In Pacific Bell Telephone Co. v. Linkline Communications Inc., 2009 U.S. Lexis 1635, 555 U.S. ______ (February 25, 2009) ("Linkline"), the U.S. Supreme Court, mostly following its decision in Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004) ("Trinko"), held that a plaintiff cannot bring a valid “price-squeeze” claim under Section 2 of the Sherman Act where (1) the monopolist owes no "antitrust duty" to deal with the plaintiff being “squeezed”, and (2) the monopolist's sales into the downstream market at retail are not below an "appropriate measure of its rival's cost," as defined by the Supreme Court in its decision in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 222-224 (1993) ("Brooke Group").
The unaddressed “elephant in the room” is the question of when a monopolist has a unilateral antitrust duty to deal in the upstream market. The answer is apparently “rarely”. As the Court recognized in Trinko, a monopolist has no duty to deal except in the most “limited circumstances”, with perhaps the highpoint of an existing duty to be found in Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985) ("Aspen"). In a nutshell, a monopolist in an upstream market, subject to regulation, has no duty to deal. In part, this is because the upstream input market cannot be characterized as “an essential facility”. The "price-squeezed" plaintiff may always apply to the regulator for relief. A monopolist in a non-regulated upstream market will rarely have a duty to deal. More likely than not, such a duty will only arise in a situation where the monopolist has a history of dealing with a price-squeezed plaintiff, where it has no business justification for a subsequent refusal, or overt act, that would raise its downstream competitors' costs, and where the downstream “exclusionary” conduct is contrary to its economic self interest. It is more likely than not that a monopolist, who does not deal at all, will not, even in the rarest of circumstances, have a duty to deal under Section 2.
In other than a situation where a "natural monopoly" is well-entrenched, a transitory monopolist, facing increased competition or threatened competition, will not be found to have the variety of "market power" condemned by Section 2. See, e.g., United States v. Syufy Enters., 903 F.2d 659, 663-664. (9th Cir. 1990); (where entry is easy, or market share is declining, the courts reluctant to find monopoly power, regardless of market share); See also Rebel Oil Co. v. Atlantic Richfield Co., 51 F.3d 1421, 1439 (9th Cir. 1995).
Let’s see if we can parse the above, and determine the current status of the venerable decision of United States v. Aluminum Co., 148 F.2d 416 (2d. Cir. 1945) ("Alcoa"). Has it joined an antitrust "Valhalla"? Does it continue to reside in the "mothball fleet" of antitrust? See Richard M. Steuer, "Monsanto and the Mothball Fleet of Antitrust", Antitrust Bullentin 1 (Spring 1985).
Pacific Bell, dba AT&T California ("AT&T") owned facilities and infrastructure necessary for the provision of DSL service, a method of connecting to the Internet at high speeds over telephone lines. Pursuant to a condition imposed by the Federal Communications Commission (FCC) in approving a recent merger, AT&T was under a regulatory duty to provide wholesale DSL transport service to independent firms, at prices no greater than the retail prices of its own DSL service to its retail customers. The plaintiffs, purchasers of AT&T DSL service in the wholesale market, filed an action under Section 2 of the Sherman Act alleging that AT&T had unlawfully "squeezed" plaintiffs' profit margins by setting a high price for the wholesale DSL transport service, while setting a low price for its own retail DSL service. The complaint alleged that this pricing policy placed the plaintiffs at a competitive disadvantage, and allowed AT&T to maintain its monopoly power position in the upstream DSL market. AT&T moved for judgment on the pleadings under Trinko. In Trinko, the Supreme Court held that a firm that does not have "an antitrust duty to deal" with its competitors, has no obligation to provide its competitors with a "sufficient" level of service.
In Linkline, the District Court held that while AT&T had no antitrust duty to deal with the plaintiffs in the upstream DSL market, Trinko was inapplicable to the downstream "price-squeeze" claim, as Trinko had not addressed the price-squeeze scenario. The District Court certified its order for interlocutory appeal to the Ninth Circuit. The question certified was whether Trinko bars price-squeeze claims when the parties are required to deal by federal communications law, but not under generally accepted antitrust principles. Linkline, 2009 U.S. Lexis 1635, at *13. The Ninth Circuit held that Trinko, did not address price-squeeze claims, and thus, the plaintiffs' complaint stated a potentially valid Section 2 claim. Id.
