Pacific Bell Telephone Co.,dba AT&T California v. linkLine Communications

• Brief for Petitioner Pacific Bell Tel. Company, D/B/A AT&T California, et al.
• Brief for Respondent Linkline Communications Inc., et al
• Reply Brief for Petitioner Pacific Bell Telephone Company, D/B/A AT&T California, et al.

Amicus briefs

• Brief for Professors and Scholars of Law and Economics in Support of Petitioner
• Brief for Verizon Communication, Inc., and the National Association of Manufacturers in Support of Petitioner
• Brief for the Washington Legal Foundation in Support of Petitioner
• Brief for the United States of America in Support of Petitioner
• Brief for Abbott Laboratories in Support of Petitioner
• Brief for the Commonwealth of Virginia and 8 Other States in Support of Petitioner
• Brief for COMPTEL in Support of Respondent
• Brief for the American Antitrust Institute in Support of Dismissal of the Writ or Affirmance

Oral Argument: Transcript

Decision: Reversed and Remanded in an opinion written by Chief Justice Roberts

[edit] Pre-Argument Articles

[edit] Argument Preview

[edit] Background

1. AT&T and its affiliates dominate the California market for wholesale DSL services. It also sells retail DSL services directly to customers. It is thus “vertically integrated” in the lingo of antitrust. That being so, one might imagine that AT&T would be the only provider of DSL services to customers in California, since it controls the infrastructure for providing DSL services at the wholesale level and presumably would have no interest in selling DSL wholesale to others who wished to compete with AT&T in the retail market.

However, under the Telecommunications Act of 1996, AT&T is required by law to sell wholesale DSL to other companies that, in turn, sell retail DSL to customers. These are the ubiquitous “internet service providers” (ISPs), like EarthLink and, important to this case, a company called linkLine. These smaller companies buy DSL from AT&T at wholesale prices and then turn around and sell internet access to households and businesses at retail for a higher price, the difference covering their operating costs and profit. AT&T does the same thing with its retail DSL sales. That makes it both the supplier (at the wholesale level) and competitor (at the retail level) of ISPs like linkLine.

This case arises from linkLine’s antitrust complaints about the prices AT&T charged ISPs at the wholesale level and the price it charged its own retail customers for DSL access. In particular, linkLine accused AT&T of putting a “price squeeze” on its wholesale customers/retail competitors by charging relatively high prices at wholesale and relatively low prices at retail, thereby making it impossible for anyone other than AT&T to sell retail DSL services at a profit. (Using completely made up numbers, consider this sort of example: AT&T might charge $100 per unit for wholesale DSL and then $105 for the same unit at retail. Unless the independent ISPs’ costs are less than $5 per unit, they will not be able to compete).

AT&T moved to dismiss the complaint as failing to state an antitrust violation. In particular, AT&T argued that under the Supreme Court’s recent decision in Verizon v. Trinko, 540 U.S. 398 (2004), there can be no price squeeze claim when the vertically integrated wholesaler/retailer has no antitrust duty to sell its product or services to its retail competitors in the first place. (The key phrase is “antitrust duty”, since AT&T clearly had a statutory duty under the Telecommunications Act to sell to linkLine).

2. In Trinko, the defendant was Verizon, which controlled phone service in New York. Under the Telecommunications Act, it was required to open its phone network to competitors. Some of the competitors (including AT&T) alleged that Verizon was not living up to its legal obligations under the Act and its regulations, dragging its feet in providing access to its “operations support system” – which is used to provide services to customers and ensure quality – thereby resulting in poor service for the customers of its competitors. One of those customers, Trinko, sued Verizon, alleging that the poor service was part of a scheme to discourage customers from signing on, or remaining, with its rivals. The Supreme Court held that the complaint failed to state an antitrust violation.

