On February 25 2009 the Supreme Court issued its decision in Pacific Bell Telephone Co v linkLine Communications, Inc, addressing when an antitrust plaintiff may bring a claim that a competitor engaged in an unlawful 'price squeeze'.(1) Traditionally, a price squeeze exists when a vertically integrated firm that controls a necessary input at the wholesale level sells the input at a price that makes it difficult or impossible for its downstream competitors to compete. If the firm has market power in the upstream input, it can charge a wholesale price that is sufficiently high and a retail price that is sufficiently low to ensure that its downstream competitors that compete only at the retail level cannot match the dominant firm's retail price and operate profitably. The effect of squeezing the profit margins of competitors, if done by a firm with monopoly or near-monopoly power in the input market, has long been thought to be a violation of Section 2 of the Sherman Act.(2) Indeed, it was first declared unlawful more than 60 years ago by Judge Learned Hand in his famous opinion in United States v Aluminum Co of America.(3) linkLine effectively jettisons price squeeze claims and continues the court's trend of narrowing antitrust liability or abandoning antitrust rules that appear questionable in light of modern economic analysis.(4)
linkLine Communications and the three other plaintiffs ('linkLine') are independent internet service providers (ISPs). linkLine competes with defendant AT&T (named defendant Pacific Bell is now part of AT&T) to provide digital subscriber lines (DSLs), which are high-speed internet connections over telephone lines, to customers in California at the retail level. Like many ISPs, linkLine does not own all the facilities needed to provide DSL service. In particular, linkLine does not own the lines that connect specific homes and business – often referred to in the industry as 'the last mile' – to the telephone network. To provide its DSL service, linkLine must use facilities owned by AT&T.
Until 2005 the Federal Communications Commission (FCC) required incumbent phone companies such as AT&T to sell transmission service to independent DSL providers such as linkLine, with the hope of developing competition for DSL service. While the FCC has now abandoned that requirement, AT&T remains obligated under a separate regulatory order to provide the DSL transmission service to independent firms at a wholesale price "no greater than the retail price of AT&T's DSL service".(5) Thus, AT&T competes in the DSL business at two levels: (i) it sells DSL transmission services to independent companies such as linkLine; and (ii) it sells DSL service to customers at the retail level.
In 2003 linkLine filed a complaint alleging that AT&T had engaged in an unlawful price squeeze by setting its prices for wholesale transmission services at a high level while charging retail DSL customers a low price. According to linkLine, this squeeze of the margin left no room for it to be profitable and thus unreasonably excluded it from the DSL market and permitted AT&T to preserve an alleged monopoly for DSL access to the Internet at the retail level in violation of Section 2 of the Sherman Act. During the pendency of the case, the Supreme Court issued its opinion in Trinko, which held that a telephone company's alleged refusal to provide local exchange service to a competitor in violation of the Telecommunication Act 1996 did not constitute a violation of Section 2 of the Sherman Act. Shortly thereafter, AT&T moved for judgment on the pleadings, contending that unless the antitrust laws imposed upon it a duty to deal with linkLine separately from the FCC's regulatory mandate, Trinko barred the claim. While noting that nothing in the Sherman Act required AT&T to deal with linkLine – that duty arose only from the regulatory requirements imposed by the FCC – the trial court nonetheless denied AT&T's motion, but certified the question for immediate review by the appellate courts. On appeal, the Ninth Circuit affirmed the trial court's decision, holding that "a price squeeze theory formed part of the fabric of traditional antitrust law prior to Trinko" and reasoning that Trinko did not disturb that settled law.(6)
The Supreme Court granted review. Interestingly, in its briefing before the court, linkLine conceded that the Ninth Circuit's decision was erroneous and asked that the case be remanded to the lower courts for linkLine to pursue what was essentially a predatory pricing theory at the retail level. Nonetheless, the court gave the case full review and issued a decision on the merits.
In an opinion by Chief Justice John Roberts, the court reversed the Ninth Circuit and held that linkLine's price squeeze theory did not state a claim under Section 2 of the Sherman Act. The court's analysis treats price squeeze claims as two distinct pricing issues – one at the wholesale level and the other at the retail level.
At the wholesale level, the court concluded that "[a] straightforward application of [its]... decision in Trinko forecloses any challenge to AT&T's wholesale prices".(7) Trinko had noted that "[t]he mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system",(8) and thus held that an entity holding lawful monopoly power is free to charge monopoly prices without fear of antitrust sanction. linkLine further elucidates that principle, noting that:
"Trinko... makes clear that if a firm has no antitrust duty to deal with its competitors at wholesale, it certainly has no duty to deal under terms and conditions that the rivals find commercially advantageous."(9)
As linkLine had not alleged that AT&T had a duty to deal with it arising from the Sherman Act, but only from an FCC order, it could not attack the prices that AT&T charged for its wholesale service.
