Pacific Bell v. linkLine: Supreme Court Puts the Squeeze on Price Squeezes

Pacific Bell v. linkLine: Supreme Court Puts the Squeeze on Price Squeezes

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On February 25, 2009, the Supreme Court, in Pacific Bell Tel. Co. v. linkLine Commc'ns, Inc., No. 07-512,—S. Ct.—(2009) (slip op.), available here, ended the era of the "price squeeze" as a stand-alone basis for liability under Section 2 of the Sherman Act. In a classic price squeeze, a vertically-integrated supplier with monopoly power in the upstream (wholesale) market raises wholesale prices to a competitor in the downstream (retail) market while it lowers its own retail prices. Id. at 8. The retail competitor's profit margins (and ability to compete) are "squeezed" between its increased wholesale costs and its need to cut retail prices to match its rival. The Court in linkLine held that a price squeeze plaintiff must prove either: (i) a violation of an antitrust duty to deal in the upstream, wholesale market; or (ii) discounting that satisfies the Brooke Group test for price predation in the downstream, retail market. Id. at 12, 17. Failing that, a plaintiff may not "join a wholesale claim that cannot succeed with a retail claim that cannot succeed, and alchemize them into a new form of antitrust liability. . . ." Id. at 17.

Background

The defendants (AT&T) sell retail DSL internet service to consumers and—as required by FCC regulations—also provide competing DSL retail service providers wholesale access to "DSL transport," which is part of the DSL infrastructure. Id. at 2-3. The plaintiffs, retail DSL competitors, alleged that AT&T monopolized the DSL market in California by simultaneously raising its wholesale prices for DSL transport while lowering its own retail DSL prices to consumers. Id. at 3. Although it held that—in light of the Supreme Court's decision in Verizon Commc'ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004)—AT&T had no antitrust duty to deal with the plaintiffs in the upstream market, the district court refused to dismiss the price squeeze claim.

The Ninth Circuit affirmed on interlocutory appeal, holding that Trinko did not foreclose the price squeeze claim. In Trinko, the Supreme Court held that a competitor under no antitrust duty to deal could not be required under Section 2 to provide a "sufficient" level of service to downstream competitors. 540 U.S. at 410. The Ninth Circuit distinguished Trinko because plaintiffs there complained about the quality of service provided, rather than about a price squeeze, and held that because "a price squeeze theory formed part of the fabric of traditional antitrust law prior to Trinko, . . . those claims should remain viable notwithstanding either the telecommunications statutes or Trinko." 503 F.3d at 883.

The Supreme Court granted certiorari "to resolve a conflict over whether a plaintiff can bring a price-squeeze claim under [Section] 2 of the Sherman Act when the defendant has no antitrust duty to deal with the plaintiff." Slip Op. at 5. In a very unusual move, before the Supreme Court, the plaintiffs disavowed the Ninth Circuit's holding, conceded that they must adequately plead predatory pricing to state a claim, and asked the court to remand with instructions that they be given leave to amend their complaint to allege a Brooke Group claim. Slip Op. at 5-6. The Court, however, declined to find that the plaintiffs' concession mooted the case, id. at 6, and proceeded to assess the viability of the price squeeze theory.

The Decision

The Court, in an opinion authored by Chief Justice Roberts and joined by Justices Scalia, Kennedy, Thomas and Alito, approached the price squeeze claim by breaking it down into "wholesale" and "retail" components, and analyzing each separately under established precedent.

First, the Court began by holding that a "straightforward" application of Trinko "forecloses any challenge to AT&T's wholesale prices." Id. at 9 (emphasis in original). Justice Roberts explained 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." Id. The Ninth Circuit assumed (and plaintiffs did not contest on appeal) that AT&T did not have any antitrust duty to deal. Id. at 8.1 The Court applied Trinko to conclude that, because the Sherman Act did not require AT&T to deal with the plaintiffs in the wholesale market at all, it necessarily did not require AT&T to offer DSL Transport "at the wholesale prices the plaintiffs would have preferred." Id. at 10. The Court found unavailing the Ninth Circuit's attempt to distinguish Trinko because that case involved quality rather than pricing terms, given that the "nub of the complaint in both Trinko and this case is identical—the plaintiffs alleged that the defendants (upstream monopolists) abused their power in the wholesale market to prevent rival firms from competing effectively in the retail market." Id. at 9-10.

Second, isolating the retail price allegations, the court deemed insufficient allegations that AT&T's retail prices were "too low" for the plaintiffs to make a reasonable profit. The Court applied Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993), in the context of a price squeeze claim, holding that retail price cutting violates the Sherman Act only when: "(1) 'the prices complained of are below an appropriate measure of [the defendant's] costs'; and (2) there is a 'dangerous probability' that the defendant will be able to recoup its 'investment' in below-cost prices." Slip Op. at 11 (quoting Brooke Group, 509 U.S. at 222-24). The court wrote that "recognizing a price-squeeze claim where the defendant's retail price remains above cost would invite the precise harm we sought to avoid in Brooke Group: Firms might raise their retail prices or refrain from aggressive price competition to avoid potential antitrust liability." Id. (citing Brooke Group, 509 U.S. at 223).

