Abolishing the price squeeze as a theory of antitrust liability

Journal of Competition Law and Economics

Volumn 4, Issue 2, 2008, Pages 279-309

  Sidak, J Gregory ^a  

^a International Institute for Competition Law and Economics (IICLE)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 50349084850     PISSN: 17446414     EISSN: 17446422     Source Type: Journal    
DOI: 10.1093/joclec/nhn018     Document Type: Article

References (124)

1. See Nicholas Economides & Ioannis Lianos, The Elusive Antitrust Standard on Bundling in Europe and in the United States at the Aftermath of the Microsoft Cases, 75 ANTITRUST L.J. (forthcoming 2008).
2. 15 U.S.C. §2.
3. See Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 415 n.4 (2004) [hereinafter Trinko (labeling a claim "monopoly leveraging" does not dispense with the requirement that the plaintiff demonstrate a "dangerous probability of success" in monopolizing a second market).
4. Although Article 82 of the EC Treaty may be characterized as the European Union's equivalent to section 2 of the Sherman Act, it penalizes the "abuse of dominance" rather than illegal acquisition or maintenance of monopoly power. Article 82 begins with a single sentence stating the concept: "Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market insofar as it may affect trade between Member States." It continues: "Such abuse may, in particular, consist in...directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions..." Id. This article does not discuss the viability of the price-squeeze theory of liability under the "abuse of dominance" doctrine under Article 82.
5. Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993).
6. United States v. Aluminum Co. of Am., 148 F.2d 416 (2d Cir. 1945) [hereinafter Alcoa].
7. Id. at 437-48.
8. Pacific Bell Tel. Co. v. linkLine Commc'ns, Inc., 127 S. Ct. 1137 (2008) (invitation for the Solicitor General to file a brief amicus curiae on behalf of the United States regarding the grant of a writ of certiorari).
9. The defendants are usually subsidiaries of AT&T, Verizon, or companies acquired by AT&T or Verizon after the suit was brought. For example, the defendants in linkLine are AT&T subsidiaries.
10. For the purposes of this article, the ILEC and its affiliates, including its ISP affiliate, collectively will be referred to as the "ILEC," although they may be legally separate entities.
11. 127 S. Ct. 1955 (2007). The Court observed that, "it is one thing to be cautious before dismissing an antitrust complaint in advance of discovery, but quite another to forget that proceeding to antitrust discovery can be expensive." Id. at 1966. Notwithstanding its ruling in linkLine in September 2007, the Ninth Circuit, citing Twombly, said in March 2008 that "discovery in antitrust cases frequently causes substantial expenditures and gives the plaintiff the opportunity to extort large settlements even where he does not have much of a case." Kendall v. VISA U.S.A., Inc., 518 F.3d 1042, 1047 (9th Cir. 2008).
12. See Review of Regulatory Requirements for Incumbent LEC Broadband Telecomm. Servs., 17 F.C.C.R. 27,000 8 (2002).
13. The Supreme Court's discussion of affirmative duties to deal in Aspen Skiing arose in the context of a prior voluntary course of dealing. The Court wrote: "In the actual case that we must decide, the monopolist did not merely reject a novel offer to participate in a cooperative venture that had been proposed by a competitor. Rather, the monopolist elected to make an important change in a pattern of distribution that had originated in a competitive market and had persisted for several years." Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 604 (1985).
14. 398 F.3d 666 (D.C. Cir. 2005).
15. Id. at 673.
16. Id. (quoting 3A PHILLIP E. AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW 767c3, at 129-30 (2d ed. 2002)).
17. 330 F.3d 176 (4th Cir. 2003).
18. 540 U.S. 398 (2004).
19. 330 F.3d at 190.
20. 374 F.3d 1044 (11th Cir. 2004).
21. Id. at 1050.
22. Id.
23. Brooke Group 509 U.S. at 224.
24. 503 F.3d 876 (9th Cir. 2007). Although the case has multiple plaintiffs and defendants, for ease of exposition I will simplify the facts to concern a dispute between linkLine and SBC.
25. Id. at 884-85.
26. The district court construed linkLine's original complaint as alleging three different forms of anticompetitive conduct: A refusal to deal, a denial of access to an essential facility, and a price squeeze. Id. at 878-79. The court dismissed the refusal to deal and denial of access to an essential facility allegations as barred by Trinko, and ordered linkLine to file an amended complaint limited to the price-squeeze claim. Id.
27. LinkLine Commc'ns, Inc. v. SBC Cal., Inc., No. 03-5265, at 6 (C.D. Cal. Apr. 1, 2005) (order granting SBC's motion to strike and certifying order for interlocutory appeal and denying SBC's motion to dismiss).
