On February 25, 2009, the United States Supreme Court rendered yet another blow to antitrust plaintiffs, concluding in Pacific Bell Telephone Co. v. Linkline Communications, Inc. (“Linkline”) that stand-alone price-squeeze claims may not be brought against alleged monopolists under Section 2 of the Sherman Act. Price squeezes occur where a vertically-integrated company with market power in the wholesale market (i) raises its wholesale prices to competitors in the downstream market, and (ii) lowers its own retail prices to customers, thereby squeezing the profit margins of downstream competitors. Lower courts had longrecognized price squeezes as stand-alone claims under Section 2. The Supreme Court overruled those cases, holding that price-squeeze claims are only viable where the defendant has an antitrust duty to deal with the plaintiff at the wholesale level (a rarity), and is engaging in predatory pricing at the retail level (also difficult to prove). Absent an antitrust duty to deal at wholesale and predatory retail pricing allegations, plaintiffs can no longer assert unlawful price-squeeze claims under the federal antitrust laws.
This case arose in the context of the provision of digital subscriber line (DSL) service, a method of connecting to the Internet over telephone lines. AT&T (the defendant) owns much of the telecommunications infrastructure and facilities necessary to provide DSL service in certain portions of California. As a result, competitors seeking to provide customers DSL service first have to obtain access to AT&T’s facilities. AT&T is obligated, under the terms of a merger agreement, to provide such access to competing DSL providers at a price no greater than the retail price of AT&T’s DSL service. AT&T thus participates in the DSL market at both the wholesale and retail levels; it provides competing DSL providers with wholesale DSL access, and also sells DSL service directly to consumers at retail.
The plaintiffs were four independent Internet service providers who sought to compete with AT&T in the California market for retail DSL service. They alleged that AT&T unlawfully squeezed plaintiffs’ profit margins by setting a high wholesale price for DSL access and a low retail price for DSL Internet service. This price squeeze, according to the plaintiffs, unreasonably impeded competition and allowed AT&T to “preserve and maintain its monopoly control of DSL access to the Internet.”
AT&T moved to dismiss the price-squeeze claim. The district court noted that several circuit courts have recognized price-squeeze claims, and denied AT&T’s motion. The district court, however, recognized that Verizon Communications Inc. v. Law Offices of Curtis V. Trinko LLP, 540 U.S. 398 (2004) (“Trinko”) may have implicitly barred such claims, and certified its ruling for interlocutory appeal. The Ninth Circuit affirmed the district court’s ruling, concluding that Trinko did not bar price-squeeze claims. The Supreme Court granted certiorari to decide whether a “price-squeeze claim may be brought under § 2 of the Sherman Act when the defendant is under no antitrust obligation to sell the inputs to the plaintiff in the first place.”
The Supreme Court’s Ruling
The Court, in an opinion written by Chief Justice Roberts and joined by Justices Scalia, Kennedy, Thomas and Alito, determined that the price-squeeze claim is really just an “amalgamation” of claims at the wholesale and retail levels. Because the individual wholesale and retail level claims were meritless, the Court concluded the price-squeeze claim was also meritless. As put by the Court, “[t]wo wrong claims do not make one that is right.”
First, the Court noted that a “straightforward application of [its] recent decision in Trinko forecloses any challenge to AT&T’s wholesale prices.” Trinko, the Court observed, “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 AT&T has no antitrust duty to deal with its rivals — “any such duty arises only from FCC regulations, not from the Sherman Act” — AT&T “was not required to offer . . . wholesale prices the plaintiffs would have preferred.” Indeed, AT&T could have “simply stopped providing DSL [ ] service to the plaintiffs . . . and not run afoul of the Sherman Act.” The Court rejected the argument that Trinko was distinguishable because Trinko involved the provision of service to wholesalers while Linkline addressed a high wholesale price. The “nub” of the complaints in Trinko and Linkline were “identical –the plaintiffs alleged that the defendants (upstream monopolists) abused their power in the wholesale market to prevent rival firms from competing effectively in the retail market. Trinko holds that such claims are not cognizable under the Sherman Act in the absence of an antitrust duty to deal.”