The Court began by emphasizing that as a general matter, the mere possession of monopoly power in a wholesale market does not violate antitrust law. It is only when a monopolist misuses its market dominance to thwart competition that antitrust law is implicated. As a result, the Court explained, in general antitrust law does not require anyone, including monopolists, to cooperate or sell to its competitors. But that rule is not absolute. Citing its prior decision in Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985), the Court noted that under “certain circumstances, a refusal to cooperate with rivals can constitute anticompetitive conduct.” In Aspen Skiing, the dominant ski resort company (which owned most of the resorts in Aspen) had long had a deal with its competitor to jointly sell multi-day ski passes, good at both its own, and its competitor’s, resorts. When the dominant resort cancelled the arrangement, and started selling passes that covered only its resorts, its competitor sued. The Supreme Court upheld a jury verdict in favor of the plaintiff, concluding that the jury could have concluded that the defendant elected for forgo “short-run benefits because it was more interested in reducing competition . . . over the long run by harming its smaller competitor.”

In Trinko, the Court described that decision as “at or near the outer boundary” of antitrust liability. It also stated that it had been very cautious in recognizing exceptions to the “right to refuse to deal,” in light of the “uncertain virtue of forced sharing and the difficulty of identifying and remedying anticompetitive conduct by a single firm.” The Court further held that the case before it did not fall within the strict holding of Aspen Skiing. Among other things, Verizon had not “voluntarily engaged in a course of dealing with its rivals, or would have ever done so absent statutory compulsion.” The Court also noted that in “Aspen Skiing, what the defendant refused to provide to its competitor was a product that it already sold at retail” while the “operations support system” services Verizon was compelled to sell to its competitors were “not otherwise marketed or available to the public.”

The Court further declined to recognize what it deemed to be a new exception to the right to “refuse to deal” in the circumstances of the case before it. Of particular importance to the Court was the existence of an extensive regulatory scheme for telecommunications services which, the Court believed, diminished the need for (and benefit of) additional antitrust regulation. At the same time, the Court perceived a downside risk of antitrust courts inadvertently mistaking mere failures of incumbent carriers like Verizon to implement all of their statutory duties “with alacrity,” which “might have nothing to do with” an intent to exclude competition. Moreover, the Court believed, involving antitrust courts in such matters could lead to extensive judicial supervision of a highly complex industry, a task for which judges are ill-equipped.

3. The Ninth Circuit eventually rejected AT&T’s reliance on Trinko. For one thing, the court explained, there was no need to recognize a new kind of liability in this case because “price squeeze” claims against monopolists have an established pedigree in antitrust law. The Ninth Circuit did not read Trinko as treating this established theory as a species of the disfavored “refusal to deal” category of claims. The court further concluded that the existence of a regulatory regime was not enough to preclude all antitrust liability, but rather simply “one factor” to consider in deciding whether to recognize a new kind of antitrust claim. In this case, while there was extensive regulation of AT&T’s wholesale business, the company’s retail business was relatively unregulated. And, the Ninth Circuit concluded, “since linkLine could prove facts, consistent with its complaint, that involve only unregulated behavior at the retail level, its action or lawsuit survives a motion for judgment on the pleadings.”

Judge Gould, in dissent, argued that if all the complaint boiled down to was a charge of predatory pricing in the retail market, linkLine should have to satisfy the traditional requirements of a predatory pricing claim – including proof that AT&T’s retail prices were below cost and charged with the intent, and realistic prospect, of recouping the losses after its competitors had been driven out of business. Since the complaint made no such allegation, Judge Gould would have ordered its dismissal.

[edit] Petition for Certiorari

1. AT&T petitioned for certiorari, arguing that the Ninth Circuit’s decision created a circuit split with a decision from the D.C. Circuit in Covad v. Bell Atlantic, 398 F.3d 666 (D.C. Cir. 2005), and was in conflict with the Court’s decision in Trinko.

On the merits, AT&T argued that there is no reasonable basis for different results Trinko and this case. If a competitor has no antitrust right to adequate access to an incumbent carrier’s network, petitioner argued, it makes little sense to say that it nonetheless has a right against “too-costly” access to the same network. Moreover, such claims, AT&T argued, “entail the same ills underlying the Court’s antitrust analysis in Trinko.” They would deprive “a legitimate monopolist’s ‘opportunity to charge monopoly prices,’” thereby undermining incentives to engage in the massive investments necessary to create such networks. Furthermore, it would be difficult for courts to “distinguish a price squeeze resulting from the defendant’s superior efficiency from a price squeeze that reflects ‘too high’ wholesale prices.” And such claims would involve courts in complex regulation of telecommunications market, a task for which they are not suited. Finally, as in Trinko, AT&T argued, the existence of a complex regulatory scheme undermines the need for antitrust regulation. The fact that regulators have chosen not to regulate retail prices of internet access, AT&T argued, does nothing to diminish the fact that the entire field is subject to expert oversight by agencies better equipped than courts to monitor the industry and protect consumers.

