On February 25, 2009, the United States Supreme Court, in Pacific Bell Telephone Co., d/b/a AT&T California v. linkLine Communications, Inc., dealt a significant blow to those antitrust claims for monopolization and attempted monopolization premised on a “price-squeeze” theory. A price squeeze occurs under circumstances in which a monopolist or would-be monopolist sells a product or necessary input in a wholesale (or upstream) market to companies with which it competes in the retail (or downstream) market and sets its wholesale price so high and its retail price so low that it squeezes the competitors’ margins to the point that the competitors cannot earn a reasonable profit and therefore cannot effectively compete. In linkLine, the plaintiffs, all internet service providers (ISPs), claimed that AT&T engaged in an unlawful price squeeze by charging them excessively high wholesale prices for digital subscriber lines (DSL) services, an input necessary to plaintiffs’ sale of internet services to consumers, while at the same time charging end users unreasonably low retail prices in competition with plaintiffs. The plaintiffs complained that this conduct violated Section 2 of the Sherman Act. AT&T sought Supreme Court review arguing that the reasoning of the Supreme Court’s recent opinion in Trinko, which held that firms having no antitrust duty to deal with a competitor have no duty to provide a sufficient level of service to those competitors, should extend to price squeezes and preclude any price-squeeze claim when the antitrust defendant has no duty to deal with competitors at the wholesale level.

Background and Supreme Court Opinion

AT&T and its affiliates own most of the infrastructure used to deliver DSL internet services to customers in California. Until recently, the Federal Communications Commission (“FCC”) required AT&T to sell DSL services to independent DSL providers, like plaintiffs. Although the FCC has largely abandoned this particular requirement, AT&T, as a condition to a recent merger, has an obligation to provide wholesale DSL services to independent ISPs at prices no higher than AT&T charges at retail for those services.

Plaintiffs rely on AT&T’s infrastructure and their ability to buy service from AT&T to compete for retail sales to consumers. The plaintiffs alleged, however, that AT&T’s excessively high wholesale prices for access to this necessary infrastructure made it impossible for them to compete in the retail market.

Several circuits in decisions dating back to the 1940’s had recognized that a price squeeze could provide the anticompetitive conduct necessary for a monopolization or attempted monopolization claim under Section 2 of the Sherman Act. But the circuits devised vastly different standards for determining the circumstances under which a price squeeze could be considered illegal. The Supreme Court had never considered whether or under what circumstance a price squeeze could violate the antitrust laws.

In earlier proceedings in linkLine, the United States District Court for the Central District of California refused to dismiss the plaintiffs’ price-squeeze claim despite the Supreme Court’s issuance of Trinko, which issued a year after plaintiffs initiated the linkLine action. In Trinko, the Supreme Court held that a firm whose only duty to deal with its competitors arose from government regulations had no antitrust obligation to provide those competitors with a particular level of service. But because Trinko did not specifically address a price-squeeze claim, neither the District Court nor the Ninth Circuit considered Trinko as controlling for that reason.

At the Supreme Court, the case took on an unusual procedural posture. After the Court granted certiorari, the plaintiffs conceded that their original price-squeeze theory, as articulated in their complaint, could not withstand scrutiny under the proper legal standard. The plaintiffs asked the Court to vacate the lower court’s decision and remand with instructions to grant plaintiffs leave to amend their price-squeeze claim to add allegations that AT&T’s retail prices were predatory, i.e., AT&T’s prices were below the costs of providing the relevant services. Various amici asked the Court to refuse to decide the case due to lack of adversarial presentation. Notwithstanding the odd procedural posture, the Supreme Court found that the issue remained ripe for decision and had not become moot.

In reversing the Ninth Circuit’s decision, the Supreme Court, in a majority opinion written by Chief Justice Roberts and joined by four other Justices, the Court went beyond the specific issue presented – whether a price-squeeze claim is viable when the defendant has no antitrust duty to deal with its competitors in the first place. To be sure, the Court addressed this issue, deciding it in the favor of AT&T – the antitrust defendant. The Court relied on Trinko to hold that, if a company has no “antitrust duty to deal” with its competitors in a wholesale market, then it has no obligation to deal on terms, including pricing terms, favorable to its competitors. Accordingly, under Trinko’s logic, if the antitrust laws do not impose any duty to deal in the wholesale market, then the antitrust laws cannot restrict the prices that the firm charges its competitors in that market, under which circumstances a price-squeeze claim becomes untenable.