Second, the Court found no antitrust doctrine to support plaintiffs’ claim that AT&T’s retail prices are “too low.” The Court noted that, “[t]o avoid chilling aggressive price competition,” it has “carefully limited the circumstances under which plaintiffs can state a Sherman Act claim by alleging that prices are too low.” To state such a claim, plaintiffs must satisfy the two elements for “predatory pricing” set forth in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993). Specifically, plaintiffs “must demonstrate that: (1) the prices complained of are below an appropriate measure of [defendant’s] costs; and (2) there is a dangerous probability that the defendant will be able to recoup its investment in below-cost prices.” Allowing a price-squeeze claim to proceed without requiring these two elements would, in the view of the Court, “invite the precise harm [the Court] sought to avoid in Brooke Group.”
The Court wrote at length about “[i]nstitutional concerns” that also counseled against recognition of price-squeeze claims. In particular, the Court stressed the “importance of clear rules in antitrust law,” and observed that firms seeking “to avoid price squeeze liability w[ould] have no safe harbor for their pricing practices.” The Court also reiterated that courts are “ill suited to act as central planners, identifying the proper price, quantity, and other terms of dealing,” and concluded that “[r]ecognizing price-squeeze claims would require courts simultaneously to police both the wholesale and retail prices to ensure that rival firms are not being squeezed.” That policing is made all the more difficult because a squeeze is a “moving target, since it is the interaction between these two prices that may result in a squeeze.”
Justices Breyer, joined by Justices Stevens, Souter and Ginsburg, stated in the concurring opinion that there was no need to address the “hypothetical questions” discussed in the Court’s opinion, and he instead would have accepted plaintiffs’ unusual concession that the Ninth Circuit’s price-squeeze holding was wrong, and would have remanded the case to allow the district court to determine whether the plaintiffs properly pled a predatory-pricing claim. The concurrence did observe, nonetheless, that “a purchaser from a regulated firm . . . cannot win an antitrust case between the regulated firm’s wholesale price (to the plaintiff) and its retail price (to customers for whose business both firms compete).”
Conclusions and Implications
From a practical standpoint, what does the decision in Linkline likely mean? Although the opinion is more evolutionary than revolutionary, it certainly clarifies significant aspects of antitrust jurisprudence:
- Stand-alone price-squeeze claims under Section 2 of the Sherman Act are foreclosed. Such claims, however, could remain under state antitrust laws. In addition, if there is an antitrust duty to deal, price squeezing could possibly constitute evidence of unlawful monopolization.
- The antitrust laws do not prohibit a lawful monopolist from charging monopoly prices; in fact, an “upstream monopolist with no duty to deal is free to charge whatever wholesale price it would like.”
- The Sherman Act “encourages” aggressive price competition at the retail level. Accordingly, “so long as the prices being charged are not predatory,” monopolists are free to compete on price.
- There are likely very few instances in which a company has an antitrust duty to deal with rivals. Although the Court did not in Linkline or Trinko reverse Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985), it did observe that there are “limited circumstances in which a firm’s unilateral refusal to deal with its rivals can give rise to antitrust liability.”
- The Court is committed to providing clear rules that enable businesses to understand and comply with the antitrust laws, and the Court also appears committed to preventing lower courts from interfering with the prices and terms under which businesses operate.
- The Court continues to make it more difficult for antitrust plaintiffs to survive motions to dismiss. In addition to dismissing yet another antitrust claim, the Court affirmed that the pleading standard set forth in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), applies to Sherman Act Section 2 claims and is not limited to allegations of conspiracy under Section 1.
- A regulatory context matters. The Court (including the concurrence) once again appeared hesitant to apply antitrust laws to regulated companies solely based on compliance with an applicable regulatory scheme.