Next, combining the two strands of its analysis, the court concluded that an antitrust plaintiff cannot "amalgamat[e]" a meritless wholesale pricing claim with a meritless retail pricing claim into a viable claim based on the relationship between the wholesale and retail prices. Id. at 12. In so doing, the Court abrogated the price squeeze standard first announced by Judge Learned Hand in United States v. Aluminum Co. of Am., 148 F.2d 416, 438 (2d Cir. 1945), which suggested that a vertically-integrated monopolist's conduct could be exclusionary if it did not "leave its rivals a 'fair' or 'adequate' margin between the wholesale price and the retail price." Slip Op. at 12 n. 8, 13. The Court observed that "[g]iven developments in economic theory and antitrust jurisprudence since Alcoa, we find our recent decisions in Trinko and Brooke Group more pertinent to the question before us." Slip Op. at 12 n. 8.

The Court discussed at some length "[i]nstitutional concerns" counseling against adopting a stand-alone price squeeze theory, with particular regard for "clear rules in antitrust law," administrability of standards, and avoiding deterring aggressive competition, which have informed several modern Supreme Court antitrust cases. See id. at 12-15. The Court emphasized in particular the practical difficulty of administering a rule that would require judges "to police" both retail and wholesale prices and ensure that the "interaction" between them does not "squeeze" rival firms, and the vagaries inherent in trying to apply a requirement that a monopolist leave its rivals a "fair" or "adequate" margin. Id. at 13-14. And, the Court wrote, "perhaps most troubling," a rule predicated on maintaining "fair" and "reasonable" margins for competitors would give vertically-integrated firms "no safe harbor for their pricing practices." Id.

Finally, having held that the plaintiffs failed to state a price squeeze claim, the Court remanded the case to the district court to assess whether the amended complaint stated a claim under the Brooke Group test. Id. at 16. It instructed the district court to apply "the new pleading standard" announced in Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 561-63 (2007), rather than the old "no set of facts" pleading standard the district court had previously applied. Slip Op. at 16. The Court went out of its way to express skepticism about the viability of a Brooke Group Claim: "For if AT&T can bankrupt the plaintiffs by refusing to deal altogether, the plaintiffs must demonstrate why the law prevents AT&T from putting them out of business by pricing them out of the market." Id. at 17.

Justice Breyer's Concurrence

Justice Breyer, in a concurring opinion joined by Justices Stevens, Souter and Ginsburg, argued that, given the plaintiffs' concession that the Ninth Circuit was wrong, the court should not have passed on the merits of the price squeeze claim. Conc. Op. at 1. Although declining to prejudge "hypothetical questions," he seemed to suggest a view that there might be a place for a stand-alone price squeeze theory in certain circumstances. Id. at 2. At the same time, he wrote that, when there is a regulatory mechanism to deter and remedy anticompetitive pricing (as there was at the wholesale level here), "the costs of antitrust enforcement are likely to be greater than the benefits." Id. (citing Town of Concord v. Boston Edison Co., 915 F.2d 17, 26-29 (1st Cir. 1990) (Breyer, J.)).

Implications of linkLine

The Supreme Court in linkLine has foreclosed stand-alone price squeeze claims, requiring that the plaintiff prove either (i) a breach of an antitrust duty to deal in the wholesale market or (ii) predatory pricing in the retail market. Nonetheless, the analytical construct of a price squeeze may have continued relevance in some limited circumstances. In particular, if a monopolist has an antitrust duty to deal with a rival, evidence that the monopolist has squeezed the rival could bear on whether the monopolist has constructively breached its duty by refusing wholesale supply on terms that allow the rival to compete in the downstream, retail market.

Although Trinko has not resolved all uncertainty regarding standards governing refusals to deal, it is probably a rare case in which a monopolist will be found to have a duty to deal with a rival. But when a firm might have such a duty, it is well advised to consider carefully whether the interaction between its wholesale prices to rivals and its retail prices to customers could give rise to a refusal to deal claim.

More broadly, linkLine is the latest in a long, unbroken line of Supreme Court antitrust cases in which the defendant has prevailed, spanning back to the early 1990s. And, the Court's opinion features several of the inter-related themes that have often colored those opinions: for instance, preferences for bright-line rules and safe harbors that limit potential for antitrust liability and provide ex ante guidance (rather than more open-ended inquiry); intensive focus on whether judges and juries can effectively administer antitrust rules; concerns about chilling aggressive competitive behavior; and a tendency to tread lightly in applying antitrust rules in regulated contexts.
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1 The Court observed that, even putting aside the district court's reliance on Trinko, AT&T's apparent lack of monopoly power in the market for high-speed internet service—given the emergence of technologies to compete with DSL—likely precluded any finding it had any duty to deal. Slip Op. at 8 n.2.

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