Although Trinko does not deal specifically with price-squeeze claims, the Court explained that, for antitrust purposes, no important distinction exists between price and non-price terms, such as quality of service, which was what was at issue in Trinko. Indeed, the antitrust laws generally view product quality and contractual terms and conditions as a function of price and therefore treat them no differently than price. And as in Trinko, the duty to deal, if one existed in linkLine, arose from FCC regulation, not from any obligation imposed by the antitrust laws. The fact that a regulatory regimen or laws, such as the telecommunication laws, may impose upon a dominant firm a duty to deal with competitors does not translate into an “antitrust duty to deal” and cannot be used to support a price-squeeze claim.

Even though the Court held that Trinko foreclosed the plaintiffs’ price-squeeze claim, the Court did not leave it at that. The Court noted that a price squeeze has two components – excessive prices in the upstream wholesale market and unreasonably low prices in the downstream retail market. The duty to deal analysis under Trinko resolves the viability (or lack thereof) of price-squeeze claims where no antitrust duty to deal exists. But the Court also had concerns that an antitrust claim based in part on the notion that a firm charged too low of a price could chill price competition. The Court earlier recognized this danger in its precedent addressing predatory pricing – a claim that a monopolist or would-be monopolist charged an unreasonably low price to drive competitors out of a market and thereby gain or maintain monopoly power. In its leading predatory pricing decision, the Brooke Group case, the Court held that predatory pricing is not actionable under the antitrust laws unless (1) the challenged prices fall below a relevant measure of cost and (2) a dangerous probability exists that the defendant will be able ultimately to recoup the short-term losses incurred from below-cost pricing by charging supra-competitive prices down the road. linkLine extends the Brooke Group standard to price-squeeze claims and requires that the allegedly unreasonably low prices in the retail market must satisfy the Brooke Group standard for predatory pricing.

Combining its analyses of pricing conduct in the wholesale and retail markets, the Court stated, “If there is no duty to deal at the wholesale level and no predatory pricing at the retail level, then a firm is certainly not required to price both of these services in a manner that preserves its rivals profit margins.”

Justice Breyer, who wrote one of the more significant price-squeeze decisions when he sat on the First Circuit, issued a concurring decision in which three other Justices joined. The concurrence opines that the Court should accept the plaintiffs’ acknowledgement that the Ninth Circuit decision in their favor was wrong and remand to allow the district court to decide whether to allow plaintiffs an opportunity to amend to add a predatory pricing claim. Further, the concurrence suggests that lower courts will find it no easier to resolve price-squeeze claims now than they do refusal to deal claims, which are based on an antitrust duty to deal. But Justice Breyer’s opinion sees no reason to address the more global question of when price squeezes will violate the antitrust laws. In his opinion, the Court could have resolved the plaintiffs’ claims more easily by relying on the regulated nature of the services in question. According to the concurrence, a plaintiff cannot prevail on a price-squeeze theory if the wholesale prices it paid were regulated -- the regulatory regime was put in place to deter and remedy anticompetitive pricing. Applying the antitrust laws in these situations will do more harm than good, in Justice Breyer’s opinion.

Analysis

As a practical matter, linkLine will make it difficult to state an independent antitrust claim under a price-squeeze theory. Now, for a viable price-squeeze claim, the defendant must (1) have a duty imposed under the antitrust laws (as opposed, for example, to a contractual or regulatory duty) to deal with the plaintiff in the wholesale market -- a duty which is quite rare -- and (2) also charge predatory prices in the retail market. In other words, to prove an antitrust claim under a price-squeeze theory, a plaintiff now must prove a unilateral refusal to deal claim and a predatory pricing claim. Each of these two underlying claims on their own is extremely difficult to establish as an independent action. Having to prove both may prove near impossible.

The Court’s decision in linkLine represents another decision in a string of antitrust opinions stretching back several years in which the Court has exhibited a decidedly pro-defense bent. Over the last decade or so, for example, the Court has, among other things, eliminated per se rules against both minimum and maximum resale price maintenance; made it more difficult to prove market power in antitrust suits where the product in question is covered by intellectual property rights; significantly limited antitrust liability for a dominant firm’s unilateral refusal to deal with competitors; and increased the burden with respect to the pleading requirements for antitrust claims. The Court’s decision in linkLine continues this trend.