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19 February 2004
On January 13 2004 the Supreme Court ruled that Verizon Communications' breach of a duty to share its local telephone network with its competitors as required by the Telecommunications Act 1996 does not support a claim for liability under Section 2 of the Sherman Act.(1) The decision provides guidance on many previously unresolved questions concerning the scope of Section 2. It raises the bar for plaintiffs seeking redress for alleged refusals to deal by regulated monopolies such as telecommunications firms and natural gas or electric utilities. The Trinko decision appears to circumscribe significantly the extent to which firms that enjoy lawful monopolies may be required to cooperate with rivals. It also casts grave doubt on the viability of the 'essential facilities' doctrine and eliminates the possibility that plaintiffs can bring a claim of monopoly leveraging without proof of monopolization or attempted monopolization in a second market.
In recent years many legal monopolists, especially those subject to statutory deregulation, have been contending with lawsuits brought by rivals or customers under Section 2 of the Sherman Act. Plaintiffs have sought treble damage awards based on claims of impeded access to 'bottleneck' facilities, refusals to introduce innovations that might ease entry by competitors or aggressive commercial strategies aimed primarily at excluding rivals from the competitive arena. The Supreme Court has now declared that some such claims may be beyond the "the outer boundary of Section 2 liability".(2) Plaintiffs now may need to present strong evidence of intent - such as evidence that the monopolist sacrificed short-term profits in order to eliminate or harm a competitor - to support a Section 2 claim.
The underlying dispute in Trinko involves Section 2 claims arising from conduct by Verizon Communications, Inc toward AT&T that allegedly violated the Telecommunications Act. Verizon and AT&T entered into an interconnection agreement whereby Verizon supplied phone service at a discounted rate to AT&T for resale. Shortly after entering the agreement, AT&T began complaining to regulatory authorities regarding lost and delayed customer orders. Verizon eventually signed a consent decree with the Federal Communications Commission settling the charges. A day after the settlement, local phone service customers served by AT&T through Verizon brought a class action against Verizon, alleging that Verizon used its monopoly power in the local phone market so that AT&T's customers were injured when they were unable to obtain satisfactory local phone service from AT&T.
The district court dismissed the Section 2 claims, finding that the Sherman Act does not impose a general duty on monopolists to cooperate with their competitors. The Second Circuit reversed and held that the plaintiffs' complaint supported an antitrust claim under two different theories of monopoly conduct: (i) a denial of access to essential facilities, and (ii) monopoly leveraging.(3)
Section 2 of the Sherman Act prohibits monopolization and requires (i) the possession of monopoly power, and (ii) the wilful acquisition or maintenance of that power. Claims of attempted monopolization add a requirement of a dangerous probability of successful monopolization. The essential facilities doctrine is based on the principle that access to certain bottleneck assets owned or controlled by a monopolist may be required if the access is essential for other firms to compete with the monopolist in another downstream market.
Monopoly leveraging is a theory of anti-competitive behaviour that occurs when a monopolist seeks to extend its monopoly power in one market to obtain a monopoly in another market. Most circuits require that the defendant's attempt to monopolize have a dangerous probability of success. Until now, the Second Circuit's leveraging test merely required the monopolist to use its monopoly power as a lever to achieve an unfair competitive advantage in another distinct market.
The court noted at the outset that duties created by Congress with the intent to spur competition in a particular industry are not necessarily enforceable under the antitrust laws. The court instead suggested that detailed regulatory schemes like the Telecommunications Act might very well preclude antitrust scrutiny altogether under the implied immunity doctrine in the absence of a 'savings clause' such as that included in the Telecommunications Act, which preserves claims "that satisfy existing antitrust standards". However, the court added that while the savings clause preserves claims that meet traditional antitrust standards, it does not create new antitrust duties.
The court explained that Section 2 of the Sherman Act was designed to thwart attempts by entities to abuse monopoly power to acquire or maintain a monopoly. Section 2 does not prohibit the acquisition of a monopoly position resulting from "a superior product, business acumen or historical accident". Such an interpretation would be antithetical to the principles of antitrust law by stifling the innovation and economic growth that are the goals of a free market system.
Writing for the court, Justice Scalia emphasized that Section 2 requires both monopoly power and anti-competitive conduct. Thus, he explained, Section 2 does not ordinarily require a firm (even a monopolist) to deal with another, noting that compelling a firm with monopoly power to share its infrastructure with a competitor is "in some tension with the underlying purpose of antitrust law", because it lessens the incentive of the monopolist to create these superior facilities. Thus, exceptions to the right to refuse to deal with its competitors are rarely recognized. However, the court noted that the right of refusal to deal is not unqualified.
The Court cited Aspen Skiing as the leading case requiring a firm to cooperate with a rival. In that case the defendant owned a dominant position in the local downhill skiing market and refused to continue a practice in which the plaintiff's ski area and the defendant's three facilities offered a daily pass to all four mountains. The defendant refused even to sell passes to the plaintiff at retail to continue the all-mountain pass. The Aspen court concluded that the defendant had forgone short-term profits in order to eliminate its competitor in violation of Section 2.