2. Respondent linkLine opposed the petition, arguing that the asserted conflict with the D.C. Circuit was not real and that the Ninth Circuit correctly construed the Court’s decision in Trinko.

Respondent argued that this case more closely resembled Aspen Skiing than Trinko, in that “this challenged price squeezing conduct is akin to, and reveals the same ‘distinctly anticompetitive bent’ as, the refusals to sell to competitors at retail prices for services ‘otherwise marketed or available to the public.” The complaint alleges, respondent said, “an upstream monopolist engaging in exclusionary conduct aimed at dominating an unregulated retail market with the expectation that ‘its future monopoly retail prices would be higher.’” Thus, linkLine argued, its claims fall within traditional antitrust doctrine which, it argued, has long recognized the price squeeze theory.

Respondent rejected AT&T’s assertion that recognizing liability here would lead to difficulties in administration, asserting that courts would need do nothing more than they already do in cases of predatory retail pricing. It likewise rejected the suggestion that the regulatory framework of the telecommunications industry relieved any need for antitrust liability. It argued that nothing in Trinko supports the notion that the existence of regulation, in itself, is sufficient to bar antitrust liability and emphasized the lack of any present regulation of retail DSL pricing to protect against predatory conduct by incumbent carriers.

[edit] The Various Views of the United States

After reviewing the petition and opposition, the Court invited the Solicitor General to file a brief expressing the views of the United States. In this case, that request turned out to be a tall order as the Federal Trade Commission (FTC) and Department of Justice (both of which administer federal antitrust law) took opposing views on the merits of the case.

In the end, the Solicitor General filed a brief siding with the Justice Department, which agreed with AT&T that the complaint failed to state a claim. Focusing on the broader question of the validity of “price squeeze” claims generally, the SG argued that although many lower courts have long recognized such claims, the Supreme Court should not. Price squeezes, the Government argued, do not “necessarily, or even ordinarily, entail anticompetitive conduct within the meaning of the antitrust laws.” When a defendant has no antitrust duty to do business with the plaintiff, the SG argued, it “necessarily follows that there can be no valid price-squeeze claim based merely on [the defendant’s] conduct in charging ‘wholesale prices that were too high in relation to what [it was] charging [its] retail” customers. That is, if the defendant has a right to refuse to deal with the plaintiff at all, it should necessarily have the right to deal with the plaintiff on price terms that are disadvantageous to the plaintiff-competitor.

Antitrust law is only implicated, the SG argued, if the defendant charges a predatory price (that is, one below cost, with the intent of driving competitors out of business and then later recouping the losses through supracompetitive retail prices). But that is a predatory pricing, not a price squeeze claim.

In an unusual move, the FTC issued a press release expressing its disagreement with the SG’s position. And “in the interest of transparency,” the Commission set forth its reasons in detail (and in the form of what could easily be mistaken for the brief it would have filed if it had the legal authority to file briefs in the Supreme Court without the SG’s permission). The Commission stressed that price squeezing has a long pedigree of antitrust recognition in the lower courts, going back to a decision from Judge Learned Hand in 1945. It argued that price squeezing risks competitive harms by deterring competition at the wholesale level – because any new entrant not only faces the basic barriers to entry that led to the monopoly in the first place, but also the prospect that the price squeezing has driven away most of its potential customers – and at the retail level – by driving out retail competition that would put pressure on the monopolist to improve not only price, but quality of service. The FTC also agreed with lineLink that the absence of regulation of retail pricing importantly distinguished this case from Trinko.

[edit] Merits Briefing

After receiving the brief of the United States, the Court granted certiorari on June 23, 2008.

