Antitrust - Ninth Circuit Upholds “Price Squeeze” Allegations Against Incumbent Local Exchange Carrier
In Linkline Communications, Inc. v. SBC California, Inc., 2007 WL 2597258 (9th Cir. Sept. 11, 2007) – a 2-1 decision authored by Judge Sidney R. Thomas – the Ninth Circuit held that the Supreme Court’s
Trinko decision did not bar the plaintiffs’ “price squeeze” claim under the Sherman Act, Section 2, against the incumbent local telephone company, which was both retail competitor and wholesale supplier
to the plaintiffs. The majority based its holding on prior Ninth Circuit precedent, which the panel determined was consistent with Trinko Judge Ronald M. Gould dissented, arguing that, in light of Trinko, the plaintiffs’
claim should have been understood and evaluated as a “predatory pricing” claim – in which case, the complaint should have been dismissed unless the plaintiffs could show that the defendant priced its retail offering
below an appropriate measure of cost.
Background
The plaintiffs (“linkLine”) are Internet Service Providers and sell “Digital Subscriber Line” service (DSL – a form of high-speed Internet service provided over existing copper telephone lines)
to retail customers. LinkLine leases telephone lines from defendants (“SBC”), which retails its own DSL service. Thus, at the time the complaint was filed in July 2003, SBC was both the wholesale supplier and retail
competitor of linkLine.
LinkLine asserted a variety of alleged anticompetitive conduct by SBC in violation of the Sherman Act, Section 2. The district court categorized SBC’s alleged anticompetitive conduct as: (1) refusal to deal with linkLine as
a wholesale customer, (2) denial of “essential facilities,” and (3) price squeezing. On SBC’s motion for judgment on the pleadings, the district court held that the refusal to deal and essential facilities allegations
were barred under Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004), but granted leave to amend the complaint limited to the price squeeze claim.
As amended, linkLine’s complaint alleged that SBC manipulated its dual role as a vertically integrated monopolist as both a wholesale monopoly supplier and retail competitor of linkLine, and for a period of time SBC charged
linkLine more for the wholesale DSL inputs than SBC charged its retail customers for DSL service and equipment. LinkLine alleged that it could not match SBC’s retail DSL pricing and also recover the costs to provide
DSL service; conversely, if SBC charged itself the same wholesale prices, it allegedly could not recover its wholesale costs and still make a profit at its low retail prices. The district court denied SBC’s motion to dismiss
the amended complaint (with respect to the price squeeze claim) and certified its order for interlocutory appeal under 28 U.S.C. § 1292(b).
Discussion
The Ninth Circuit defined an anticompetitive “price squeeze” as occurring “when a vertically integrated monopolist sets its prices at rates at the first (or ‘upstream’) level so high that its customers
cannot compete with it in the second-level (or ‘downstream’) market.” In City of Anaheim v. Southern California Edison Co., 955 F.2d 1373 (1992), the Ninth Circuit previously had held a price squeeze
can occur even in a business regulated at both the wholesale and retail pricing levels, if the plaintiffs demonstrated a specific intent by the wholesale monopolist to “serve its monopolistic purposes at retail competitors’
expense.” In Trinko, however, the Supreme Court held that the failure by a regulated monopolist to deal with a competitor and wholesale customer – when that monopolist had no duty to deal with the competitor
absent statutory compulsion – did not violate the Sherman Act, Section 2. The Ninth Circuit asked itself “whether a price squeeze is merely another term of the deal governed by the Supreme Court’s analysis in
Trinko, or whether it is something else,” and noted that the D.C. Circuit and Eleventh Circuit had offered conflicting answers to the same question (citing Covad Communications Co. v. Bellsouth Corp.,
374 F.3d 1044, 1050 (11th Cir. 2004), and Covad Communications Co. v. Bell Atlantic Corp., 398 F.3d 666, 673 (D.C. Cir. 2005)).
Siding with the Eleventh Circuit, the Ninth Circuit rejected SBC’s argument that Trinko completely eliminated the viability of a Section 2 price squeeze theory in regulated industries. Indeed, according to the Ninth
Circuit, its prior City of Anaheim decision “undertook a Trinko-type analysis” and, in that particular case, concluded that the plaintiffs’ price squeeze theory was not viable. Analyzing linkLine’s
allegations against SBC, the Ninth Circuit noted that linkLine’s price squeeze theory conceivably could be based upon SBC’s retail pricing – which was not regulated – as opposed to its regulated wholesale
pricing. At the preliminary stage of a motion to dismiss, the Ninth Circuit held that the complaint should survive.
In dissent, Judge Gould argued that, in light of Trinko and Brooke Group v. Brown & Williams Tobacco Corp., 509 U.S. 209 (1993), the complaint should have been dismissed because the plaintiffs did not allege
that SBC priced its retail DSL service below an appropriate measure of cost. Judge Gould reasoned that Trinko “in essence takes the issue of wholesale pricing out of the case, and thus transforms what is left of any
claim of ‘price squeeze,’” and, “if plaintiffs in good faith cannot allege market power, below cost sales and probable potential for recoupment in the retail market, then the case should not proceed.”
Conclusion
The Ninth Circuit previously considered the impact of Trinko on a claim against an incumbent telephone company in MetroNet Services Corp. v. Quest Corp., 383 F.3d 1124, 1128-30 (9th Cir. 2004). In MetroNet,
the Ninth Circuit held that Trinko foreclosed the plaintiff from asserting a Section 2 claim where the challenged conduct did not constitute cessation of a prior course of dealing between the plaintiff and rival telephone
company. In linkLine, however, the Ninth Circuit distinguished MetroNet because it involved allegedly anticompetitive wholesale price terms, not an alleged price squeeze between wholesale and retail prices. With
the panel’s arguable departure from MetroNet’s straightforward application of Trinko, and given Judge Gould’s pointed dissent, it is possible that the Ninth Circuit will grant a petition for
en banc review. Indeed, the panel itself seemingly hinted at the possibility of en banc review with its discussion of City of Anaheim: “Normally, only our court, sitting en banc, may overrule
our precedent . . . .” The panel also, perhaps, hinted at the possibility of Supreme Court review, as the panel aligned itself with the Eleventh Circuit’s BellSouth decision and parting ways with the D.C. Circuit’s
in Bell Atlantic.