Thursday, February 26, 2009

Supreme Court Further Limits Antitrust Remedies for Carrier Pricing Complaints

By a unanimous ruling, the Supreme Court has further reduced the opportunity for a carrier competitor of an incumbent to seek an FCC or judicial remedy to pricing strategies arguably designed to eliminate competition by offering wholesale prices below that charged to competitors for similar services. [1] In 2003 several Internet Service Providers (“ISPs”) filed suit against Pacific Bell Telephone Co., contending that this incumbent carrier attempted to monopolized the market for Digital Subscriber Link (“DSL”) broadband Internet access by creating a price squeeze with ISP competitors obligated to pay a higher wholesale price than what Pacific Bell offered on a retail basis.

Both the District Court and the Ninth Circuit Court of Appeals agreed that the ISPs could present their price squeeze claim, despite the Supreme Court Ruling in Verizon Communications, Inc. v. Law Office of Curtis V. Trinko, LLP, 540 U.S. 398 (2004) that limits antitrust claims against common carrier, telecommunications service providers and further restricts what remedies a court can provide in lieu of what rights the Telecommunications Act of 1996 provides market entrants.

The Court assumed that Pacific Bell had no antitrust duty to deal with any ISPs based on the FCC’s premise that ample facilities-based competition exists. [2] Curiously, Court does not mention that Pacific Bell could avoid a unilateral duty to deal with ISPs based on the FCC’s classification that DSL and presumably its component parts constitute information services and not common carrier-provided telecommunications services.

But for a voluntary concession to secure the FCC’s approval of AT&T’s acquisition of BellSouth the Court noted that Pacific Bell would not even have a duty to provide ISPs with wholesale service. The Court granted certiori to resolve the question whether ISP plaintiffs can bring a price-squeeze claim under Section 2 of the Sherman Act when the defendant carrier has no antitrust-mandated duty to deal with the plaintiffs. The lower courts concluded that the Trinko precedent did not bar such a claim, but the Supreme Court reversed this holding.

On procedural grounds, the Court’s decision chided the ISP plaintiffs for changing the nature of their claim from a price squeeze to one characterizing Pacific Bell’s tactics as predatory pricing. On substantive grounds, the Court noted that a new emphasis on predatory pricing would have require determination whether the retail price was set below cost, [3] a claim the ISPs did not make.

The Court determined that the case did not become moot, because of the change in economic and antitrust arguments. However the decision evidences great skepticism whether the ISPs have any basis for a claim, because in the Court’s reasoning the ISPs failed to make a claim that Pacific Bell’s retail DSL prices were predatory, and the ISPs also failed to refute the Court’s conclusion that Pacific Bell had no duty to deal with the ISPs, i.e., to provide wholesale service. [4]

The Court apparently can ignore the voluntary concession AT&T made that created a duty to deal, because that concession may trigger FCC oversight, but it does not change whether an antitrust duty to deal arises. The Court reads the Trinko case as foreclosing any antitrust claim if no antitrust duty to deal exists. [5]

The Court remanded the case to the District Court to determine whether the ISP plaintiffs have any viable predatory pricing claim. The Court expressed the need for clear antitrust rules and apparently views consumer access to low retail prices—predatory or not—as sufficient reason for courts to refrain from intervening. Remarkably, the Court does not seem troubled even if all ISPs competitors exited the market, an event that surely would the surviving incumbent carrier to raise rates:

For if AT&T can bankrupt the 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. [6]

This case evidences a strong reluctance on the part of the Supreme Court to approve of any sort of judicial review over the pricing strategies of carriers. Presumably the plaintiffs could have petitioned the FCC to review the wholesale prices, but the Commission might just as well have claimed that even the sub-elements of DSL service constitute information services not subject to Title II pricing and nondiscrimination requirements.

[1] Pacific Bell Telephone Co., v. Linkline Communications, Inc., slip op. 555 U.S. ___
(rel. Feb. 25, 1009); available at:

[2] “DSL now faces robust competition from cable companies and wireless and satellite services.” Id. at 2; see also, id. at 8, n.2.
[3] The Court referenced Brook Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993) that supports the inference that a predatory pricing claim can be established only with proof of below cost pricing coupled with evidence that the defendant can subsequently recoup any lost profits. Id. at 4.

[4] “The challenge here focuses on retail prices—where there is no predatory pricing—and terms of dealing where there is no duty to deal.” Id. at 8. “If there is no duty to deal at the wholesale level and no predatory pricing at the retail level, then a firm is certainly not required to price both of these services in a manner that preserves its rivals’ margins.” Id. at 12.

[5] “In this case, as in Trinko, the defendant has no antitrust duty to deal with its rivals at wholesale; any such duty arises only from FCC regulations, not from the Sherman Act.” Id. at 9.

[6] Id. at 16-17.