On February 25, 2009, the Supreme Court firmly rejected the so-called "price-squeeze" theory of antitrust liability, under which a vertically integrated firm with monopoly power in an upstream market could be found to violate Section 2 of the Sherman Act by selling the upstream product at so high a price and the downstream product (for which the upstream product is an input) at so low a price that its purchasers in the upstream market could not compete against it in the downstream market. The theory was based on United States v. Aluminum Co. of America, 148 F. 2d 416 (2d Cir. 1945) (Alcoa), in which Judge Learned Hand held that such pricing could violate Section 2 if the prices were such that competitors could not earn "a living profit." In Pacific Bell Telephone Co. v. linkLine Communications, Inc., No. 07–512, 555 U.S. ___, slip op. (2009), the Court declared that where antitrust law does not impose a duty on a defendant to deal with its competitors in the upstream market, and where the elements of a predatory pricing claim are not satisfied in the downstream market, the interaction between the defendant's conduct in the two markets cannot create antitrust liability.
linkLine is an internet service provider ("ISP") that sells digital subscriber line ("DSL") internet service at retail. linkLine owned some of the facilities needed to provide DSL service, but it purchased from AT&T California ("AT&T") DSL access service – the right to use AT&T's facilities to provide the so-called "last mile" of service to the customer's home or business. AT&T is required, under the Telecommunications Act and by subsequent order of the Federal Communications Commission governing the terms of a merger, to provide DSL access service to ISPs such as linkLine. AT&T is vertically integrated and also sells DSL access and ISP services in the same downstream market as linkLine. linkLine sued AT&T under Section 2 of the Sherman Act, claiming that the difference between the price at which AT&T sells upstream DSL services and the price of AT&T's retail DSL/ISP is such that linkLine cannot compete at retail with AT&T, i.e., that it is being "squeezed" out of the downstream market.
The district court denied AT&T's motion to dismiss the price-squeeze claim. On an interlocutory appeal, AT&T argued that, under Verizon Communications Inc. v. Trinko, 540 U.S. 398 (2004), the antitrust laws (as opposed to the Telecommunications Act and the FCC's order) imposed no obligation on AT&T to sell to linkLine at all and that AT&T thus could not have committed an antitrust violation by agreeing to sell to linkLine but only at a high price. The Ninth Circuit rejected AT&T's position, noting that Trinko did not address price-squeeze claims and holding that the complaint stated a potentially valid Section 2 claim under Alcoa. The Supreme Court granted certiorari on the limited question of "whether such a price-squeeze claim may be brought under §2 of the Sherman Act when the defendant is under no antitrust obligation to [deal with] the plaintiff in the first place." Slip op. at 1.
In an opinion written by Justice Roberts, the Court reversed and remanded, holding that the proper approach was to examine the upstream and downstream markets separately, rather than to focus on their interaction.1
With respect to the upstream market, the Court held that because AT&T had no obligation under the antitrust laws to deal with linkLine at all (a district court holding that linkLine did not appeal), it could not be liable for agreeing to deal with it only on unfavorable terms — in this case, a high price. With respect to the downstream market, the Court emphasized its traditional reluctance to impose antitrust liability for prices that are "too low," except where the requirements of Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993) — i.e., below-cost pricing and a dangerous probability that the defendant could recoup any losses it suffered through such pricing — were satisfied.
On these facts, the Court held that "Plaintiffs' price-squeeze claim, looking to the relation between retail and wholesale prices, is thus nothing more than an amalgamation of a meritless claim at the retail level and a meritless claim at the wholesale level," slip op. at 12, concluding that "[t]wo wrong claims do not make one that is right." Id. at 17. The Court explicitly rejected Alcoa, noting the developments in economic and antitrust theory since that decision was issued. Id. at 12 n.3. The Court also expressed doubt about the institutional competence of the judiciary to deal with price-squeeze claims, observing 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." Id. at 13. The Court remanded the case so that the district court could appraise whether the allegations in an amended complaint adequately pleaded a predatory pricing claim under Brooke Group.
Justice Breyer, in a concurring opinion joined by Justices Stephens, Souter and Ginsburg, wrote that, rather than substantively addressing the price-squeeze theory, he would have accepted linkLine's concession that the Ninth Circuit's decision in its favor on that theory was erroneous, vacated that decision, and remanded (as the Court did) for consideration of the predatory pricing claim. Justice Breyer conceded that "[a]s a matter of logic, it may be that a particular price-squeeze can only be exclusionary if a refusal by the monopolist to sell to the squeezed customer" would also be exclusionary, but he stated that he "would try neither to answer these hypothetical questions here nor to foreshadow their answer." Instead, Justice Breyer would, if addressing the merits, limit the holding regarding price-squeezes to situations, like this one, in which the monopolist was a regulated company. Justice Breyer observed that "[w]hen a regulatory structure exists to deter and remedy anticompetitive harm, the costs of antitrust enforcement are likely to be greater than the benefits." Conc. op. at 2.
linkLine holds that a Section 2 claim cannot be based on a traditional price-squeeze theory. A plaintiff that feels squeezed must prove either (or both) that (a) the monopolist had an antitrust obligation to deal with it in the upstream market (which will be difficult to do given Trinko) or (b) the monopolist's downstream prices were predatory under the Brooke Group test. Some plaintiffs may argue that the holding of linkLine should be confined to its facts and limited to cases in which the monopolist is regulated, as the four concurring Justices proposed. Given that the Court's opinion placed no reliance on the fact that AT&T is regulated, and that the logic and language of the Court's opinion extend to unregulated monopolists, such an attempt to confine the opinion will likely fail.
The more general implication of the opinion is that the Court remains intent on narrowing the reach of Section 2 of the Sherman Act. In addition to rejecting the price-squeeze theory of liability, the Court in dicta observed that it was only in "rare" cases that unilateral conduct would violate the antitrust law. Slip op. at 7-8. Moreover, in rejecting Alcoa, the Court referred to developments in economic theory since that decision was issued, thus validating once again the tool most often used by litigants and courts to circumvent old, pro-plaintiff case law.
While vertically integrated companies that are not under an antitrust obligation to deal with their competitors may freely set upstream prices high and downstream prices at any point above cost without fear of creating Section 2 liability, they may still be liable for predatory pricing under Brooke Group if they set their prices below cost. Particularly in the immediate aftermath of the decision, as the lower courts assess the contours of permissible downstream pricing, companies whose competitors may feel "squeezed" should work closely with antitrust counsel to manage the risk of being found to have priced predatorily.