The United States Supreme Court heard oral argument on December 8, 2008 in Pacific Bell Telephone Co. v. linkLine Communications, Inc., No. 07-512, a case that will give the Court an opportunity to decide whether a plaintiff can state a valid monopolization claim under Section 2 of the Sherman Act by alleging a “price squeeze.” LinkLine alleged a Section 2 claim against the defendant (Pacific Bell, now owned by AT&T), an incumbent local exchange carrier (ILEC) that is required by federal law to provide its competitors with access to its wholesale services, because AT&T allegedly set such a high wholesale price to linkLine relative to its retail price that linkLine could not compete with AT&T at the retail level. This case follows on the 2004 decision in Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko, LLP, in which the Court rejected a plaintiff’s claim that an ILEC’s failure to provide interconnection services to its rivals was a “refusal to deal” in violation of Section 2.

Background

LinkLine is an internet service provider (ISP) that sells digital subscriber line (DSL) internet access. It purchases wholesale DSL services from AT&T, which as an ILEC must provide wholesale DSL services to ISPs such as linkLine in a “just and reasonable” manner under the 1934 Telecommunications Act. AT&T is a vertically integrated competitor of linkLine, selling its own DSL access and ISP services at retail. LinkLine’s complaint alleged a classic “price squeeze” – i.e., that the difference between the price at which AT&T sells wholesale DSL services to linkLine and others and the price of AT&T’s retail DSL service was so small that it was impossible for linkLine and others to compete at retail with AT&T.

AT&T moved to dismiss the complaint, arguing that AT&T’s wholesale pricing could not provide the basis for an antitrust claim after Trinko and that the relevant standard for evaluating AT&T’s retail pricing was the predatory pricing test established by the Court in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., under which a plaintiff must allege (1) that the defendant’s pricing is below some appropriate measure of its cost, and (2) that the defendant has a “dangerous probability” of recouping the foregone income by raising retail prices to a supra-competitive level after it eliminates its competitors. The district court refused to dismiss the complaint. However, the court granted AT&T’s motion to certify an interlocutory appeal on the question of whether the Supreme Court’s decision in Trinko bars a plaintiff from claiming a Section 2 violation based on an alleged price squeeze by a competitor who also acts as the plaintiff’s supplier at the wholesale level, but who has no duty to deal with the plaintiff absent statutory compulsion.

The Court of Appeals for the Ninth Circuit affirmed, holding that linkLine stated a valid price squeeze claim. The court distinguished Trinko because, although AT&T was regulated at the wholesale level, the antitrust laws provided the primary regulation of AT&T’s behavior in the retail DSL market. In the Ninth Circuit’s view, the regulatory structure was not “designed to deter and remedy” the specific anticompetitive harm caused by the alleged price squeeze. The court noted that the price squeeze doctrine predated Trinko and cited a line of price squeeze cases based on Alcoa, a famous 1945 Second Circuit opinion from Judge Learned Hand in which the court held that a monopolist of upstream products violated the Sherman Act when it charged a monopoly price for those products at wholesale and then priced its downstream products so low that downstream competitors who purchased the upstream products were unable to earn a “living profit” at retail. Judge Gould dissented from the Ninth Ciruit’s majority opinion in linkLine, arguing that Trinko “takes the issues of wholesale pricing out of the case, and thus transforms what is left of any claim of ‘price squeeze.’ ” Since the wholesale price could not factor into the equation, he argued, “the retail side of a price squeeze cannot be considered to create an antitrust violation if the retail pricing does not satisfy the requirements of Brooke Group.”

AT&T appealed, asserting that price squeeze claims are precluded by Trinko, and the Supreme Court granted certiorari to resolve the issue. The case generated significant interest and disagreement among the federal antitrust agencies. The Solicitor General and the Department of Justice Antitrust Division filed an amicus brief in support of AT&T’s position, while the Federal Trade Commission (FTC) declined to join the brief. Instead, the FTC issued a public statement arguing that “the Ninth Circuit’s narrow decision does not conflict with the Court’s antitrust jurisprudence and is consistent with Judge Hand’s decision in [Alcoa] and Justice (then Judge) Breyer’s decision in Town of Concord v. Boston Edison Co.

In an unusual development, linkLine abandoned its price squeeze claim after the Court granted certiorari, urging the justices to vacate and remand the case with permission to linkLine to amend its complaint again to assert a predatory pricing claim. The Court took the unprecedented step in an antitrust case of granting argument time to a nongovernmental public interest group, the American Antitrust Institute (AAI), as amicus curiae, granting AAI’s request that it be given an opportunity to “urge the Court not to abolish ‘price squeeze’ as an independent basis for antitrust liability, and to demonstrate that this long-established theory remains sound under the Court’s modern antitrust jurisprudence.”

