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In a unanimous decision, Pacific Bell Telephone Co., dba AT&T California, et al. v. LinkLINE Communications, Inc. et al., the United States Supreme Court has effectively foreclosed antitrust plaintiffs, absent extraordinary circumstances, from establishing a “price squeeze” claim under Section 2 of the Sherman Act.¹ Chief Justice John Roberts’ opinion continues the Court’s recent trend toward narrowing the range of viable antitrust claims challenging unilateral conduct by entities with substantial market power.

The case is significant, in part, because the Supreme Court reached its decision on the merits despite the fact that, following the grant of certiorari on an interlocutory appeal, respondents abandoned their initial position and all litigants agreed that the appeals court decision had been wrong, arguably rendering a Supreme Court decision on the merits unnecessary.

Despite the conclusiveness of the Court’s ruling, businesses and their counselors should be aware that key aspects of the Court’s decision could be limited to the highly regulated telecommunications environment, that the Court generally has reaffirmed the viability of antitrust claims based on exclusionary unilateral refusals to deal by firms with market power, and that the federal antitrust agencies have announced a desire to expand efforts to pursue monopolistic conduct under federal antitrust and related laws.

The case began when four independent Internet service providers alleged that AT&T, which is both a competing Internet service provider and a supplier of digital subscriber line (DSL) services, violated Section 2 by subjecting plaintiffs to a “price squeeze.” As the Court explained, a price squeeze claim is premised on the existence of a vertically integrated company that sells inputs at wholesale while also selling finished goods or services incorporating those inputs at retail. By concurrently raising the wholesale price of inputs and lowering the retail price of the finished goods or services, the vertically integrated company can squeeze the profit margins of its retail competitors.

The LinkLINE plaintiffs alleged that they did not own all the facilities needed to supply customers with Internet service, but instead must lease DSL transport service from AT&T; that AT&T competed with plaintiffs in the retail supply of Internet service but, unlike plaintiffs, also controlled the majority of the infrastructure and facilities needed to provide DSL service in California; and that AT&T had squeezed the plaintiffs’ profit margins by raising the wholesale price for DSL transport service and lowering the retail price for Internet services.

The plaintiffs claimed that AT&T’s price squeeze was an act of monopolization in violation of Section 2 of the Sherman Act. The defendants moved for judgment on the pleadings, arguing that another recent Supreme Court decision, Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko, et al., 540 U.S. 398 (2004), foreclosed a price squeeze claim in the absence of an antitrust duty to deal on the part of the defendant. The trial court found that the defendant in LinkLINE did not have an antitrust duty (or a regulatory duty, as discussed below) to deal with plaintiffs, but nevertheless denied the motion to dismiss on the grounds that Trinko did not involve a price squeeze claim and that courts have long recognized price squeeze claims as viable under the antitrust laws. The Ninth Circuit Court of Appeals affirmed the denial of the defendant’s motion for judgment on similar grounds. The Supreme Court reversed, holding that a price squeeze claim may not be brought under Section 2 when a vertically integrated defendant has no antitrust duty to deal with the plaintiff at wholesale.

Anatomy of A Price Squeeze under Trinko and Brooke Group

Mirroring Judge Ronald Gould’s dissenting opinion in the Ninth Circuit, the Supreme Court noted that a price squeeze claim involves allegations that defendant charged both a high wholesale price and a low retail price, and analyzed each component separately.

With respect to AT&T’s allegedly high wholesale prices, the Court ruled that a straightforward application of Trinko foreclosed the LinkLINE plaintiffs’ challenge. In Trinko, the plaintiff alleged that defendant Verizon violated Section 2 of the Sherman Act by denying its competitors access to interconnection support services. The Supreme Court held that, while Verizon’s conduct might have violated federal telecommunications regulations, Verizon had no antitrust duty to deal with its competitors and, therefore, its refusal to deal in Trinko was not actionable under Section 2 of the Sherman Act. In LinkLINE, by analogy, the Supreme Court held that, because AT&T had no antitrust duty to deal with plaintiffs at all, Section 2 could not compel AT&T to charge plaintiffs any particular price at wholesale.

With respect to AT&T’s allegedly low retail prices, the Court reiterated a long-stated concern that imposing antitrust liability for a dominant firm’s low pricing could chill procompetitive conduct on the part of firms with market power. The Court noted that, to avoid chilling aggressive price competition, Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993), imposed tough requirements on plaintiffs seeking to establish predatory pricing under Section 2. Under Brooke Group, a predatory pricing claim must fail unless the plaintiff can show that (1) the defendant’s prices are below an appropriate measure of its rival’s costs; and (2) there is a “dangerous probability” that, in the long run, the defendant will be able to recoup its “investment” in below-cost pricing. Stopping short of holding that all price squeeze claims must satisfy the Brooke Group standard, the Court nevertheless observed that the LinkLINE plaintiffs’ failed to allege the Brooke Group elements.

