“Price Squeeze” Theory Insufficient to Support Monopoly Claims: High Court

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

In an opinion by Chief Justice John Roberts, the U.S. Supreme Court today rejected an independent “price-squeeze” theory under Section 2 of the Sherman Act.

The Court ruled that AT&T—the telecommunications company that owns much of the infrastructure and facilities needed to provide digital subscriber line (DSL) services in California—would not have engaged in monopolization of the retail DSL market by engaging in a price squeeze vis-à-vis competing independent Internet service providers (ISPs), in the absence of an antitrust duty to deal at the wholesale level or predatory pricing at the retail level.

A decision of the U.S. Court of Appeals in San Francisco (2007-2 Trade Cases ¶75,875), holding that the price squeeze claim was potentially valid, was reversed. The Justice Department had contended that 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.

The complaining independent ISPs filed an antitrust suit in 2003, claiming that AT&T engaged in a price squeeze in violation of Section 2 of the Sherman Act, which prohibits monopolization.

The ISPs—which received wholesale DSL transport service from AT&T and sold DSL directly to consumers in competition with AT&T—contended that the company did not leave them with a “fair” or “adequate” margin between the wholesale price and the retail price to compete.

Predatory Pricing

As a general rule, businesses are free to choose the parties with whom they deal, as well as the prices, terms, and conditions of that dealing, the Court explained. However, a dominant firm might incur antitrust liability for purely unilateral conduct by charging “predatory” prices—below-cost prices that drive rivals out of the market and allow the monopolist to raise its prices later and recoup its losses—or by refusing to deal where it has an antitrust duty to deal with its competitors.

The ISPs contended that AT&T squeezed their profit margins by setting a high wholesale price for DSL transport and a low retail price for DSL Internet service. This purportedly allowed AT&T to “preserve and maintain its monopoly control of DSL access to the Internet.” But the complaining ISPs did not allege a predatory pricing claim at least in their original complaint.

They did not contend that: (1) the challenged retail prices were below an appropriate measure of AT&T’s costs and (2) there was a dangerous probability that the AT&T would be able to recoup its investment in below-cost prices.

In rejecting an independent theory of liability based on a price squeeze, the Court said that recognizing a price squeeze in the absence of predatory pricing could lead firms to raise their retail prices or refrain from aggressive price competition to avoid potential antitrust liability.

Duty to Deal

While AT&T had a regulatory obligation to provide wholesale DSL service to the ISPs, it had no antitrust duty to deal, the Court noted. If AT&T had simply stopped providing DSL transport service to the complaining ISPs, it would not have run afoul of the Sherman Act.

The Court pointed to its recent decision in Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP (2004-1 Trade Cases ¶74,241) for the proposition 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.”

Thus, only to the extent that a monopolist engages in a duty-to-deal violation at the wholesale level or predatory pricing at the retail level do plaintiffs have a remedy under existing antitrust law.

Remand

The matter was remanded to the district court to determine whether the ISPs' amended complaint, which was not before the Court, stated a claim in light of current pleading standards and whether the ISPs were entitled to leave to amend their complaint to bring a claim under the predatory pricing theory of the Supreme Court's 1993 decision in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp. (1993-1 Trade Cases ¶70,277).

Unusual Procedural Posture

The Court noted at the outset that it would consider the matter, even though the case had “assumed an unusual posture.” The case was not rendered moot by the petitioning ISPs' request that the Supreme Court vacate the federal appellate court's decision in its favor and remand with instructions that they be given leave to amend their complaint to allege a Brooke Group claim. The ISPs—“no longer pleased with their initial theory of the case”—determined that a dissenting opinion by Judge Ronald M. Gould in the appellate court stated the correct position that price squeeze claims must meet the Brooke Group requirements for predatory pricing.

The Supreme Court decided that it was appropriate to address the question presented. The parties continued to be adverse not only in the litigation as a whole, but also in the specific proceedings before the Supreme Court. AT&T asked the Supreme Court to reverse the judgment of the appellate court and remand with instructions to dismiss the complaint. The ISPs asked that the Supreme Court vacate the judgment and remand with instructions that they be given leave to amend their complaint.

It was not clear that the ISPs had unequivocally abandoned their price-squeeze claims addressed in the petition for certiorari. Further, in the absence of a Supreme Court decision on the merits, the appellate court’s decision would presumably have remained binding precedent in that circuit and a conflict among the circuits would have persisted, the Court reasoned.

Concurring Opinion

A concurring opinion, authored by Justice Stephen G. Breyer and joined by three other justices, would have remanded the case to the district court to determine whether the ISPs may proceed with their predatory pricing claim as set forth in Judge Gould’s dissenting Ninth Circuit opinion. The dissent also would have “accept[ed] respondents’ concession that the Ninth Circuit majority’s “price squeeze” holding is wrong.”

The February 25 opinion, Pacific Bell Telephone Co. v. linkLine Communications, Inc., appears here on the U.S. Supreme Court website. It will appear at 2009-1 Trade Cases ¶76,500.