1. AT&T began its merits brief by again asserting that this case is materially indistinguishable from Trinko. AT&T argued that Trinko “establishes that, at least where AT&T has no duty to deal with respondents, it likewise has no duty to deal with them in a manner that would promote their success in the alleged downstream market for DSL-based Internet-access service.”

And as it did in its cert.-stage briefs, AT&T challenged the Ninth Circuit’s assertion that “price squeeze” claims are generally cognizable under federal antitrust law. The Supreme Court, AT&T noted, has never decided the question; confronted with the question for the first time in this case, it urged, the Court should hold that price squeeze claims are generally unavailable under the Sherman Antitrust Act. Price squeeze claims miss the point of antitrust law, AT&T argued, which is to protect competition and not simply to protect a monopolist’s competitors. It may be true that a prolonged price squeeze by a wholesale monopolist can drive out its retail-level competitors. But that “does not mean that a price squeeze is anticompetitive,” AT&T argued. Citing decisions from various circuits, academic literature, and the ever influential antitrust treatise by Harvard professor Phillip Areeda, AT&T argues that a wholesale monopolist could extract all but the minimum profits the retail plaintiff needs to stay in business, just by raising the wholesale rate and staying out of the retail business entirely. The fact that the wholesaler has entered the retail market as a competitor, the argument goes, therefore creates no additional competitive harm. AT&T argued that the Court had already recognized as much in recognizing, in Trinko, that federal antitrust law does not condemn “monopoly leveraging” unless it involves otherwise wrongful conduct.

At the same time, AT&T asserted, the price squeeze theory can provide protection to retailers who fail to make a profit not because of anything the monopolist has done but rather because of its own inefficiencies. And it discourages efficient vertical integration when the wholesale monopolist can enjoy a competitive advantage as a result of the inherent efficiencies in that vertical integration.

Indeed, recognizing price squeeze claims “would discourage pro-competitive conduct,” AT&T argues. First, it encourages the monopolist to keep its retail prices high, so as to avoid the claim that its retail competitors are being squeezed out by having to competing with retail prices from its supplier that are too low. Second, it would deter “efficient vertical integration and socially desirable, voluntary dealing.” That is, even when a wholesale monopolist could, through the efficiencies of vertical integration, sell a product at retail more cheaply than anyone else, it might decline to do so for fear of antitrust liability. Alternatively, the wholesaler might simply refuse to sell to anyone who might compete with it at the retail level, something that it is ordinarily entitled to do (although not in this case, as the sales are required by federal telecommunications law). Third, price squeeze claims interfere with a monopolist’s ability to charge monopoly prices for its products and thereby recoup the cost of the substantial investments that often created the monopoly in the first place. For example, telecommunications companies may be deterred from investing billions of dollars in high-speed internet infrastructure if they believe that at the end of the day, their ability to profit from these expensive and risky investments will be substantially diminished by an obligation to allow its retail competitors to prosper at its expense.

As it did at the cert. stage, AT&T again emphasized its view that recognizing such claims would also enmesh federal antitrust courts in the minutiae of complex markets, a job for which judges are ill-equipped. Placing courts in that role is particularly inappropriate, AT&T argued, in a case such as this, where the relevant market is subject to regulation by an expert agency (here, the Federal Communications Commission).

2. In a somewhat surprising move, respondent in its brief essentially abandoned any attempt to defend the viability of a traditional price squeeze theory. Although it had argued in its brief in opposition that the decision below correctly recognized and applied the price squeeze theory long accepted in the lower courts, in its merits brief, respondent argued instead that the issue was no longer important because its complaint also stated a predatory retail pricing claim – a distinct form of antitrust liability described in the Court’s 1993 decision in Brooke Group Ltd v. Brown & Williamson Tobacco Corp. Under that theory, the plaintiff must show that a retail competitor is charging below-cost prices and has a reasonable chance of recouping those losses through the resulting decrease in competition. Under a Brooke Group claim, the facts that the retailer is owned by a wholesaler, or the amount of the wholesale price being charged the plaintiff, are irrelevant.

Respondent further argued that both AT&T and the Government recognized that such traditional predatory pricing claims. Moreover, it asserted, the concerns that led to the result in Trinko should have no application to a traditional predatory pricing claim.