28. Id.
29. Id. at 6-7.
30. Id. at 7.
31. Id.
32. Id. at 8-9. To set up its price-squeeze theory, linkLine postulated the existence of a retail DSL market in which retail cable modem ISP service is not considered a substitute for retail DSL ISP service.
33. Id. at 8.
34. Id. at 9.
35. Id.
36. Id. at 10.
37. Id. at 9.
38. Id.
39. Id. at 11.
40. Id. at 12.
41. linkLine Commc'ns, Inc. v. SBC Cal., Inc., CV 03-5265 SVW, at 12 (C.D. Cal. April 1, 2005) (order granting SBC's motion to strike and certifying order for interlocutory appeal and denying SBC's motion to dismiss).
42. Id. at 15 (citing Covad Commc'ns Co. v. BellSouth Corp., 374 F.3d 1044, 1050 (11th Cir. 2004)).
43. Id.
44. Id. at 20.
45. Id. at 26.
46. Id. at 26-28.
47. Id. at 28.
48. Id. at 29.
49. Id. at 30.
50. Covad Commc'ns Co. v. Bell Atl. Corp., 398 F.3d 666, 673 (D.C. Cir. 2005).
51. LinkLine Commc'ns, Inc. v. Cal., Inc., 503 F.3d 876, 880 (9th Cir. 2007).
52. 955 F.2d 1373 (9th Cir. 1992).
53. 503 F.3d at 880-81 (quoting City of Anaheim, 955 F.2d at 1377).
54. Id. at 882. Apart from the question of whether such reasoning in City of Anaheim survives Trinko, the separate question arises of whether that reasoning had already been overruled by the Supreme Court's analysis in NYNEX Corp. v. Discon, Inc., 525 U.S. 128 (1998). There, a downstream competitor alleged a per se unlawful boycott by a regulated telephone company, New York Telephone, which chose to buy certain services at allegedly inflated prices from its own downstream affiliate. Unobservant regulators allegedly permitted New York Telephone to recover the padded costs from ratepayers. Justice Breyer, writing for a unanimous Court, rejected the proposition that "hoodwinking regulators," id. at 132, stated an antitrust cause of action: We concede Discon's claim that [New York Telephone's] behavior hurt consumers by raising telephone service rates. But that consumer injury naturally flowed not so much from a less competitive market for removal services [for obsolete telephone equipment, supplied by New York Telephone's affiliate], as from the exercise of market power that is lawfully in the hands of a monopolist, namely, New York Telephone, combined with a deception worked upon the regulatory agency that prevented the agency from controlling New York Telephone's exercise of its monopoly power. To apply the per se rule here-where the buyer's decision, though not made for competitive reasons, composes part of a regulatory fraud-would transform cases involving business behavior that is improper for various reasons, say, cases involving nepotism or personal pique, into treble-damages antitrust cases. And that per se rule would discourage firms from changing suppliers-even where the competitive process itself does not suffer harm. Id. at 129 (emphasis in original). Justice Breyer stressed that Discon had the burden of "alleg[ing] and prov[ing] harm, not just to a single competitor, but to the competitive process, i.e., to competition itself." Id. at 135. Remarkably, the Ninth Circuit's decision in linkLine contains no mention of Discon whatsoever.
55. linkLine, 503 F.3d at 882-83. In the district court, SBC had argued that Trinko held that its reasoning preserved only "well established" antitrust claims, rather than merely existing claims, and that because price-squeeze claims are no more well established than are refusal-to-deal claims, Trinko's preservation of antitrust claims does not apply to price squeezes. LinkLine Commc'ns, Inc. v. SBC Cal., Inc., CV 03-5265 SVW, at 31 (C.D. Cal. April 1, 2005) (order granting SBC's motion to strike and certifying order for interlocutory appeal and denying SBC's motion to dismiss). The Ninth Circuit used City of Anaheim in linkLine to justify a "hoodwinking regulators" rationale for antitrust liability of the sort that the Supreme Court rejected in Discon. 525 U.S. at 132. Discon preceded Trinko by six years. It was therefore incongruous for the Ninth Circuit to characterize the reasoning of City of Anaheim as "well established" when the Supreme Court decided Trinko in 2004.