Supreme Court Oral Argument

At oral argument, AT&T asserted that the Court should reverse the Ninth Circuit and hold that AT&T had no duty under the antitrust laws to provide wholesale DSL service at prices that allowed linkLine a margin of profit on its retail service. AT&T argued that it only sold wholesale DSL services to its retail competitors because federal law required it to do so, and thus it had no “antitrust duty” to deal with competitors on specific terms. Responding to a series of questions from Justice Breyer, AT&T argued that the Federal Communications Commission (FCC), which regulates the terms of wholesale DSL service, is the “place where in this case the plaintiffs could go” to receive a remedy. AT&T also argued that Alcoa was “wrongly decided… in several respects” and should be overruled. The Solicitor General’s Office, who argued on behalf of the United States, agreed, contending that a “mere margin-based price squeeze without more” does not violate Section 2. The Solicitor General adopted the rationale of Judge Gould’s Ninth Circuit dissent, arguing that there could be no price squeeze because AT&T was allowed to charge a monopoly price for its wholesale service. This leaves the plaintiff only with a claim that the defendant’s retail price is too low – i.e., the plaintiff must meet the Brooke Group predatory pricing standard to state a valid claim.

LinkLine agreed with AT&T and the government that a price squeeze claim survives Trinko only if it meets the Brooke Group requirements of a predatory pricing claim. However, it argued that the Court did not need to consider whether Alcoa is still good law. Rather, linkLine stated that the Court should vacate the case because the record was “incomplete.” According to linkLine, the best course of action would be to remand to the district court with instructions to allow linkLine to amend the complaint to allege a predatory pricing claim at the retail level under Brooke Group.

The AAI argued that the writ of certiorari should be dismissed because, since linkLine had abandoned the price squeeze claim, the question presented was a mere hypothetical. AAI suggested that the presence of regulation at the wholesale level “does not completely oust antitrust” law because “the relationship between antitrust and regulation is symbiotic and complementary.” However, while AAI stated that there are “many reasons why” the Court should reaffirm the Alcoa standard, ultimately it did not have occasion to provide a substantive defense of the traditional price squeeze doctrine. Justice Kennedy asked several questions about linkLine’s ability to seek relief at the wholesale level from the FCC, concluding that AAI was attempting to “use the regulation in order to establish the duty, but then you don’t want to go to the regulators to regulate the price. And it seems to me that that’s inconsistent.”

In rebuttal, AT&T agreed with Justices Breyer and Kennedy that “the presence of a regulatory remedy here is a critical factor” in favor of reversal. AT&T also argued that “it is critically important to have clear rules that avoid deterring beneficial conduct.” In particular, AT&T advocated a “clear rule stating that in the absence of a duty to deal, an allegation of price squeeze” does not state a valid claim under Section 2.

Conclusion

The linkLine case gives the Supreme Court the opportunity to provide clear guidance to companies with a dominant position in an upstream market and customers that are also competitors in downstream markets. The Court has a number of procedural options at its disposal: it could vacate and remand with instructions to allow linkLine to file another amended complaint, as linkLine requested; it could vacate and remand with instructions to dismiss the case because linkLine has exhausted its right to amend the complaint; it could reverse, indicating (possibly in dicta) that Trinko is controlling and the FCC’s regulatory scheme provides sufficient protection for competition; or it could reverse the Ninth Circuit’s decision and potentially overrule Alcoa, thereby extinguishing the price squeeze doctrine unless the plaintiff can allege a predatory pricing scheme under Brooke Group. Although neither party supported the Alcoa decision at oral argument and AAI did not articulate a strong rationale for the traditional price squeeze claim, the Court may be likely to tailor a fairly narrow opinion that relies on the relevant regulatory scheme rather than addressing the validity of price squeeze claims under Section 2 generally.

More broadly, linkLine is the latest in several cases in which the Supreme Court has considered the scope of the duties imposed by the Sherman Act on companies that have high market shares or that operate under some type of regulatory supervision. It follows several such cases that the Court has handled in the past few years, including Trinko; Bell Atlantic Corp. v. Twombly, which established a more restrictive pleading standard for Sherman Act claims; Weyerhaeuser v. Ross Simmons Hardwood Co., which applied the Brooke Group standard to claims of predatory bidding by a monopsonist; and Credit Suisse Securities LLC v. Billing, which held that securities laws grant implied immunity from antitrust laws in some securities cases. The Court’s recent preference for relying on regulatory schemes to address antitrust concerns, seen in Trinko and Credit Suisse, may indicate that the Court’s decision in linkLine is likely to turn on the FCC’s ability to regulate wholesale DSL prices and the lack of an antitrust duty to deal at the wholesale level.