3. Respondents’ brief put AT&T in a bit of an awkward posture. On the one hand, it obviously must have been pleased to have the plaintiff concede that the antitrust theory upon which it had succeeded in the Ninth Circuit was, in fact, not a viable one. On the other hand, the concession risked derailing the case and preventing AT&T from getting what it probably wanted most – not so much a victory in this case, but the elimination of the price squeeze theory of liability. After all, that theory exposes AT&T to the threat of lawsuit and liability in many other cases given the company’s size and its monopolies, and the widespread acceptance of the price squeeze theory in the federal circuits. But petitioner now faced the prospect that the Court would avoid the question altogether and simply vacate and remand the case for consideration of the remaining predatory pricing claim.

It is therefore not all that surprising that AT&T’s reply brief focused principally on keeping the price squeeze question alive. Petitioner began by briefly arguing that the complaint does not state a claim even under the Brooke theory, but then quickly moved on to the larger problem: explaining why the Court should overrule the Ninth Circuit (and most others) on an important question of antitrust law in a case in which none of the parties was defending the majority rule in the Supreme Court. First, AT&T argued that the concession did not moot the case because respondent continues to press its antitrust claim against AT&T, just on a different theory. At the same time, AT&T urged, the concession does not present any prudential reason to avoid deciding the question presented. The question remains important, it argued, and in any event, even if respondent refused to defend the judgment below, two of its amici had, ensuring a full presentation of the issues for the Court.

[edit] Oral Argument

a. A good bit of the oral argument was devoted to the question of what to do with the case in light of respondents’ effective abandonment of its price squeeze claim. The Chief Justice asked AT&T’s lawyer, Aaron Panner of Kellog, Huber, Hansen, Todd, Evans & Figel, whether the concession mooted the case. When Panner responded that it did not because respondent continued to press a Section 2 antitrust claim, the Chief noted that with respect to standing, the Court considered Article III standing on a claim-by-claim basis, suggesting the possibility that the case might be moot with respect to the specific antitrust theory before the Court. Panner responded by arguing that standing is considered not theory by theory but rather on the basis of each claim for a particular kind of relief, and in this case the plaintiff continued to seek the same relief under the same statute, only under a different theory. Justice Ginsburg noted that when a respondent refuses to defend the decision below, the Court ordinarily appoints an amicus to do so (something the Court did not do in this case). Panner observed that this confirms that the Court retains Article III jurisdiction in such cases.

Respondents’ counsel, Maxwell M. Belcher of Belcher & Collins, P.C., spent a good deal of his argument time getting grief from the Justices about his abrupt change in position and his suggestion that the Court should simply vacate, rather than reverse, the Ninth Circuit. “I don’t have a white flag and I don’t think we particularly have given up,” he started out. He then suggested that the Court could avoid deciding the continuing validity of the price squeeze theory by vacating the Ninth Circuit’s decision “not because it’s erroneous, but because it is incomplete.”

Justice Ginsburg asked him how the Court could simply vacate the decision when he himself acknowledged that it was wrong. Justice Kennedy then pressed him on whether the theory the Ninth Circuit accepted was, in fact, one that respondent had advanced to that court to begin with. He eventually elicited the admission that respondents’ change of heart occurred only after the Court granted certiorari. That obviously annoyed Justice Kennedy: “it seems to me that, in that instance, you seriously prejudiced Petitioners here, and that that should be weighed heavily against you when you ask to – for permission to amend your complaint in the district court” to add a predatory pricing claim. The Chief Justice also noted that “it would have been nice if you thought the case was essentially moot, to hear about that in the cert. opposition.”

Returning to the question of what to do with the case, Justice Breyer suggested that the Court could simply vacate the Ninth Circuit’s decision and explain that the price squeeze claim was no longer part of the case. Respondents’ counsel agreed, but the Chief Justice questioned whether that was right, given the concession that the basis for the court of appeals’ decision was wrong. Justice Ginsburg further noted that even if the Court vacated the decision in this case, that would leave in place circuit precedent recognizing the validity of the price squeeze theory. Justice Alito followed up, noting that if the Court simply vacates, then AT&T or others could be subject to suit under the same theory in a case filed next week. Respondent’s counsel acknowledged that this was true.