56. Id. at 883 (quoting Trinko, 540 U.S. at 412).
57. Id. at 883-84.
58. Id. at 885.
59. Id.
60. Id.
61. Id. at 886.
62. Id. at 885.
63. Id.
64. Id. at 885-86.
65. Id. at 886.
66. Id. at 887.
67. Verizon Commc'ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004)
68. Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., 127 S. Ct. 1069 (2007)
69. Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993)
70. NYNEX Corp. v. Discon, Inc., 525 U.S. 128 (1998).
71. linkLine Commc'ns Inc. v. Pac. Bell Tel. Co., 503 F.3d 876, 885 (9th Cir. 2007) (Gould, J., dissenting).
72. See Robert W. Crandall & Hal J. Singer, Life Support for Unaffiliated ISPs?, REGULATION, Fall 2005, at 46. Some, on both sides of the Atlantic, may argue that Europe is moving closer to a consumer-welfare model. One might say that, given the stage of development of European competition law, addressing as it does many industries that have been dominated by state-owned or state-granted monopolies, an emphasis at the level of the European Commission on abuse of dominance-as opposed to consumer welfare-has been an expedient, perhaps necessary, means to break down the barriers resulting from member-state competition laws that insulate favored national players that exploit their dominant positions. So, one might argue, as European competition law progresses, an interpretation of abuse of dominance to protect competitors will give way to an American-style interpretation of abuse of dominance to protect consumers. This argument would be more persuasive if the notable targets of recent EC abuse-of-dominance cases were not American multinational corporations doing business in Europe.
73. See, e.g., WILLIAM J. BAUMOL & J. GREGORY SIDAK, TOWARD COMPETITION IN LOCAL TELEPHONY (MIT Press 1994)
74. William J. Baumol & J. Gregory Sidak, The Pricing of Inputs Sold to Competitors, 11 YALE J. ON REG. 171 (1994)
75. William J. Baumol & J. Gregory Sidak, The Pricing of Inputs Sold to Competitors: Rejoinder and Epilogue, 12 YALE J. ON REG. 177 (1995)
76. Jerry A. Hausman & Timothy J. Tardiff, Efficient Local Exchange Competition, 40 ANTITRUST BULL. 529 (1995).
77. Town of Concord v. Boston Ed. Co., 915 F.2d 17, 25 (1st Cir. 1990).
78. United States v. AT&T Corp., 552 F. Supp. 131 (D.D.C. 1982), aff 'd sub nom. Maryland v. United States, 460 U.S. 1001 (1983).
79. See Trinko, 540 U.S. at 412-16.
80. See Deutsche Telekom AG v. Commission, Case T-271/03, Judgment of the Court of First Instance (April 10, 2008).
81. For legal and economic analyses of other recent European price-squeeze cases, see Michele Polo, Price Squeeze: Lessons from the Telecom Italia Case, 3 J. COMPETITION L. & ECON. 453 (2007)
82. Laura Ferrari Bravo & Paolo Siciliani, Exclusionary Pricing and Consumer Harm: The European Commission's Practice in the DSL Market, 3 J. COMPETITION L. & ECON. 243 (2007)
83. Damien Geradin & Robert O'Donoghue, The Concurrent Application of Competition Law and Regulation: The Case of Margin Squeeze Abuses in the Telecommunications Sector, 1 J. COMPETITION L. & ECON. 355 (2005)
84. Pietro Crocioni & Cento Veljanovski, Price Squeezes, Foreclosure and Competition Law: Principles and Guidelines, 4 J. NETWORK INDUS. 28 (2003).
85. Dennis Carlton observes that, "just as in the case of predatory pricing, any sensible price squeeze theory must use the costs of an efficient firm in applying the financial viability test." See Dennis W. Carlton, Should "Price Squeeze" Be a Recognized Form of Anticompetitive Conduct?, 4 J. COMPETITION L. & ECON. 271 (2008).
86. A separate question is whether it is a violation of the separation of powers for a court to regulate prices through its administration of a consent decree, because ratemaking is considered a legislative function. See Farrell Malone & J. Gregory Sidak, Should Antitrust Consent Decrees Regulate Post-Merger Pricing?, 3 J. COMPETITION L. & ECON. 471 (2007).
87. Dennis Carlton observes that another perverse alternative available to the vertically integrated monopolist-whether it is regulated or unregulated-seeking to avoid price-squeeze liability is to exit the downstream market: Where there is a duty to deal under the antitrust laws, application of the theory is likely to create incentives for inefficiency as firms either raise price or cease production to avoid liability. Where there is no duty to deal under the antitrust laws, application of the theory is likely to lead to withdrawal of goods from the market to the detriment of consumers as firms cease dealing with each other in order not to trigger liability.
