Thursday, November 20, 2008

Solicitor General, Antitrust Group to Argue in Supreme Court “Price Squeeze” Case

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter, and John W. Arden.

The U.S. Solicitor General and the American Antitrust Institute (AAI) will be permitted to participate in oral argument as amicus curiae on Monday, December 8, when the U.S. Supreme Court considers a decision of the U.S. Court of Appeals in San Francisco (2007-2 Trade Cases ¶75,875) allowing a "price squeeze" claim to proceed against a telecommunications company.

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

Wholesale Prices v. Retail Prices

The 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 was providing retail services and necessary equipment to end-user customers. During one period, the company even charged wholesale prices that actually exceeded retail prices, thereby making it impossible for independent ISPs to compete in the retail market.

In a friend-of-the-court brief, the federal government supported the petitioning telecommunications company, arguing that “[a] price-squeeze allegation based solely on the margin between a vertically-integrated defendant’s wholesale and retail prices is insufficient to state a claim under Section 2 of the Sherman Act.”

Antitrust Duty to Deal

The federal government asserted that a statutory or regulatory duty to deal with rivals “does not automatically establish an antitrust duty to deal.” Since the incumbent telecommunications company had no antitrust duty to deal with the ISPs at the wholesale level, it had no duty under the antitrust laws to offer the ISPs any particular wholesale price terms, according to the government.

Allegations that the company’s retail prices were too low to allow the ISPs to compete did not state a claim for predatory pricing, the government maintained. An action for predatory pricing requires claims (1) that the retail prices are below “an appropriate measure of their costs,” and (2) that the company had a dangerous probability of recouping its investment in below-cost prices.

Finally, the government charged that the appellate court erred in recognizing a Section 2 claim based solely on the margin between the company’s wholesale and retail prices. Allowing such a claim “would protect competitors, not competition or consumers.” Low retail prices benefit consumers, as long as they are above predatory pricing levels, the brief stated.

Theory Remains Sound

In its amicus brief, the AAI—a non-profit education, research, and advocacy organization—urged the Supreme Court to reject the Justice Department's invitation to abolish price-squeeze claims as an independent basis for liability under Section 2of the Sherman Act. The long-established price-squeeze theory remains sound under modern antitrust policy, the brief contends.

The test for liability under the famous Alcoa case “does not protect ‘competitors’ at the expense of ‘competition,’ as the DOJ contends, but rather bars a monopolist that operates at two stages of production from foreclosing equally efficient single-stage rivals,” the AAI argues.

The anticompetitive effects of a price squeeze are well recognized, the brief notes. These effects include the preservation or entrenchment of a monopoly, the impairment of non-price competition and innovation, the facilitation of price discrimination, and the ability of a monopolist that is regulated at one level to dominate at a second, unregulated level.

AAI further argues that the district court’s finding of no antitrust duty to deal should not preclude a price-squeeze claim and that the company’s petition for review is moot in light of the ISPs' abandonment of their price-squeeze claim.

The petition is Pacific Bell Telephone Co. v. LinkLine Communications, Inc., Dkt. No. 07-512, cert. granted June 23, 2008. The motions for leave to participate in oral argument as amicus curiae and for divided argument were granted on November 17.

Text of the government’s brief appears here at the Department of Justice Antitrust Division website. Text of the American Antitrust Institute’s brief appears here on the AAI website.

Granting Argument to Public Interest Group

The Court's unusual granting of 15 minutes for the AAI argument was the subject of much discussion on the ABA Antitrust Section's listserve on November 20. Antitrust practitioners asked whether anyone could remember when a public interest organization received oral argument time in an antitrust case. In this case, the AAI asked for 10 minutes and received 15 minutes.

One listserv member cited a discussion of this issue on the ScotusBlog ("Practice Pointer: Oral Argument in Pacific Bell v. linkLine Communications," November 19, 2008).

The blog observed that "it's fairly unusual for the Court to actually grant a private amicus argument time—much less more time then the ten minutes that AAI had requested. So what gives?"

The answer is that the Linkline respondents had essentially abandoned their price-squeeze claim and had asked to be allowed to amend their complaint to further develop their retail-level predatory pricing claim.

If AAI were not granted an opportunity to participate in the argument, the judgment of the Ninth Circuit would be undefended.

Scotusblog comments that "the disposition of AAI's motion may serve as a useful practice pointer for other private amici seeking argument time . . . it demonstrates that the best chance for private amici to get argument time may lie in identifying a gap that, for whatever reason, would otherwise be left unaddressed at oral argument . . ."

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