At the retail level, the court treated linkLine's challenge to AT&T's prices as a simple application of existing predatory pricing rules. As the court noted, it has consistently refused to permit an antitrust challenge to a competitor's low prices unless (i) the prices are below some measure of cost, and (ii) there is a substantial risk that the competitor will be able to recoup its losses by subsequently charging monopoly prices after eliminating its competition.(10) Since linkLine's complaint did not contain these allegations, the court concluded that it could not challenge AT&T's retail prices either.
In sum, the court held that the price squeeze claim asserted in the case was "nothing more than an amalgamation of a meritless claim at the retail level and a meritless claim at the wholesale level", and that therefore, AT&T "is certainly not required to price both of these services in a manner that preserves its rivals' profit margins".(11)
Aside from its reliance on existing precedent, the court also cited several "[i]nstitutional concerns that counsel against recognition" of linkLine's price squeeze claims. First, it noted that the judiciary is "ill suited 'to act as [a] central planner[... ], identifying the proper price, quantity and other terms of dealing".(12) Yet claims of the type asserted by linkLine would require simultaneous policing of the interaction of prices at two different market levels. Second, the court could discern no mechanism by which it could determine when wholesale prices were set too high in relation to retail prices. In fact, relying on then-Judge Breyer's opinion in Town of Concord v Boston Edison Co,(13) the court concluded that such an inquiry would effectively turn it into a price-regulating body. Finally, the linkLine court stated that there are no alleged competitive harms flowing from price squeezes independent of those that would occur from an unlawful refusal to deal at the wholesale level or predatory pricing at the retail level. Therefore, there is no need for a price squeeze theory of liability to prevent such harms.
Breyer issued a short opinion concurring in the judgment, joined by Justices Stevens, Souter and Ginsberg. He agreed with the result in the case, but would not have abandoned the price squeeze theory as the majority did. He nonetheless concluded that the regulatory regime in place permitted linkLine to remedy any alleged anti-competitive harm and therefore that, under the circumstances, "the costs of antitrust enforcement are likely to be greater than the benefits".(14)
It is difficult to gauge the long-term effects of linkLine. Perhaps the most striking feature of the decision is the court's emphasis on the concept of an antitrust duty to deal. The court has now made it clear that unless a monopolist or would-be monopolist has an obligation to deal with a competitor that springs from the Sherman Act, the courts will not attempt to police the unilateral pricing practices of such firms at the wholesale level. As the antitrust laws only rarely impose upon a firm an affirmative duty to deal with a competitor, few claims are likely to meet the standard.
What is not completely clear is whether the federal courts will countenance a price squeeze theory characterized as a refusal to deal. For example, if a monopolist's wholesale price for an input is set at a high level and its retail price at a low level such that a competitor cannot compete in the marketplace given the margin, could those facts support a claim that the monopolist has, in effect, unlawfully refused to deal? linkLine's admonitions against courts' policing pricing and other terms of transactions strongly suggest that such a theory is not viable. However, there were similar cautions in Trinko and yet at least one court after Trinko held that a refusal to offer reasonable terms might be deemed a denial of access to an essential facility, which is a species of a refusal to deal.(15) Whether antitrust plaintiffs pursue such an argument - and whether the federal courts, given the further guidance provided by linkLine, permit such claims to go forward - remain to be seen.
For further information on this topic please contact William T Monts or Erica S Mintzer at Hogan & Hartson LLP by telephone (+1 202 637 5600) or by fax (+1 202 637 5910) or by email (firstname.lastname@example.org or email@example.com).
(1) Decision available online at www.supremecourtus.gov/opinions/08pdf/07-512.pdf.
(4) See, for example, Leegin Creative Leather Prods, Inc v PSKS, Inc, 127 S Ct 2705 (2007), overruling a nearly century-old per se rule against minimum resale price maintenance; Verizon Communs, Inc v Law Offices of Curtis V Trinko, LLP, 540 US 398 (2004), substantially narrowing the circumstances in which a firm may be held liable under the Sherman Act for unilaterally refusing to deal with another firm.
(10) 2009 WL 454286 at *9, citing Brooke Group Ltd v Brown & Williamson Tobacco Corp, 509 US 209, 222-24 (1993).
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