On February 25, 2009, the U.S. Supreme Court issued its decision in the digital subscriber line (“DSL”) “price-squeeze” case reversing the Ninth Circuit’s decision and placing substantial pleading and proof burdens on a “price-squeeze” cause of action.1 The two most significant new burdens imposed by the Court are the need to show an “antitrust duty to deal” at the wholesale level of distribution, and the need to show predatory pricing at the retail level.
The complaint alleged a price-squeeze by AT&T selling access to the “last mile” (i.e., the telephone lines that connect homes and businesses to the telephone network) at a high price to its wholesale customers, including plaintiff linkLine Communications, but then selling DSL Internet services at a reduced retail rate to consumers. The “squeeze” occurs because plaintiffs (i.e., independent providers of Internet service) pay an increased wholesale price for DSL transport, while having to compete at retail with AT&T’s reduced retail price for DSL Internet service. AT&T filed a motion to dismiss based on the Supreme Court’s decision which held that there is no antitrust duty to provide rivals with a “sufficient” level of service.2 The District Court held that AT&T had no duty to deal with plaintiffs, but denied the motion with respect to the price squeeze claims. After another round of motions on an amended complaint, the District Court certified for interlocutory appeal the question of whether “Trinko bars price squeezing claims where the parties are compelled to deal under the federal communications laws.” AT&T had argued that to allege price squeeze, plaintiffs had to allege predatory pricing at the retail level. The Ninth Circuit affirmed denial of AT&T’s motion holding that price squeeze claims are viable, notwithstanding the federal communications laws. The Supreme Court granted certiorari because of a circuit split, where another circuit had agreed with the preclusive impact of Trinko on price squeeze cases.3
The classic theory of a price squeeze involves a company competing at the wholesale as well as the retail level. By raising prices at the wholesale level, while reducing prices at the retail level, competitors’ costs are increased while their prices are decreased, thus the “squeeze.” The history of the theory starts with Judge Hand’s decision in United States v. Aluminum Co. of America (“ALCOA”), and continues through three other circuits.4 In ALCOA, the defendant was charged with charging higher prices for aluminum ingot at the wholesale level, while competing with firms in the “retail” market for various gauges of rolled steel, with prices designed to deprive wholesale customers of reasonable profits. Similar decisions upheld “price squeeze” theories where the company executing the squeeze had monopoly power at the wholesale level, priced its product at a “higher than fair price,” and priced its product at the retail level at a level below which its competitors could make a “living profit.”5 Other than the Seventh Circuit decision in City of Mishawaka v. American Electric Power Co., the reported circuit court opinions did not even consider an additional requirement of “predatory practices,” in order to establish a “price squeeze” cause of action (as AT&T had argued), a suggestion the Seventh Circuit dismissed in Mishawaka.6
The Supreme Court in Pacific Bell approached the Ninth Circuit’s opinion by first disaggregating the price squeeze into wholesale and retail components, an approach not taken by any prior court. It then imposed the standard from Trinko that businesses are free to choose with whom they deal, including setting prices, absent an “antitrust duty to deal,” citing Aspen Skiing Co. v. Aspen Highlands Skiing Corp.7 Moving on to the retail component of the price squeeze, the Supreme Court took refuge in the holding in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp.,to the effect that in order for a low price scheme to be actionable, (1) the prices complained of must be below some appropriate measure of cost and (2) there must be a “dangerous probability” of recoupment.8
Thus, the new U.S. view of a “prize squeeze” requires an “antitrust duty to deal” at the wholesale level and predatory pricing at the retail level. It sets aside six decades of “price-squeeze” case law and very likely rings the death knell for “price-squeeze” cases in the United States. Only in those rare Aspen Skiing situations of essential-facilities combined with actual below average variable cost pricings can the now mythical “price squeeze” claim be made.
The emerging European approach to price squeeze contrasts with the approach taken by the U.S. Supreme Court in Pacific Bell
In its Guidance on Enforcement Priorities published at the end of last year, the European Commission analyzed margin squeezes by analogy to refusal to deal and discriminatory pricing.9 European law will intervene to regulate these practices where the perpetrator can be classified as a dominant undertaking. Dominance is analogous in some ways, but certainly not identical, to the U.S. concept of monopolization. Where a firm can act in a market substantially independent from any thought of the likely reactions of customers and competitors, that firm will be dominant in that market under European law. This dominance creates under European law a comparable notion to the U.S. antitrust duty to deal. As a result of the high market power of the dominant undertaking, European law will intervene to regulate unilateral conduct of that undertaking, including refusals to deal without objective justification. Where a dominant undertaking does not refuse to deal, but prices its products at a level where purchases become uneconomic, this pricing strategy can be considered to have the same effect as a refusal to deal and will be treated similarly. The Commission calls this a “constructive refusal” to deal.10 Similarly, an abuse occurs where the dominant undertaking, without objective justification, pursues a policy of discriminatory pricing by selling the same product in similar conditions at different prices.
Margin squeezes can therefore be seen as a manifestation of one or both of these well-recognized categories of abuse under EU law. In striking analogy to the facts of Pacific Bell, the European Commission fined Deutsche Telekom €12.6 million for committing an abusive margin squeeze by supplying access to the local telephone loop (the upstream market controlled by Deutsche Telekom) at a price that effectively prevented competition from supplying telephone services downstream to retail customers in competition with Deutsche Telekom, at a price lower than that charged in that downstream market by Deutsche Telekom.11 The Commission held that Deutsche Telekom’s upstream prices were set at a level that prevented an “equally efficient competitor” in the upstream market from trading profitably. The European Court of First Instance agreed with the Commission’s analysis. In a similar case regarding the supply of retail broadband services, the Commission fined the Spanish telecoms operator Telefónica just less than €152 million for a five-year margin squeeze centered on pricing for access to the local loop.12
By espousing the equally efficient competitor test, the European Court has confirmed the absence under European law of any requirement for predation on the downstream market. So long as dominance is established in the upstream market, and the price charged for the upstream product is too high to enable an equally efficient competitor to compete downstream, the infringement is established. There is no requirement that the squeeze be perfected by having to show also that the infringer’s upstream price is below cost or predatory in some other way. In other words, in Europe, a “one-way squeeze” will suffice—high prices at the wholesale level are sufficient without a showing of predatory prices at the retail level.
The application of this one-way squeeze is demonstrated in a field outside the area of telecoms and public networks in the UK case of Genzyme.13 Genzyme supplied the drug Cerezyme—a treatment for the rare Gaucher’s disease—and also supplied homecare services necessary for the administration of the drug. Dominance was established because of the dearth of other treatments for Gaucher’s disease. On appeal from the Office of Fair Trading, the UK Competition Appeal Tribunal found that Genzyme’s policy of providing Cerezyme both to the UK National Health Service and any other customer at a single bundled price constituted an unlawful margin squeeze practiced against a third-party homecare provider. The homecare provider was prevented from competing with Genzyme in the downstream market for the provision of homecare services for administering Cerezyme because it could purchase Cerezyme only at the price that Genzyme sold both the drug and the bundled homecare service to the National Health Service. By definition, therefore, no undertaking would be able to trade profitably in the downstream market, and abuse was established.
This clear divergence between U.S. and European case law is likely to lead to many more margin squeeze cases being brought in Europe than in the United States. Given the additional preponderance in Europe of recently privatized state monopolies (particularly in the telecom and transportation markets), effectively controlling access to many downstream markets, this contrast is likely to be even sharper.