Wednesday, September 10, 2008

DOJ, States Urge Supreme Court to Overturn “Price Squeeze” Decision

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

The U.S. Department of Justice and nine states have advised the U.S. Supreme Court to overrule a decision of the U.S. Court of Appeals in San Francisco, allowing a “price squeeze” claim to proceed against a telecommunications company. The views of the U.S. and the nine states were contained in separate “friend-of-the-court” briefs, supporting the petitioning telecommunications company.

The divided appellate court had ruled on September 11, 2007, that complaining Internet service providers (ISPs) selling digital subscriber line (DSL) Internet access to retail customers were not barred from claiming that the incumbent telecommunications company serving as their supplier at the wholesale level had violated Section 2 of the Sherman Act by virtue of an alleged price squeeze.

Wholesale v. Retail Prices

The complaining ISPs claimed that the incumbent company had engaged in an unlawful price squeeze by intentionally charging them wholesale prices that were too high in relation to prices at which it provided retail services and necessary equipment to end-user customers.

During one period, the company allegedly charged wholesale prices that actually exceeded retail prices, thereby making it impossible for independent ISPs to compete in the retail market.

DOJ Arguments

In its brief, the Justice Department argued that “[i]n the absence of an antitrust duty to deal, an allegation that a vertically-integrated defendant’s wholesale prices are too high in relation to its retail prices for retail-rivals to compete does not allege a claim under Section 2 of the Sherman Act.” According to the Justice Department, the appellate court erred in allowing the ISPs to proceed on their claims in the absence of an antitrust duty to deal or predatory-pricing allegations.

States' Call for “Bright Line” Rule

The nine states (Alabama, Colorado, Florida, Kansas, Nebraska, Oklahoma, Utah, Virginia, and Washington) called for a bright-line rule that would be rational and predicable. They suggested a ruling barring price-squeeze claims against a firm that has no antitrust duty to deal.

The states offered three reasons for reversal: (1) the appellate court’s decision protects competitors rather than competition and would have undesirable effects on consumers; (2) determining a wholesale price that was fair relative to retail pricing was an exercise for which courts were ill-suited; and (3) the appellate court’s decision was incompatible with the reasoning in the U.S. Supreme Court’s decision in Verizon Comms. Inc. v. Law Offices of Curtis V. Trinko, LLP, 2004-1 Trade Cases ¶74,241.

The appeals court decision is LinkLine Communications, Inc. v. SBC California, Inc. (2007-2 Trade Cases ¶75,875). The petition is Pacific Bell Telephone Co. v. LinkLine Communications, Inc., Docket No. 07-512, filed October 17, 2007, granted June 23, 2008.

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