88. Carlton, Should "Price Squeeze" Be a Recognized Form of Anticompetitive Conduct?, supra note 74, at 278 (emphasis added). However, exit is not so simple for a regulated firm. The firm often has an "obligation to serve" as a matter of state public utility law and thus faces a statutory or regulatory barrier to exit.
89. See J. GREGORY SIDAK & DANIEL F. SPULBER, DEREGULATORY TAKINGS AND THE REGULATORY CONTRACT: THE COMPETITIVE TRANSFORMATION OF NETWORK INDUSTRIES IN THE UNITED STATES (1997).
90. 525 U.S. 366 (1999).
91. Id. at 392, 399-400, 416-18.
92. See Jerry A. Hausman & J. Gregory Sidak, A Consumer-Welfare Approach to Mandatory Unbundling of Telecommunications Networks, 109 YALE L.J. 417 (1999).
93. Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985).
94. See Carlton, Should "Price Squeeze" Be a Recognized Form of Anticompetitive Conduct?, supra note 74, at 275.
95. Gerald R. Faulhaber, Cross-Subsidization: Pricing in Public Enterprise, 65 AM. ECON. REV. 966 (1975). For a 30-year retrospective on the acceptance and application of Faulhaber's cross-subsidization analysis by regulators, see Gerald R. Faulhaber, Cross-Subsidy Analysis with More Than Two Services, 2 J. COMPETITION L. & ECON. 441 (2005).
96. Frank Ramsey, A Contribution to the Theory of Taxation, 37 ECON. J. 47 (1927).
97. The relevance of Ramsey's seminal article to public utility pricing was first enunciated in Marcel Boiteux, Sur la Gestion des Monoples Publics Astreints à l'Equilibre Budgétaire, 24 ECONOMETRICA 22 (1956), republished in English as Marcel Boiteux, On the Management of Public Monopolies Subject to Budgetary Constraints, 3 J. ECON. THEORY 219 (1971).
98. See William J. Baumol & David F. Bradford, Optimal Departures from Marginal Cost Pricing, 60 AM. ECON. REV. 265 (1970).
99. See, e.g., JEAN-JACQUES LAFFONT & JEAN TIROLE, COMPETITION IN TELECOMMUNICATIONS 60-65 (MIT Press 2000).
100. linkLine, 503 F.3d at 880.
101. Id. at 883.
102. Alcoa, 148 F.2d at 438.
103. Trinko, 540 U.S. at 399.
104. Compare, for example, how the D.C. Circuit in Rothery Storage & Van Co. v. Atlas Van Lines, 792 F.2d 210, 226 (D.C. Cir. 1986) (Bork, J.), reasoned that, by 1986, certain Supreme Court decisions had been implicitly overruled by the analysis contained in the Court's more recent cases embracing the consumer-welfare approach.
105. Trinko, 540 U.S. at 408.
106. Alcoa, 148 F.2d at 429 (emphasis added).
107. ROBERT H. BORK, THE ANTITRUST PARADOX: A POLICY AT WAR WITH ITSELF 52 (1978). Bork elsewhere concluded: "The Alcoa decision...stands revealed as a thoroughly perverse judicial tour de force, contrary to the legislative intent of the Sherman Act, the great 1911 cases that formulated the 'rule of reason,' and the entire spirit of antitrust." Id. at 170.
108. RICHARD A. POSNER, ANTITRUST LAW 103, 196, 250, 263 (2d ed. 2001).
109. NCAA v. Board of Regents of the University of Oklahoma, 468 U.S. 85 (1984).
110. Town of Concord v. Boston Ed. Co., 915 F.2d 17 (1st Cir. 1990).
111. Id. at 18.
112. Carlton, Should "Price Squeeze" Be a Recognized Form of Anticompetitive Conduct?, supra note 74, at 271 (emphasis added).
113. Town of Concord, 915 F.2d at 21-22 (citations omitted).
114. Id.
115. Id. at 24.
116. Id. at 24-25.
117. See, e.g., 3A AREEDA & HOVENKAMP, supra note 16, 758b at 30.
118. Town of Concord, 915 F.2d at 25.
119. Trinko, 540 U.S. at 408.
120. Dennis W. Carlton, A General Analysis of Exclusionary Conduct and Refusal to Deal-Why Aspen Skiing and Kodak Are Misguided, 68 ANTITRUST L.J. 659, 662 (2001).
121. Trinko, 540 U.S. at 408, 414.
122. Id.
123. Furthermore, asserting that a price squeeze justifies a different analysis because it effectuates some sort of "abuse of dominance" conflicts with Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447 (1993).
124. Carlton, Should "Price Squeeze" Be a Recognized Form of Anticompetitive Conduct?, supra note 74, at 276.