b. Turning to the merits, several Justices seemed reticent to rule broadly on the viability of a price squeeze claim. Justice Stevens pressed AT&T and Assistant to the Solicitor General Deanne Maynard on the scope of their argument, asking whether their position required the Court to rule that Judge Hand was wrong in recognizing the price squeeze theory in a seminal decision from the 1940s. (Both the Government and AT&T essentially conceded that it did.) Justices Breyer and Souter also pressed the parties on whether the Court could simply say that a price squeeze claim is unavailable when a regulatory agency – here the FCC – is empowered to prevent the competitive harm complained of. Justice Breyer, in particular, worried that even if the claim did not seem appropriate in this case, it might be an important antitrust tool in other, different cases, especially if there was no agency to deal with the problem. And Justice Souter wanted to know whether the price squeeze theory has been thoroughly repudiated by economists, or whether its value remained an issue subject to reasonable dispute.

That said, there appeared to be little support for upholding the Ninth Circuit’s decision either. Respondents’ counsel avoided the hard questions by disavowing the price squeeze theory. The task of defending the judgment below fell to Richard M. Brunell, Director of Legal Advocacy at the American Antitrust Institute. As discussed in this prior post, the Court had taken the unusual step of allowing a non-governmental amicus argument time to defend the judgment below. But even Mr. Brunell began by advocating that the Court simply vacate the decision below without deciding the price squeeze claim. However, Brunell did then offer a defense of the price squeeze theory, noting that it has long been accepted by almost all of the Circuits and by at least some economic authorities. But both Justices Souter and Breyer wanted to know why such a theory was necessary when an agency was available to deal with anticompetitive pricing.

Both the Chief Justice and Justice Kennedy expressed a more general skepticism about the price squeeze theory, noting that AT&T has no duty to deal with its competitors other than that imposed by regulation. And if the duty to deal arises from communications law, Justice Kennedy suggested, why shouldn’t antitrust law leave the regulation of that forced relationship to the FCC? Justice Scalia chimed in, asking Brunel whether it would be proper for the FCC to allow predatory pricing. They presumably would not, Brunell answered, but the FCC doesn’t regulate retail DSL pricing at all.

[edit] Analysis

At the end of the day, it seems reasonably clear that the Court will not affirm the Ninth Circuit and also will not accept respondents’ invitation to simply vacate the decision and leave consideration of the validity of the price squeeze theory for another day. At the same time, if I had to guess, I’d wager that the Court will not put a decisive end to the theory either. Instead, it seems likely that the Court will say that to the extent the theory has any basis at all (which I suspect the Court will express some doubt about) it does not apply where there is a regulatory agency available to deal with the problem, as there is here. And on that basis, the Court will reverse the judgment below. It will also likely note that the question remains open whether respondent should be permitted to pursue an amended complaint asserting a predatory pricing claim (perhaps noting that the district court should take into account the delay and expense respondent inflicted on AT&T and the courts by pursuing a claim that it ultimately agreed has no basis).

As a matter of practice, I wonder if respondents made the right choice in declining to defend the decision below. After all, the price squeeze theory has been widely accepted in the lower courts. Even if it seemed doomed in the Supreme Court, respondent might have avoided a good deal of grief – and better positioned itself for preserving its right to pursue a predatory pricing claim on remand – if it hadn’t abruptly changed position once cert. was granted. At the very least, respondent would have done well to made up its mind at the brief in opposition stage – the spirit of Rule 15 suggests, even when the Rule does not directly require, that parties notify the Court of any reasons that might prevent the Court from reaching the question presented. Failure to do so until the merits brief can give the unfortunate impression that the respondent was waiting to see if the Court granted cert. before confessing error in the judgment below.

[edit] Opinion Analysis

At oral argument yesterday in Hawaii v. Office of Hawaiian Affairs, the petitioner’s counsel was in the enviable position of spending most of his argument debating just how big his victory in the case should be. Respondent’s counsel, in turn, conceded that to the extent the lower court decided the case on the basis that petitioner claimed it did, then the decision was wrong and should be vacated.