The Trinko court distinguished Aspen, noting that the defendant in Aspen had voluntarily forsaken revenue from the plaintiff at prices charged to the general public in hopes of charging monopoly prices in the future - thus sacrificing short-term profit for long-term gains. Unlike Aspen, the Trinko court noted that Verizon's reluctance to deal with its competitors at great expense did not necessarily imply a similar motive. Although the court did not expressly adopt this 'sacrifice test' as necessary to prove anti-competitive animus,(4) it signalled that such a showing would be sufficient. It also indicated that at the very least, Section 2 claims must be supported by substantial evidence of anti-competitive intent.
The court further distinguished Aspen, noting that the defendant in
Aspen refused to sell a service already available to consumers, whereas
Verizon was compelled to supply its infrastructure to rivals - not consumers
- and that the Telecommunications Act required that Verizon install a new system at great
expense, which ultimately failed to provide the level of service required by
the Telecommunications Act. The court held that Verizon's insufficient provision of service
to its rivals under these circumstances did not support an antitrust claim under
the court's refusal-to-deal precedents.
In passing, the court added that the holding would not be changed under the essential facilities doctrine because, unlike the Trinko facts, the doctrine requires a lack of access to the facilities in question. In this case a federal agency had the power to compel access to Verizon's facilities and thus the "indispensable requirement" of unavailability of access could not be met. However, the court refused either to recognize or to repudiate the essential facilities doctrine. Rather, it indicated that "essential facility claims should be denied where a state or federal agency has effective power to compel sharing and to regulate its scope and terms".
The court also addressed the Second Circuit's monopoly leveraging theory, which defines 'monopoly leveraging' as use of monopoly power in one market to "gain competitive advantage in another".(5) The majority rule in other circuits requires that the monopolist use its monopoly power in one market to monopolize or dangerously threaten to monopolize another market. The court explained that the Second Circuit erred when it dispensed with the requirement that there be a dangerous probability of success in monopolizing a second market.
The court concluded its opinion with a discussion of the costs and benefits of applying antitrust principles concomitant with regulatory structures designed to address anti-competitive conduct in a particular industry. The court noted that the application of antitrust law to heavily regulated industries may add little to a regulatory scheme designed to police anti-competitive conduct. Thus, the danger that courts may inadvertently punish, and therefore deter, pro-competitive conduct ('false positives') outweighs any added benefit of additional antitrust scrutiny. The court cited the Telecommunications Act's provision for oversight responsibility by the Federal Communications Commission and state public service commissions, as well as their considerable authority to impose penalties for non-compliance, as adequate safeguards against anti-competitive conduct. Further, it observed that courts are ill equipped to monitor day-to-day compliance with regulatory schemes such as the Telecommunications Act, and thus should generally defer to their oversight.
In his concurring opinion, Justice Stevens, joined by Justices Souter and Thomas, suggested that the court should not have addressed the merits of the case because the plaintiffs lacked standing to assert the Section 2 claim. The concurrence rejected the Second Circuit ruling that the plaintiffs suffered injuries distinct from those suffered by AT&T, and therefore had standing to assert claims for treble damages under Section 4 of the Clayton Act. The concurrence noted that the plaintiffs' alleged injuries were derivative of those suffered by AT&T, Verizon's competitor, explaining that Section 4 limits treble damages claims to those directly injured by the defendant's conduct in order to prevent double recoveries or complex apportionment issues. Stevens reasoned that AT&T, as the injured party, was in a "better position...to vindicate the public interest in enforcement of the antitrust laws". The majority opinion did not explicitly disagree with this position, but noted that it was unnecessary to address the standing issue because the plaintiff's allegations did not support an antitrust claim.
Congressional reaction to the Trinko decision was mixed. House Judiciary
Committee Chairman Sensenbrenner vowed to "develop legislative responses
problems that may arise as a result of [the] decision". He added that the
ruling "will be perceived as giving a green light to all manner of anti-competitive
behaviour" by the regional Bell telephone companies. John Conyers was
"disheartened" by the ruling, calling it "a serious blow to competition
in the telecommunications industry". He called for bipartisan legislation
to address the "Supreme Court's serious blunder". Others, including
House Energy and Commerce Chairman Tauzin, praised the ruling, claiming such
frivolous lawsuits have delayed full implementation of the Telecommunications Act. It remains
to be seen whether Congress will try to overturn Trinko; but it is clear
that the decision has changed the antitrust landscape.
For further information on this topic please contact Janet L McDavid or Mary Anne Mason or David J Michnal at Hogan & Hartson LLP by telephone (+1 202 637 5600) or by fax (+1 202 637 5910) or by email (firstname.lastname@example.org or email@example.com or firstname.lastname@example.org).
(4) See Brief for the United States and the Federal Trade Commission as Amici Curiae at 10 (Verizon Communications Inc v Law Offices of Curtis V Trinko, LLP, US, (2004) (02-682). The United States argued that the predatory or exclusionary conduct required by Section 2 "normally involves the sacrifice of short-term profits or goodwill in order to maintain or obtain long-term monopoly power". Id.
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Mary Anne Mason