Antitrust -- 2009



Pacific Bell Tel. Co. v. linkLine Communications, Inc.   (U.S. Supreme Court)

Revival of "price squeeze doctrine" by Ninth Circuit

On Nov. 15, the NAM and Verizon Communications Inc. filed an amicus brief urging the Supreme Court to review a Ninth Circuit decision that affirms the “price squeeze doctrine” of antitrust law. This doctrine is recognized when companies that sell at both wholesale and retail levels, and have large wholesale market shares, set their retail prices too low for their wholesale customers to stay in business. However, this doctrine is an exception to consumers-first antitrust law, which has generally held that low prices anywhere are good for consumers and that if a less efficient competitor cannot keep up, courts need not intervene to fix the problem.

In this case, linkLine Communications, an internet service provider (ISP), bought DSL transport services from SBC, combined them with ISP services and sold the package to subscribers. SBC (Pacific Bell) does the same thing for its internet access customers, but for a price with which linkLine had an increasingly difficult time competing. Thus, because it could not compete, linkLine sought a remedy in antitrust litigation.

Our brief argued that the allegation that a vertically-integrated monopolist’s wholesale and retail prices create a “price squeeze,” at least where the monopolist has no antitrust duty to deal, fails to state a claim under Section 2 of the Sherman Act.

First, we argued that the Ninth Circuit’s ruling conflicts with four other Circuit Court decisions, which expressly held that a dominant firm does not violate Section 2 by failing to sell goods to a competitor at a wholesale price that ensures that competitor makes a profit at the retail level.

Next, we asserted that the Ninth Circuit’s ruling conflicts with the Supreme Court’s precedents and is inconsistent with settled antitrust principles. For example, in Brooke Group, the Supreme Court ruled that a price discount is not predatory unless it is below cost and poses a dangerous risk of subsequent monopoly pricing. The same rule should be applied here, since a “price squeeze” typically reflects the decision of a vertically-integrated firm to voluntarily offer a good to a competitor at wholesale and to compete vigorously over price at retail, both of which are beneficial practices that should be encouraged.

Finally, we argued that the Ninth Circuit’s rule creates uncertainty where clarity is needed. Unlike the objective test adopted in Brooke Group to determine when price is used as a predatory weapon to ensure the application of the law in a predictable manner, the Ninth Circuit’s decision forces juries, antitrust counselors, and managers to decide what wholesale and retail prices leave a rival with the opportunity to secure a “reasonable” profit.

On Sept. 4, the NAM and Verizon filed another amicus brief on the merits in this case. Our brief argued that a price-squeeze theory of antitrust liability should be rejected categorically because the potential competitive gain from recognizing a price-squeeze inquiry is hard and costly to identify, particularly for courts, and worse, any price-squeeze duty would present grave risks of deterring conduct encouraged by the antitrust laws. In addition, from a policy perspective, expanding Section 2 to recognize price-squeeze claims is particularly inadvisable when a regulatory authority like the FCC already oversees the conduct. Even without regulation at the retail level, regulatory authority at the upstream-input level can readily address any true competition issues.

Additionally, we argued that regulators are better positioned than judges or juries in antitrust cases to make the inherently uncertain determinations about pricing and the effects on investment and innovation that are necessary in a price-squeeze analysis.

On February 25, 2009, the Court rejected the price-squeeze theory of antitrust liability. As a result, a company operating at both the wholesale and retail levels need not price its products or services in a way that preserves the profit margins of companies that buy from it and sell at retail in competition with it. This is true as long as the seller has no duty to sell to competitors at the wholesale level and is not engaging in predatory pricing at the retail level. Indeed, selling at a lower retail price is the essence of competition, according to Chief Justice Roberts, author of the opinion. The case was sent back to determine whether there might be a predatory pricing claim that satisfies the specific pleading requirements of the 2007 Twombly decision.


Related Documents:
NAM brief  (September 4, 2008)