Every now and again, by the time a case has gone through the crucible of Supreme Court merits briefing, it becomes obvious to counsel for the respondent that there is no reasonable chance of successfully defending the decision below, at least on the grounds upon which it was decided (or appeared to be decided). The Hawaii case was one such instance. Coincidentally, just before that argument began, the Court issued its decision in another such case, AT&T v. linkLine, No. 07-512.

In linkLine, the court of appeals held that the plaintiff (an independent internet service provider (ISP)) had stated an antitrust claim against AT&T (both a provider of wholesale DSL services to ISP’s like linkLine, and a retail seller of DSL services itself) under a so-called “price squeeze” theory. The basic idea was that AT&T was driving its competitors in the retail DSL market out of business by charging too high a wholesale price (raising the plaintiff’s costs) and charging too low a price at retail (effectively reducing the plaintiff’s revenue). The price squeeze theory has been around for a while, famously recognized by Judge Learned Hand in a case from the 1940s. But its underpinnings had been substantially eroded by a recent decision from the Supreme Court, Verizon v. Trinko, 540 U.S. 398 (2004), which held that a company that does not have any antitrust duty to deal with its competitors cannot be subject to antitrust liability based on the way it conducts itself during voluntary transactions with its competitors. In Trinko, the challenged conduct was providing the competitor lousy service. The court of appeals in linkLine thought, however, that there was a difference when the conduct was engaging in a price squeeze, in part because the price squeeze theory had been around in the lower courts for quite some time.

However, by the time of the briefing on the merits, linkLine’s lawyers apparently decided that this was a distinction that the Court was not going to accept, and they promptly abandoned their price squeeze claim in the Supreme Court, asking instead for a remand to allow them to amend their complaint to pursue a more traditional predatory pricing claim against AT&T.

They got their wish, mostly. Yesterday, the Court handed down its decision, putting a stake in the heart of the price squeeze theory of antitrust liability. Writing for five justices, Chief Justice Roberts rejected, as an initial matter, any suggestion that the plaintiff’s change in position mooted the case or otherwise counseled against deciding the question presented. The parties were still adverse in the general litigation, he explained, and with respect to what the Court should do about the judgment (plaintiffs wanting it vacated, and AT&T wanting it outright reversed).

The Chief then explained that in light of Trinko, and the plaintiffs’ concession that AT&T had no antitrust duty to deal with them, AT&T accordingly had no antitrust duty to sell wholesale DSL services to them at any particular price. And, the Court explained, the only duty AT&T has with respect to its retail pricing is the ordinary antitrust duty not engage in predatory pricing (defined as selling below cost with a dangerous probability of being able to recover the losses after driving their competitors out of business).

The price squeeze theory, the Court said, was undesirable because it threatened to chill the very thing antitrust law is designed to encourage - low prices for consumers. “Firms might raise their retail prices or refrain from aggressive price competition to avoid potential antitrust liability,” the Chief explained. At the same time, the majority doubted the courts’ institutional capacity to reasonably administer a price squeeze regime, which could ultimately require courts to decide what constitutes reasonable wholesale and retail prices in particular markets.

The Court accordingly vacated the Ninth Circuit’s decision and remanded. It noted that plaintiffs had already been allowed to file an amended complaint, alleging an ordinary predatory pricing claim. But it concluded that in finding the second complaint adequate, the district court had applied a too lenient pleading standard (i.e., the “no set of facts” standard the Court rejected in Twombly). The district court would therefore having to revisit the question on remand.

The Court also stated, somewhat cryptically, that even if allowed to replead, the plaintiff’s complaint “may not survive a motion to dismiss” because “if AT&T can bankrupt 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.” This could be read to suggest not simply that plaintiffs would have to satisfy the ordinary Brook Group standard for making out a predatory pricing claim, but that in the circumstances of this case, even that theory is somehow unavailable in light of how dependant the plaintiffs are on AT&T as a wholesale supplier.

Four justices concurred in the judgment, preferring that the Court have decided the case on the narrower ground that at least when there is a government regulator (here, the FCC) that could provide relief for the alleged harm (here, too high wholesale prices) without the need to invoke antitrust law. Justice Breyer’s opinion would have kept open the possibility, however, that a price squeeze theory could be valid in other circumstances.

[edit] Links and further information