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Wednesday, February 25, 2009

Supreme Court Reverses 9th Circuit, Rules "Price Squeezing" Not An Antitrust Violation

The Supreme Court has reversed a 9th Circuit decision and found unanimously for AT&T (Pacific Bell Telephone) in Pacific Bell Telephone v. Linkline. Writing for the Court, Chief Justice Roberts held,

The plaintiffs in this case, respondents here, allege that a competitor subjected them to a "price squeeze" in violation of § 2 of the Sherman Act. They assert that such a claim can arise when a vertically integrated firm sells inputs at wholesale and also sells finished goods or services at retail. If that firm has power in the wholesale market, it can simultaneously raise the wholesale price of inputs and cut the retail price of the finished good. This will have the effect of "squeezing" the profit margins of any competitors in the retail market. Those firms will have to pay more for the inputs they need; at the same time, they will have to cut their retail prices to match the other firm's prices. The question before us is whether such a price-squeeze claim may be brought under § 2 of the Sherman Act when the defendant is under no antitrust obligation to sell the inputs to the plaintiff in the first place. We hold that no such claim may be brought.

...

1. A straightforward application of our recent decision in Trinko forecloses any challenge to AT&T's wholesale prices. In Trinko, Verizon was required by statute to lease its network elements to competing firms at wholesale rates.... The plaintiff -- a customer of one of Verizon's rivals -- asserted that Verizon denied its competitors access to interconnection support services, making it difficult for those competitors to fill their customers' orders. ...The complaint alleged that this conduct in the upstream market violated § 2 of the Sherman Act by impeding the ability  of independent carriers to compete in the downstream market for local telephone service. Ibid.

We held that the plaintiff's claims were not actionable under § 2. Given that Verizon had no antitrust duty to deal with its rivals at all, we concluded that "Verizon's alleged insufficient assistance in the provision of service to rivals" did not violate the Sherman Act. ... Trinko thus makes clear 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.

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. See supra, at 8. There is no meaningful distinction between the "insufficient assistance" claims we rejected in Trinko and the plaintiffs' price-squeeze claims in the instant case. The Trinko plaintiffs challenged the quality of Verizon's interconnection service, while this case involves a challenge to AT&T's pricing structure. But for antitrust purposes, there is no reason to distinguish between price and nonprice components of  [*22] a transaction....The nub of the complaint in both Trinko and this case is identical -- the plaintiffs alleged that the defendants (upstream monopolists) abused their power in the wholesale market to prevent rival firms from competing effectively in the retail market. Trinko holds that such claims are not cognizable under the Sherman Act in the absence of an antitrust duty to deal.

The District Court and the Court of Appeals did not regard Trinko as controlling because that case did not directly address price-squeeze claims.... This is technically true, but the reasoning of Trinko applies with equal force to price-squeeze claims. AT&T could have squeezed its competitors' profits just as effectively by providing poor-quality interconnection service to the plaintiffs, as Verizon allegedly did in Trinko. But a firm with no duty to deal in the wholesale market has no obligation to deal under terms and conditions favorable to its competitors. If AT&T had simply stopped providing DSL transport service to the plaintiffs, it would not have run afoul of the Sherman Act. Under these circumstances, AT&T was not required to offer this service at the wholesale prices the plaintiffs would have preferred.

2. The other component of a price-squeeze claim is the assertion that the defendant's retail prices are "too low." Here too plaintiffs' claims find no support in our existing antitrust doctrine.

"[C]utting prices in order to increase business often is the very essence of competition." ... In cases seeking to impose antitrust liability for prices that are too low, mistaken inferences are "especially costly, because they chill the very conduct the antitrust laws are designed to protect." ...To avoid chilling aggressive price competition, we have carefully limited the circumstances under which plaintiffs can state a Sherman Act claim by alleging that prices are too low. Specifically, to prevail on a predatory pricing claim, a plaintiff must demonstrate that: (1) "the prices complained of are below an appropriate measure of its rival's costs"; and (2) there is a "dangerous probability" that the defendant will be able to recoup its "investment" in below-cost prices....

In the complaint at issue in this interlocutory appeal, App. 10-24, there is no allegation that AT&T's conduct met either of the Brooke Group requirements. Recognizing a price-squeeze claim where the defendant's retail price remains above cost would invite the precise harm we sought to avoid in Brooke Group: Firms might raise their retail prices or refrain from aggressive price competition to avoid potential antitrust liability. ...

3. Plaintiffs' price-squeeze claim, looking to the relation between retail and wholesale prices, is thus nothing more than an amalgamation of a meritless claim at the retail level and a meritless claim at the wholesale level. 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' profit margins.

...

1. Institutional concerns also counsel against recognition of such claims. We have repeatedly emphasized the importance of clear rules in antitrust law. Courts are ill suited "to act as central planners, identifying the proper price, quantity, and other terms of dealing." ...
It is difficult enough for courts to identify and remedy an alleged anticompetitive practice at one level, such as predatory pricing in retail markets or a violation of the duty-to-deal doctrine at the wholesale level. ...Recognizing price-squeeze claims would require courts simultaneously to police both the wholesale and retail prices to ensure that rival firms are not being squeezed. And courts would be aiming at a moving target, since it is the interaction between these two prices that may result in a squeeze.

Perhaps most troubling, firms that seek to avoid price-squeeze liability will have no safe harbor for their pricing practices....At least in the predatory pricing context, firms know they will not incur liability as long as their retail prices are above cost....

The most commonly articulated standard for price squeezes is that the defendant must leave its rivals a "fair" or "adequate" margin between the wholesale price and the retail price.

...

2. Amici assert that there are circumstances in which price squeezes may harm competition. For example, they assert that price squeezes may raise entry barriers that fortify the upstream monopolist's position; they also contend that price squeezes may impair nonprice competition and innovation in the downstream market by driving independent firms out of business. ...

The problem, however, is that amici have not identified any independent competitive harm caused by price squeezes above and beyond the harm that would result from a duty-to-deal violation at the wholesale level or predatory pricing at the retail level. ... To the extent a monopolist violates one of these doctrines, the plaintiffs have a remedy under existing law. We do not need to endorse a new theory of liability to prevent such harm.

...

Lastly, as mentioned above, plaintiffs have asked us for leave to amend their complaint to bring a Brooke Group predatory pricing claim. We need not decide whether leave to amend should be granted. Our grant of certiorari was limited to the question whether price-squeeze claims are cognizable in the absence of an antitrust duty to deal. The Court of Appeals addressed only AT&T's motion for judgment on the pleadings on the plaintiffs' original complaint.  For the reasons stated, we hold that the price-squeeze claims set forth in that complaint are not cognizable under the Sherman Act.

The case is Pacific Bell v. Linkline, 07-512.

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