’s “price squeeze” theory does not state a Sherman Act violation. The Court analyzed “price squeeze” claims as two distinct pricing issues – one at the wholesale level and the other at the retail level. First, at the wholesale level, the Court concluded that “[a] straightforward application of [its] . . . decision in Trinko forecloses any challenge to AT&T’s wholesale prices.” Trinko had noted that “[t]he mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system,” and thus held that an entity holding lawful monopoly power is free to charge monopoly prices without fear of antitrust sanction. linkLine further elucidates that principle, noting that “Trinko . . . makes clear that if a firm has no antitrust duty to deal with its competitors at wholesale, it certainly has no duty to deal under terms and conditions that the rivals find commercially advantageous.” Because linkLine had not alleged that AT&T had a duty to deal with it arising from the Sherman Act but only from an FCC order, it could not attack the prices that AT&T charged for its wholesale service.
Second, at the retail level, the Court treated linkLine’s challenge to AT&T’s prices as a simple application of existing predatory pricing rules. As the Court noted, it has consistently refused to permit an antitrust challenge to a competitor’s low prices unless (1) the prices are below some measure of cost and (2) there is a substantial risk that the competitor will be able to recoup its losses by subsequently charging monopoly prices after eliminating its competition. Since linkLine’s complaint did not contain these allegations, the Court concluded that it could not challenge AT&T’s retail prices either.
In sum, the Court treated the “price squeeze” claim asserted in the case as “nothing more than an amalgamation of a meritless claim at the retail level and a meritless claim at the wholesale level” and that, therefore AT&T “is certainly not required to price both of these services in a manner that preserves its rivals’ profit margins.”
Aside from its reliance on existing precedent, the Court cited several “[i]nstitutional concerns that counsel against recognition” of linkLine’s “price squeeze” claims. First, it noted that the judiciary is “ill suited ‘to act as [a] central planner[ ], identifying the proper price, quantity, and other terms of dealing.’” Second, it could discern no mechanism by which courts can determine when wholesale prices were set too high in relation to retail prices. Finally, the Court noted that the alleged competitive harms flowing from “price squeezes” are the same as those that flow from unlawful refusals to deal at the wholesale level or predatory pricing at the retail level. Therefore, there is no need for “price squeeze” theory of liability to prevent such harms.
Ramifications of linkLine
It is difficult to gauge the long-term effects of linkLine, particularly in the life sciences area. Perhaps the most striking feature of the decision is the Court’s emphasis on the concept of an antitrust duty to deal. The Court has now made clear that unless a monopolist or would-be monopolist has an obligation to deal with a competitor that springs from the Sherman Act, the courts will not attempt to police the unilateral, above-cost pricing practices of such firms at the wholesale level. Because the antitrust laws only rarely impose upon a firm an affirmative duty to deal with a competitor, few claims are likely to meet that standard. For vertically integrated life sciences companies that compete in both input markets and retail markets, there will be greater flexibility to set input prices unless an antitrust plaintiff can show that such companies have a duty to deal under the antitrust laws. Such cases are likely to be rare.
What is not completely clear is whether the federal courts will countenance a “price squeeze” theory characterized as a refusal to deal. For example, if a monopolist’s wholesale price for an input is set at a high level and its retail price at a low level such that a competitor cannot compete in the marketplace given the margin, could those facts support a claim that the monopolist has, in effect, unlawfully refused to deal? linkLine’s admonitions against courts policing pricing and other terms of transactions strongly suggest that such a theory is not viable. But there were similar cautions in Trinko, and at least one court – in Nobody in Particular Presents, Inc. v. Clear Channel Commc’ns, Inc. – subsequently held that a refusal to offer reasonable terms might be deemed a denial of access to an essential facility – a species of a refusal to deal. Whether antitrust plaintiffs pursue such an argument, and whether the federal courts, given the further guidance provided by linkLine, permit such claims to go forward remain to be seen.