Procedural Posture and Mootness

After the price squeeze issue had gone up to the Supreme Court, the LinkLINE plaintiffs reversed course, admitting that they must meet the Brooke Group standard in order to have a viable claim. They asked the Supreme Court not to reverse the Ninth Circuit, but rather to vacate that court’s decision and remand to the trial court with instructions to allow plaintiffs to file an amended complaint under Brooke Group. Plaintiffs’ concession led some, including several amici, to argue that the question before the Court—whether a price squeeze claim under Section 2 can survive in the absence of an antitrust duty to deal—was moot. The Supreme Court disagreed, noting that the parties continued to seek different relief—AT&T sought reversal, as opposed to vacation, of the Ninth Circuit’s decision—and that plaintiffs did not appear to have abandoned their price squeeze claims in the absence of a duty to deal, but rather seemed to contend that a price squeeze claim is viable as long as it also satisfies the Brooke Group standard.

Echoing the amici’s mootness arguments, Justice Stephen Breyer, joined by Justice John Paul Stevens, Justice David Souter and Justice Ruth Bader Ginsburg, concurred in the majority’s decision but questioned the need for the Court to reach the merits of the price squeeze question. Suggesting that when, as in the telecommunications industry, competition is regulated by a detailed administrative scheme, the costs of antitrust enforcement are likely to be greater than the benefits, Justice Breyer stated that he would have accepted the respondents’ concession that the Ninth Circuit’s price squeeze holding was wrong, and would have vacated that decision and remanded to the trial court for a determination whether plaintiffs could proceed with an amended complaint under Brooke Group. This approach would have avoided a ruling on the effects of Trinko on the price squeeze theory and arguably would have left more room for plaintiffs to advance future price squeeze claims under Section 2 of the Sherman Act.

Counseling Considerations

Despite the conclusiveness of the Court’s ruling, businesses and their counselors should be aware that:

(1) the Court’s finding that AT&T has no antitrust duty to deal is derived from a preemptive regulatory decision that makes this a special case,

(2) the Court has reaffirmed the potential for antitrust liability for exclusionary unilateral refusals to deal by firms with market power,

(3) a public dispute recently broke out between the antitrust enforcement agencies over the appropriate standards for challenging unilateral refusals to deal, and

(4) the Obama Administration has given clear signs that it wishes to depart from the Bush Administration’s posture with respect to pursuing monopolistic conduct.

In LinkLINE, the lower courts and the Supreme Court found that AT&T has no antitrust duty under Section 2 to deal with the plaintiffs because the Federal Communications Commission no longer requires owners of DSL-related facilities to provide competitors with wholesale DSL services (or access to their facilities). The basis for that regulatory change is the FCC’s determination that the number of competitive alternatives to DSL available in the market for high-speed Internet service make it unlikely that such a refusal to deal will exclude competition from the market to a significant extent. Accordingly, in that regulated market, the Court deemed it unlikely that, under antitrust law, the plaintiffs could show unlawful exclusionary effects resulting from AT&T’s refusal. Outside this regulatory context, however, the Court has generally reaffirmed the potential for Section 2 violations to be based on exclusionary effects resulting from unilateral refusals to deal by dominant firms.

In the antitrust enforcement arena, the Department of Justice during the Bush Administration published its view that unilateral refusals to deal “should not play a meaningful role in antitrust enforcement.” Disagreeing pointedly and publicly, the Federal Trade Commission has stated that the Supreme Court has reaffirmed that unilateral refusals to deal can give rise to antitrust liability and that the Commission intends to enforce vigorously the Court’s Section 2 standards (through Section 5 of the FTC Act).

During her recent confirmation hearing before the Senate, President Obama’s appointee to head up the DOJ’s Antitrust Division, Christine Varney, addressed this issue. Read “Varney Confirmation Hearing: Expect More Aggressive Antitrust Enforcement, ”our Alert on her testimony, here.  Varney announced, among other things, an intent to reverse the current trend toward relatively narrow enforcement of unilateral conduct under Section 2 of the Sherman Act.

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1 Section 2 of the Sherman Act makes it unlawful to “monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations.” 15 U.S.C. § 2.