The Supreme Court reversed. While the plaintiffs had "confess[ed] error" that the Ninth Circuit's decision was incorrect and that the Brooke Group test for predatory pricing was applicable, the case was nevertheless not moot. Id. at * 15. Writing for the Court, Chief Justice Roberts, joined by Justices Scalia, Kennedy, Thomas and Alito, held that in a federally regulated communications industry, there is no antitrust duty to deal, and that in any event, the predatory pricing test of Brooke Group was applicable to the predatory pricing claim in the downstream retail market. Id. at *19 n.2, *24. The Court opined that businesses are generally free to choose the parties with whom they wish to deal, and that a duty to deal by a dominant firm in the upstream market will only exist under "limited circumstances". Id. at *18. While we are not treated to a recitation of the circumstances under which a monopolist in the upstream market must deal with actual or potential competitors, the Court cites Aspen as an example. See also Trinko, 540 U.S. at 409 (Aspen "is at or near the outer boundary of Section 2 liability"). In Aspen, the Court found it significant, in determining that the defendant had a duty to deal, that it in fact had a history of dealing with the plaintiff, and that it had ceased participation in a cooperative venture, without any articulated business justification, and in a situation where it was willing to forsake short-term profits to achieve an anticompetitive exclusionary result. Thus, whatever the limited circumstances under which a duty to deal under Section 2 of the Sherman Act will exist in the upstream market, a course of dealing between the parties and the lack of a proferred business justification may be decisive factors. But, as the late Paul Harvey might have remarked, Linkline does not treat us "to the rest of the story."
As in Trinko, the Linkline Court articulated the disconnect between allowing a federal court to sit as a regulator of what a "fair price" was, or what an acceptable profit margin could be. Linkline, 2009 U.S. Lexis at *28. It stressed the incompatibility between regulatory oversight, and Article III courts. The Court noted that where a regulatory structure designed to deter and remedy anticompetitive harm is in place, the additional benefits to competition provided by antitrust enforcement will tend to be small. Id. at *37. Thus, it is less plausible that the antitrust laws contemplate continuing oversight of pricing level and output decisions. Finding a duty to deal in other than the rarified atmosphere articulated in Trinko and Linkline could result in the "false positives" that would mitigate the benefits of aggressive competition. Matsushita Elec Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 594 (1986).
Where does this leave the venerable Alcoa decision of Judge Learned Hand? Stay tuned. While there may be more written in nostalgia than in active antitrust jurisprudence, a "straightforward" application of Trinko, should lead to the conclusion that while Alcoa has not been expressly overruled, its application will only exist in antitrust commentary. Amici argued that price-squeeze claims have long been recognized, and a number of antitrust decisions, perhaps beginning with United States v. Terminal Railroad Ass'n, 224 U.S. 383 (1912) and Associated Press v. United States, 326 U.S. 1 (1945). These cases, of course, involved concerted group boycott activity under Section 1. In Alcoa, the Second Circuit, sitting as a court of last resort because of the recusal of four justices of the Supreme Court, translated the price-squeeze conundrum into the syntax of Section 2. Rather than focus on the defendant's abusive market practices, of which none were sufficiently proven, the emphasis was on the defendant's market power, even where there was no proof that Alcoa had used its monopoly power in the aluminum ingot market to extract monopoly profits in the downstream market for aluminum sheet. Judge Hand condemned Alcoa's market position as having been exacerbated by its anticipating future demand growth, and then increasing its capacity to serve its enhanced demand. Shame! He reasoned that this was likely to discourage new entry into aluminum production by expanding capacity more rapidly than demand for its increased output warranted. The combination of substantial capital investment coupled with reduced downstream pricing to consumers was found to violate Section 2, as the exclusionary foreclosure of new entry. Judge Hand reasoned that the antitrust laws were designed to promote "social or moral," as well as economic goals. Aloca, 148 F.2d at 427-28.
Where does this leave the venerable Alcoa decision of Judge Learned Hand? Stay tuned. While there may be more written In light of the Court's decision in Linkline, we predict that future generations of lawyers and law students will indeed pay homage to Alcoa, but in the sense that the Bard wrote in Hamlet, Act 5, Scene 1 "Alas, poor Yorick! (Alcoa) I knew him [well]."